The UAE, known for its tax-friendly and pro-business environment, attracts investors and entrepreneurs from worldwide. However, the United Arab Emirates is strengthening its taxation policy to support its economic growth. Still, the taxes in the UAE are manageable for people and drive success for the business sector.
UAE Cabinet’s decision no. 85 on September 2022 set forth a new national definition and criteria for tax residency. The new rules, effective 1 March 2023, provide clarity for individuals and legal entities regarding the UAE tax residency status. So, aligning with the international taxation standards, they did facilitate the introduction of corporate income tax in June 2023.
This move aims to modernize the tax system of the UAE to reinforce its financial progress. Together with serving the Emirati nationals, the UAE tax framework is accommodating its large expatriate population. Nonetheless, some expats are facing challenges in proving UAE tax residency due to their home countries’ lack of clear rules.
In this article, we are discussing the new UAE taxation rules, and the classification of taxes in the UAE. Also, we will look upon the impact of UAE taxation on the business community, and its future prospects. Just sit back, relax, and enjoy reading this informative piece of content on the tax landscape of the UAE.
Benefits of UAE’s Taxation for Free Zone Businesses
The UAE offers many tax advantages to the businesses operating in 50+ free trade zones.
- Free zone companies enjoy full foreign ownership.
- Businesses running in the free zones receive a preferential 0% corporate tax rate on their income from qualifying activities.
- Foreign run free zone entities can repatriate 100% profits outside the UAE.
- LLC and other firms in the free trade zones are able to conduct fully safe financial transactions.
- UAE’s tax-free environment provides significant rewards and incentives for the free zone firms.
Types of the UAE Business Taxes
These are the taxes in the UAE that are applicable on the businesses.
Now, we briefly take a look on these UAE business taxes.
Excise Tax
Since introduction in 2017, UAE’s excise tax discourages the consumption of harmful goods like tobacco and energy drinks. Businesses producing, importing, or storing applicable goods must register with the FTA as excise taxpayers. Also, manufacturers pay quarterly rate of 100% on tobacco/related products, 50% on carbonated drinks, and 15% on sweetened beverages. Moreover, the excise tax payment is due within 15 days of the taxation period.
Value Added Tax
Since 2018, the value-added tax (VAT) requires companies earning AED 375,000 annually to pay 5% on goods and services. Businesses have to pay VAT quarterly within 28 days of the tax period’s end. Companies earning between AED 187,500 and AED 375,000 are exempt, but can register voluntarily for reporting compliance. VAT exempt goods and services include financial services, international transportation, healthcare, residential buildings, educational services, and local passenger transport services.
Corporate Tax
Businesses in the UAE grossing over AED 375,000 annually are subject to 9% corporate tax. Whereas, the MNEs coming under the Pillar 2 of the BEPS 2.0 framework are subject to different CT rates. OECD Base Erosion and Profit-Sharing rules apply on the MNEs whose global revenues exceed AED 3.15 billion.
Non-qualifying income of a Qualifying Free Zone Person (QFZP) is liable to 9% CT rate. While, the qualifying income of a QFZP is also liable to 0% CT rate. Similarly, companies or juridical persons whose income is below 375,000 are subject to 0% CT rate.
Businesses in the free trade zones get the corporate tax holiday, until they don’t operate in the UAE mainland. Foreign banks operating in the UAE are subject to a 20% tax on their annual taxable income. Progressive corporate tax of up to 55% is applicable on companies in the petroleum sector at the emirate level.
Read More: Deadlines for UAE Corporate Tax
Kinds of the UAE Personal Taxes
Here are the kinds of taxes in the UAE that are applicable on the individuals.
Next, we briefly look upon these UAE personal taxes.
Tourist Tax
The UAE makes foreigners liable to pay taxes when using resorts, hotels, and restaurants. Tourist facilities in different Emirates of the UAE charge some taxes and levies to collect revenue from foreign travelers. Tourism Dirham Dubai tax ranges from AED 7 to AED 20 per room per night, depending on the hotel’s rating.
Restaurants in Abu Dhabi typically add 10% service fee and 6% tourism levy. Hotels in Ras Al Khaimah collect AED 15 tourism fee per room per night. Likewise, other tax charges and levies may include hotel tax, service fee, municipal tax, tourist fee, and city tax.
Customs Duty
Normally, imported goods in the UAE are liable to 5% customs duty tax, of the cost, freight, and insurance value. However, certain harmful items like alcohol and tobacco are subject to higher import taxes in the UAE. Goods traded between GCC states and national products from GCC, GAFTA, Singapore, and EFA nations are exempt from customs duties.
Municipal Rental Tax
Residential tenants in the UAE have to pay a municipal rental tax, which varies depending on the emirate. Tenants residing in Dubai pay a 5% annual rental tax. Whereas, residential tenants living in Abu Dhabi and Sharjah respectively pay 3% and 2% municipal rental tax. Commercial property tenants also pay a rental tax, ranging between 6% and 10%.
Property Transfer Tax
While purchasing a property in the UAE, residents have to pay a transfer fee that differs by the emirate. In Dubai, you have to pay 4% of the property value, that is split evenly between the buyer and seller. On the other hand, just 2% property transfer tax is applicable in Abu Dhabi.
Property transfer tax applies on any direct or indirect transfers of real estate within the UAE. It includes the transfer of shares in a company that holds real estate in the UAE. Furthermore, the booming demand of the residential and commercial properties in the UAE is generating revenue for sellers and government.
Conclusion
Known for its tax-friendly environment, the UAE is bringing new taxes to boost its financial growth. Foreign entrepreneurs planning to incorporate business in the UAE must stay up-to-date with the latest tax regulations. Consequently, this awareness saves them from tax penalties and regulatory fines, while they expand their operations to the UAE.
By staying knowledgeable, expatriate investors can make timely decisions about moving business to the UAE. In turn, they can fully take advantage of the diverse business opportunities in the UAE. Also, it includes making the most of the minimal business and personal/individual tax regime of the UAE.
Don’t hesitate to consult professional business advisors for tax guidance across the UAE. Thus, you can always rely on them for effective business setup and taxation consultancy. Top experts at KWS ME are available to hold your back in the UAE.
FAQs about Taxes in the UAE
These are the short answers to the frequently asked questions in the UAE.
What is the tax-free income in the UAE?
United Arab Emirates does not impose a direct income tax on the salary of the staff. It means that the many employees enjoy the tax-free income in the UAE. Nevertheless, high-earning individuals above the AED 375,000 threshold are subject to 9% the corporate tax.
How much VAT rate is applicable in the UAE?
The standard rate of the value-added tax (VAT) in the UAE is 5%. United Arab Emirates is introducing new administrative regulations and financial reporting requirements regarding VAT for companies. However, some goods and services are exempt from the VAT, to give businesses competitive advantage.
Are dividends taxable in the UAE?
The dividend income, capital gains, and profits from group reorganization of UAE companies are normally exempt from the tax.
How to calculate the VAT in the UAE?
A 5% VAT rate applies in the UAE on the invoice value, excluding special cases like profit margin schemes. For example, if the product price is AED 500, then input VAT (paid during buying) of AED 25 is applicable. Similarly, a VAT of AED 50 applies on the sale of a service costing AED 1000.
Will corporate tax put extra burden on foreign banks in Dubai?
Dubai’s ruler Mohammed bin Rashid Al Maktoum has issued law no. 1/2024 on taxation for foreign banks operating in Dubai. 9% UAE corporate tax rate on international banks in Dubai will become part of the 20% Dubai Banking Tax rate. So, the effective 2024 Dubai Banking Tax rate of 11%, and 9% CT will keep combined tax rate at 20%.
