The federal government of the UAE has not promulgated any tax laws and, as a result, much of the existing tax structure in the emirates has been established by the individual emirates, which have issued varying corporate tax decrees. While this seems like it would lead to confusion and hamper the business environment, in practice, taxes are only imposed on oil- and gas-producing companies (at rates that are set forth in their government concession agreements), and on the branches of foreign banks (at rates set out in specific tax decrees or fixed in agreements with the rulers of those emirates in which the bank branches are being operated.
The income tax decrees that have been enacted in each emirate provide for tax to be imposed on the taxable income of all bodies corporate, wherever incorporated, and their branches that carry on trade or business, at any time during the taxable year through a permanent establishment in the relevant emirates. Corporate entities are taxed if they carry on trade or business directly in the emirate, or indirectly via the agency of another body corporate.
Corporate Taxes In Dubai
According to the Dubai income tax decree, all companies carrying on trade or business in Dubai are required to pay tax on their earnings. The rates of tax are on a sliding scale up to a maximum of 55%. In practice, however, taxes are only paid by two groups of companies:
- Oil- and gas-producing firms, which pay taxes at rates specified in their concession agreements. Oil companies are additionally required to pay royalties on their production output; and,
- Branches of foreign banks pay tax at a flat rate of 20% on annual profits. The taxable income of banks is calculated by reference to their audited financial statements.
Corporate Income Tax
The Dubai Income Tax Ordinance of 1969 and Dubai income tax decree (and its amendment 1970) specifies that an organisation that conducts trade or business in Dubai shall be subject to taxation as follows: A “chargeable person” means a body corporate wherever incorporated, or each and every branch thereof, carrying on trade or business of any type during an income tax year through a permanent establishment situated in the emirate, whether directly, or through the agency of another body corporate (and not entitled under an agreement with the ruler to an exemption from liability to income tax). Two or more such branches of a body corporate so carrying on trade shall each be treated as separate chargeable persons. The fact that a body corporate has a secondary body corporate carrying on trade or business through a permanent establishment in the emirate shall not in itself constitute the parent body corporate as a chargeable person. “Carrying on trade or business” means:
- Selling goods or rights in such good in the emirate;
- Operating any manufacturing, industrial or commercial enterprise in the emirate;
- Letting any property located in the emirate; or
- Rendering services in the emirate (excluding the mere purchasing of goods, or rights in such goods in the emirate).
A chargeable person in Dubai shall be charged taxes on a sliding scale as described above except that the tax so charged shall be reduced by the credit aggregate of oil dealt in for that fiscal year so long as the total of all the reductions granted to all of the chargeable persons in that fiscal year shall not exceed the credit aggregate of oil dealt for that fiscal year.
Taxable income is computed after the deduction of all costs and expenses that are incurred by a chargeable person earning such income. In the UAE, the various deductible costs and expenses include acquisition cost of goods, the expenses of operating the business, allowances for depreciation, obsolescence and exhaustion of both tangible and intangible assets, and losses sustained by the chargeable person in connection with the business.
Investment Incentives
There are free zones in Dubai that offer combinations of tax and business incentives that are aimed at transforming Dubai into a global business and commercial centre. The incentives usually include tax holidays for a guaranteed period. For example, most free zones offer a tax holiday of 50 years. The extension of 100% foreign ownership is also common, as is the suspension of any Customs duties within the free zone and the provision of “one-stop shop” administrative services.
Withholding Tax
There are no withholding taxes in the UAE.
Personal Income Tax
No personal taxation currently exists in the UAE.
Capital Gains tax
There is no capital gains tax in the UAE. For taxpaying entities, capital gains are taxed as part of business profits.
Customs Duty
Customs duties are very low and there are many exemptions available for companies in various sectors. Customs duties are generally levied at the rate of 5%. Goods imported and intended for re-export often benefit from Customs duties discounts or exemptions, as do manufacturers on the import of their machinery, raw materials and spare parts used for industrial purposes.
Value-Addedd Tax
There is no value-added tax in the UAE at present.
Social Security
The UAE does not impose social security taxes upon expatriates. UAE-national employees contribute to retirement and pension funds in accordance with specific regulations.
Municipal Tax & Property Tax
Municipal taxes are imposed on hotel services and cinema shows. Service charge percentages vary among the emirates. A service charge of 5% to 10% is charged on food purchased in restaurants. Hotels charge a 10% to 15% service charge per night on room rates. These charges are usually included in the customer’s bill, which the municipality will collect from restaurants and hotels. Hotels also charge an additional 15% service charge on the services they provide.
In most of the emirates, property tax is payable by residential and commercial tenants by reference to the annual rent of residential property, generally at a rate of 5% and for commercial property at a rate of 5% to 10% payable to the local municipality. REAL ESTATE SALE/PURCHASE FEE: A sale registration fee of 2% of the value of the sale is imposed on the seller, payable to the Dubai Land Department. A purchase registration fee of 2% of the value of the sale is payable by the buyer of the property. The rate can differ in other emirates.
Foreign-Exchange Controls
There are no exchange controls on the remittance of profits or repatriation of capital, and there are virtually no restrictions on foreign trade.
Tax Treaties
The UAE has entered into tax treaties with several countries, including the following: Algeria, Armenia, Austria, Belarus, Belgium, Bulgaria, Canada, China, the Czech Republic, Egypt, Finland, France, Germany, India, Indonesia, Italy, Lebanon, Malaysia, Mauritius, Morocco, Mozambique, New Zealand, Pakistan, Poland, Romania, Singapore, South Korea, Spain, Sri Lanka, Syria, Tajikistan, Thailand, Turkey, Ukraine and Yemen.
Meanwhile, tax treaties have been concluded with Bosnia-Herzegovina, Jordan, Luxembourg, Malta, Mongolia, the Netherlands, Philippines, Seychelles, Sudan, Tunisia and Uzbekistan, however as of early 2015 they had not formally entered into force.
Read More from OBG
