Taxes are implemented to raise revenue to cover government expenditures. While specific policies and regulations vary from one territory to another, this primary purpose doesn’t change.
In the United Arab Emirates (UAE), corporate income tax policies for different territories are put in place by a federal tax regime. This is stipulated under Tax Decrees issued by each of the seven Emirates of the country, including Dubai. Under these decrees, corporate income taxes are paid based on a progressive rate system, where rates reach as much as 55 percent.
If you plan to set up a company in Dubai, you need to understand the implementation of taxes to ensure legitimate business operations and avoid penalties.
This article explains the most important facts about business taxation under the policies from the Federal Tax Authority (FTA) in Dubai, with a particular focus on the types of taxes you need to pay for your business.
Dubai Taxation: A Brief Introduction
One of the UAE’s seven emirates and the most populous city in the country, Dubai has its own taxation system initially issued in 1969 and amended a year after. This was based on territoriality, a concept adopted from the French.
The Dubai tax decree stipulates that whoever runs a business or conducts trade within the emirate will have to pay corporate income taxes of up to 55 percent.
While this decree was born at the onset of the 1970s, there have been several amendments and additional tax laws the UAE government has implemented since. Some of these refer to other taxes, particularly the excise tax and value-added tax (VAT).
5 Types of Taxes for Businesses
Depending on the type of business you’re starting with the help of the best company formation service in Dubai, you may need to pay one or more of the following taxes:
1. Corporate Tax
There are a few conditions that need to be fulfilled for a business to be taxed by the local government.
First, it needs to be registered in Dubai and operate there through a branch office or local company. Second, it should be engaged in any form of trading activity.
It is also worth noting that corporate taxes are imposed on the income generated during a specific tax year. In most cases, this coincides with the calendar year, though it can still vary.
Dubai’s corporate tax system may impose varying taxes on different companies within its jurisdiction. However, most of these taxes only apply to certain business types, particularly those engaged in the gas and oil industry and foreign banking institutions.
Companies in gas and oil trading face a 55 percent tax rate straight to their profits, while foreign bank branches only need to pay 20 percent of their taxable income.
No withholding taxes are implemented for remitting royalties, interests, and dividends overseas.
2. Value Added Tax (VAT)
Implemented in 2018, VAT is a significant update to the country’s taxation system as it is levied at a national level.
Its standard definition stipulates that it should be applied at every stage of the supply chain. However, the rules and regulations implemented in this tax law imply that VAT will only be imposed on the final consumer in Dubai.
In short, the end-users shoulder VAT costs while registered businesses only serve as “tax collectors” on behalf of the FTA.
The VAT rate in the Emirate is one of the world’s lowest at 5 percent (though there is also a zero percent VAT rate).
Companies can claim refunds from tax authorities by submitting a set of documents, though they need to be VAT-registered to do so.
Take note: Businesses with a turnover of more than Dh375,000 are required to register for VAT. Those with income lower than that (but still above Dh187,500) can voluntarily do so as well.
3. Excise Tax
The excise tax was introduced a year earlier than VAT, but it still is relatively new.
In 2017, the local government of Dubai introduced this indirect tax to curb the use of goods that can potentially harm human health. This includes carbonated beverages, energy drinks, tobacco, and other similar products.
The excise tax imposed on these products are set at the following rates:
- Carbonated drinks – 50 percent
- Energy drinks – 100 percent
- Tobacco – 100 percent
Excise and value-added taxes can be paid electronically through the FTA in the UAE.
4. Customs Duty Tax
This tax is imposed on the cost, insurance, and freight value at 5 percent for most imported products in Dubai. However, there may be other rates implemented to certain goods, like tobacco and alcohol.
There are also exemptions to customs duty taxes:
- UAE nationals who lived abroad and are returning to the country for good
- Foreigners coming to the country for the very first time
Moreover, a customs duty tax relief and other exemptions are enjoyed by:
- Products that are imported and intended to be re-exported
- Manufacturers engaging in the importof raw materials, machinery, and spare parts for industrial purposes
- Certain activities and/or goods from specific countries
5. Municipality and Property Taxes
When you do business in the UAE, you’ll also be required to pay municipal taxes.
For the hospitality and entertainment sector, the rate is at 7 percent, with a 10 percent charge on the total invoice value levied on all hotel stays.
Many municipalities also implement property taxes based on the annual rental value, although this is generally included in the tenant’s obligation rather than the property owners. Take note, however, that there may be cases wherein different fees will be payable by both parties involved in a leasing relationship.
In Dubai, the municipality tax levied on properties is at 5 percent of tenants’ annual rental value or 5 percent of property owners’ specified rental index.
What Is Tax Residency?
Corporate taxation aside, Dubai residents (individuals) enjoy no income taxes. This is advantageous for entities with foreign origins – both individuals and companies – because they could still be liable for taxation for their home country.
As a tax resident of Dubai, you will get to save on taxes while maximizing the advantage of doing business in the City of Gold.
However, you do need to live in the city longer to become a tax resident – that is, unless you qualify for tax deductions or exemptions under a double taxation treaty between the UAE and your home country.
Understanding Taxation in Dubai
Taxation is one of the most crucial things you need to learn when doing business anywhere in the world. Learn and understand the tax system in Dubai using this article as a guide to avoid penalties and potentially save your hard-earned cash.
Naresh Manchanda is a Partner at MBG Corporate Services, an international organization supporting clients across Asia, Europe and the Middle East and providing sustainable solutions and strategies that drive business transformation. Established in 2002 and headquartered in Singapore, MBG is a 450-strong member team that operates out of Europe, the Middle East and Asia, providing Legal, Risk, M&A, Tax, Strategy, Technology and Audit Services.