An Overview of the UAE Tax System: Understanding the Basics

The UAE tax system is one of the world’s most attractive tax regimes which turned out to be the key ingredient of the country’s success all these years in making an indelible impression on business-oriented people all across the globe. Boasting a liberal taxation system featuring zero income tax, the UAE casts a magic spell on citizens of other countries including foreign investors and business persons that turns them to the country to either set new goals in life or achieve the existing ones. And believe it or not, this is not going to cease any time soon. Even the recent introduction of federal corporate tax doesn’t cast a shadow over the Emirates’ popularity amongst investors worldwide.

Overview

No country can run on its own, TBH! Hence federal, state and local governments. And just like an individual needs funds to run their home, governments also require adequate finances from diverse resources to be able to run their nation successfully. For most countries, taxes paid by their people is the primary source of income to further invest in the country’s development and to continue providing services they need or want. Conversely, in the United Arab Emirates, it’s petroleum and natural gas, tourism, real estate, construction, trade, financial services and non-compliance fines.

However, it doesn’t mean there are no taxes in the nation. Although there is no tax on individuals’ personal income currently, several other taxes are very much there such as Corporate Tax (Emirate-level), Toll (Salik), Municipality Tax, Property Tax, Customs Duty, Tourism Tax, Rental Tax, Excise duty and VAT. Not to mention the new kid on the block, Nevertheless, the UAE still leads the pack when countries with the lowest taxes are discussed globally. It comes as no surprise that a host of entrepreneurs including Russian investors are flocking to Dubai to fulfil their entrepreneurial dreams.

Purpose of the Article

This page aims at providing a basic understanding of the UAE Tax System. Whether you are planning to expand your existing venture or to set up a new business in Dubai or any part of the States, you must be familiar with the UAE tax system, at least the basic if not in-depth. To help you with that, we, being in the industry for the last two decades or so, have brought this blog right for you. Happy reading.

Here is an infographic that provides an overview of the UAE Tax System.

UAE Tax System: Introduction

The United Arab Emirates is a federation of seven Emirates: Abu Dhabi, Dubai, Sharjah, Ajman, Umm Al Quwain, Ras Al Khaimah, and Fujairah. Each emirate is governed by its own ruling family and is responsible for its own internal affairs. However, the UAE is governed as a whole by a federal government that handles matters of national importance.

Speaking of taxes, the country has earned its tle for imposing either low taxes relatively or offering tax holidays in free zones. Even though a couple of new taxes have been enacted by all the Emirates in the past few years, those are relatively too low. For instance, Value Added Tax (VAT), which was launched in 2018, is levied at the rate of just 5% and the Federal Corporate Tax, implemented of late (in 2023) at the rate ranging between 9%-15%. The highest tax rate in the UAE is 55% but that too is applicable to those corporations that are operating at the Emirate level in addition to royalties such as oil and natural gas extraction companies. We mean, foreign banks and oil companies.

Some emirates also impose additional taxes on certain goods and services. For example, Dubai imposes a hotel tax and a tourism fee. Additionally, certain business activities may be subject to specific taxes or fees.

Importance of Understanding the UAE Tax System

Understanding the tax system in the United Arab Emirates (UAE) is vital for several reasons. If you are a resident or a business operating in the UAE, you will need to comply with tax laws and regulations in order to avoid penalties and fines. Additionally, understanding the tax system can help you to plan your finances and make informed business decisions. Furthermore, it will help you in case of any audit or review by the authorities. It also gives you an idea of what are deductions and exemptions available and how to claim them. Overall, understanding the UAE tax system can help you to manage your finances more effectively and stay compliant with the law.

Types of Taxes in the UAE & Tax Rates in the UAE

At the moment, the UAE doesn’t tax individuals’ personal income or capital, however, there are a few other taxes that the respective entity living in the country is liable to pay. Here are they:

Value-Added Tax (VAT): introduced in 2018, VAT is a consumption tax imposed on goods and services at a standard rate of 5%. The amount of tax gets added to the price of goods and services and is typically paid by the end consumer in the supply chain. Businesses with an annual turnover above a certain threshold are required to register for VAT and charge VAT on their sales. The UAE government has set the threshold for VAT registration at AED 375,000, which is roughly equivalent to USD 102,000. Entities (except juridical persons/natural person engaged in business) that are below this threshold are not required to register for VAT, but they may still choose to do so on a voluntary basis.
Sin Tax: an excise tax imposed on specific goods deemed harmful to society according to Cabinet Decision No. 52 of 2019 on Excise Goods, Excise Tax Rates and the Methods of Calculating the Excise Price. Such products include alcohol, tobacco, soft drinks, fast foods, coffee, sugar and gambling, energy drinks, vapes and cigarettes. The rate of excise tax can vary from 100% to 50% depending upon the nature of the good. For example, 50% on carbonated drinks and any product with added sugar or other sweeteners, 100% on tobacco products, energy drinks, electronic smoking devices and liquids used in such devices and tools. The tax on the sale of alcohol in the UAE also was 100% but before 01/01/2023. The new amendment has slashed the alcohol tax by 30%.
Customs Duty: a tax imposed on imported goods. The customs duty in the UAE is calculated as 5% of the CIF (Cost Freight Insurance) value except for alcohol and cigarettes. Alcohol attracts 50% Duty while cigarettes 100%.
Real Estate Tax: the UAE does not impose taxes on property owners. However, when buying or selling of property happens, a property transfer fee of usually 4% is applicable to both parties which splits equally between the buyer and the seller.
Tourism Dirham fee: a fee imposed on hotel stays, usually included in the room rate. In Dubai, tourists are levied AED 20 Tourism Dirham fee by five-star hotels, AED 15 by four-star hotels and AED 10 by three-star hotels. Tourist taxes apply to restaurants, hotels, hotel apartments and resorts in the UAE. These include a 10% tax on room rates, a 10% service charge, a 6% to 10% city tax, 10% municipality fees and a 6% tourism fee.
Salik tolls: the electronic toll road system in the Emirates is called Salik. A fee is imposed on vehicles passing through certain toll gates on the road in Dubai. At present, a fixed toll tax of AED 5.25 is applicable for each Salik Passing.
Corporate Income Tax: So far only oil corporations and foreign bank branches operating in the UAE were subject to pay the corporate income tax at the rate of 55% and 20% respectively. However, starting this year all the businesses in the UAE operating at the federal level are supposed to pay corporate income tax. The standard rate for the federal CIT has been decided at 9% which can go up to 15% depending on the annual profits generated by the companies.

Tax Compliance in the UAE

Tax compliance is important in the UAE as it ensures that individuals and businesses fulfil their legal obligation to pay taxes, which in turn helps to fund government services and infrastructure. Non-compliance with tax laws can result in fines and penalties, and can also damage a company’s reputation. Additionally, being tax compliant can help businesses to establish credibility and trust with clients and partners. In UAE, the Federal Tax Authority (FTA) has been established to ensure compliance with tax laws and regulations and to ensure that the tax system is fair and efficient. When you are doing business in the UAE, you must be punctual and compliant when it comes to:

Registering for taxes: To stay compliant with tax laws in the UAE, you will need to register for taxes with the Federal Tax Authority (FTA) particularly if you surpass the threshold set by the government. For instance, businesses operating in the UAE are required to register with the FTA and file VAT returns on a regular basis. VAT is currently set at 5% in the UAE. This can typically be done online through the FTA’s e-Services portal. You will need to provide information such as your business name, Emirates ID, and trade license number.
Filing tax returns: Once registered on the FTA’s portal, you will need to file regular tax returns usually on a monthly or quarterly basis, depending on the type of tax you are liable for and pay any taxes owed on time to avoid penalties. Individuals are not required to file personal income tax returns in the UAE. Taxpayers can also file their returns through an authorized tax consultants.
Keeping accurate records: It is necessary to keep accurate records of your financial transactions and maintain compliance with any other relevant laws and regulations in the UAE. This includes maintaining financial records, invoices, receipts, and other documents related to business operations. Accurate records are crucial for a number of reasons, including Tax compliance, Auditing, Legal compliance and Business transactions.

Tax Exemptions and Incentives

The United Arab Emirates offers various tax exemptions and incentives to attract foreign investment and support economic growth. These include:

100% foreign ownership: Companies in the UAE are allowed to be 100% foreign owned.
0% corporate income tax: The UAE does levy a corporate income tax on about 350,000 SMEs with taxable profits up to AED 375,000 so that they could remain competitive in the market.

0% value-added tax (VAT): The UAE has a zero-rated VAT system, which means that VAT is not charged on most goods and services. Supplies subject to the zero rate are listed in Article 45 of the Federal Decree-Law no. (8) of 2017 on Value Added Tax, such as:
- Exports of goods and services
- International transport of goods and passengers
- Certain means of transport, such as trains, trams, vessels, airplanes
- First sale/rent of residential buildings
- Aircraft or vessels designated for rescue and assistance by air or sea
- Certain investment precious metals
- Certain healthcare services and related goods and services
- Certain educational services and related goods and service
Tax holiday in free trade zones: The UAE has several free trade zones, such as the Dubai International Financial Centre and the Abu Dhabi Global Market, which offer additional tax exemptions and incentives to companies operating within their boundaries.
Incentives for certain industries: The UAE government may provide additional incentives for specific industries, such as renewable energy and technology.

Tax exemptions for certain businesses

In the United Arab Emirates, businesses can be eligible for tax exemptions based on certain criteria. For example, businesses engaged in certain activities, such as oil and gas exploration, are exempt from corporate income tax. Additionally, businesses that operate in certain designated free zones may also be eligible for tax exemptions or other benefits. It’s worth noting that the UAE does not have a federal income tax system; instead, each emirate has its own tax laws and regulations. Therefore, it’s important to check with the relevant authorities in the specific emirate where the business is located to determine if it may be eligible for any tax exemptions. We can also help you in figuring out your eligibility for any sort of tax exemption in the UAE.

Incentives for foreign investors

The United Arab Emirates (UAE) offers a number of incentives for foreign investors, including:

100% foreign ownership: Foreign investors are allowed to fully own their business in the UAE, with no requirement for a local partner.
Tax exemptions: The UAE has a relatively low tax environment, with no personal income tax and a low corporate tax rate of only 50% on oil companies and free zones.
Free trade zones: The UAE has numerous free trade zones, such as the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM), which offer additional benefits such as 100% import and export tax exemptions, and no currency restrictions.
Access to regional market: The UAE serves as a hub for trade and business in the Middle East, providing easy access to a large and diverse market.
Developed infrastructure: The UAE has a well-developed infrastructure, including modern transportation networks, ports, and airports, making it easy for businesses to operate and expand in the country.
Strategic location: The UAE is strategically located between Europe, Asia and Africa, making it an ideal hub for trade and commerce.
Attractive lifestyle: The UAE offers an attractive lifestyle, with year-round sunshine, world-class healthcare, and a wide range of leisure and entertainment options.

Federal Tax Authority

The Federal Tax Authority (FTA) is a government agency in the United Arab Emirates (UAE) responsible for implementing and enforcing federal tax laws and regulations. The FTA is responsible for administering and collecting value-added tax (VAT) and excise tax, as well as providing guidance and support to taxpayers. The agency also works to prevent tax evasion and fraud and conducts audits to ensure compliance with tax laws. The goal of the FTA is to establish a fair and efficient tax system that supports the growth and development of the UAE economy.

Overview of the UAE Tax Authority

Launched in 2016 by the President of the UAE via Federal Decree-Law 13 of 2016 to simplify the life of taxpayers, the FTA is a government entity responsible for the administration, collection and enforcement of federal taxes such as VAT. Clearly, the main obligations of the authority include registering businesses for federal VAT, collecting and enforcing VAT payments, and providing guidance and support to businesses regarding VAT compliance. The FTA also enforces other federal taxes, such as excise tax and corporate income tax. The authority operates under the jurisdiction of the Ministry of Finance and is headed by a Director General.

Contacting for Assistance

The launch of FTA has made the life of taxpayers a whole lot easier. However, it’s not easy to stay compliant with the UAE tax laws. While you are juggling a ton of things, you might lose sight of your tax obligations. That’s where outsourced tax specialists in Dubai come into the picture and save you from hefty fines and other unpleasant consequences of non-compliance. For any assistance in staying compliant with myriad UAE tax laws, you may get in touch with Adam Global Auditing and Accounting. We are a renowned taxation services provider in UAE that has a team of seasoned professionals with extensive knowledge about miscellaneous facets of tax and compliance. You may also rely on us for Corporate tax services in UAE if you are looking for an expert agent to represent you before the Federal Tax Authority.

Conclusion

To conclude, running a business in the UAE requires you to meet certain obligations that you have towards the government such as timely payment of taxes you owe. Being compliant with tax laws simply means you understand your tax obligations, properly register for the taxes that are applicable to your business, accurately report income and expenses, and pay the right amount of taxes on time. While non-compliance can result in fines, penalties and even criminal proceedings, tax law compliance helps you maintain a good reputation in the market and establish trust with customers and partners, which can be beneficial for the business in the long term.

Recommendations for Further Reading/Resources

As the UAE’s first-ever corporate tax has been implemented this year you should know everything about the new tax. Below-listed blogs feature updated content regarding various federal-level taxes that can prepare you for the sliding-door transition.

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