Taxes in Dubai: What to consider

Dubai is known for its favorable tax system, which is attractive for both individuals and companies. Because one of the most outstanding features of Dubai is the lack of an income tax for private income, which makes the city particularly attractive for investors, but also international businessmen. But with the changes in recent years, even Dubai is no longer completely tax-free.

Table of contents

The most important things in brief
Is Dubai still a tax haven?
Why is Dubai tax-free?
Dubai tax rates
Who is taxable?
What are the taxes in Dubai?
income tax
What is a permanent establishment?
Indirect taxes
vat
Special consumption tax
motor vehicle tax
Corporate taxation - withholding tax
What taxes do you really pay in Dubai?
Who is exempt from tax liability?
conclusion
FAQ
As an entrepreneur, do I always have to pay corporation tax?
Can corporate income tax be evaded?
Do I have to pay taxes as an employee?
How is my private income taxed?

The most important things in brief

• Dubai is traditionally known as a tax haven.
• This is because no tax is charged on private income.
• However, a value added tax of 5% was introduced in 2018.
• 5 years later, specifically in June 2023, a corporation tax of 9% was introduced.
• However, this is only charged if certain turnover thresholds are exceeded.

Is Dubai still a tax haven?

Dubai could well be described as a tax haven according to current criteria. Because under certain conditions, the tax burden is even 0%. The only taxes that apply besides 5% VAT may be relatively low consumption taxes based on lifestyle. Dubai and the other UAE emirates have also managed to be removed from the black list of European tax havens, strengthening their reputation as a reputable business location. But does this mean that Dubai is completely exempt from taxes?

Why is Dubai tax-free?

Dubai is preceded by the reputation of being tax-free. But is that really true? At least in part, because Dubai has experienced a strong economic upturn in recent decades. For example, the city and government is pursuing strict economic policies aimed at attracting potential investors. This economic policy is also the reason why Dubai does not directly tax income. However, the corporation tax introduced since June 2023 must be considered. Dubai's situation also plays a decisive role in terms of tax exemption. This is because the Emirate is located on the Persian Gulf and therefore acts as an important transit and trade hub between Europe, Asia and Africa. As a result, it benefits from the prosperity gains of neighboring countries and at the same time boosts its own economy.

Dubai tax rates

Dubai's most important tax rates to keep in mind include, on the one hand, the annual rent tax of 5% and social security contributions of 26% of the gross salary. Social security contributions are only due for employees who are employed in the Emirates and are nationals of the UAE. These contributions are divided between the employer at 15% and the employee at 11%. In addition, a 5% VAT is charged on products or services.

In addition to these tax rates, a new corporate income tax of 9% was added in June 2023, which is due for entrepreneurs who exceed a certain turnover threshold.

Who is taxable?

The new corporate tax system was introduced in Dubai. Under this system, all companies that operate in Dubai and are not registered in a free trade zone are required to pay corporate income tax. The same applies to subsidiaries of foreign companies and branches. There may be special rules for companies in free zones, provided that they meet certain conditions.

Companies in the tourism sector can also benefit from these low tax rates.

But what is the corporate tax system for? Dubai wants to use the income from corporate income tax to finance smaller start-ups and expand its infrastructure.

Corporate income tax

Basically, Dubai was known for not having levied taxes on the turnover or profit of legal entities. However, this changed with the introduction of corporation tax in June 2023. Since then, companies and individuals carrying out business activities in the UAE have been charged a total of 9% corporate income tax on their profits. However, there is also an allowance here. If a company does not exceed the annual turnover of AED 1,000,000, corporate income tax is waived. This is intended to relieve the burden on smaller companies and start-ups.

However, with a tax rate of 9%, which is very low by global standards, corporations can often avoid this tax burden easily and legally. For example, if the owners of a company act as employees at the same time, they can simply minimize the company's profit by adjusting their salaries. Because, as mentioned earlier, no tax is charged on income from dependent activities, which is why companies can save themselves quite a bit in this way.

However, there are exceptions for certain sectors of the economy, such as the oil industry or banking, where companies must tax up to 55 percent of their profits. Foreign companies that have settled in one of the numerous free trade zones in Dubai or other Emirates should also be considered. These companies often enjoy many more tax benefits than companies right in the center, for example.

In principle, corporation tax applies to the following cases:

-Legal entities (such as companies) established in the UAE or foreign legal entities effectively managed and controlled in the UAE. Non-resident legal entities (foreign legal entities) that have a permanent establishment in the UAE.
-jNon-residents who earn income from government sources.
-Non-resident legal entities that have a 'nexus' in the UAE when they earn income from immovable property in the UAE.
-Individuals who conduct business or business activities in the UAE and generate a turnover of more than AED 1,000,000 per calendar year from such transactions (sole proprietorships) or business activities.

What is a permanent establishment?

In connection with corporation tax, the criterion of permanent establishment should be briefly mentioned.

The term “permanent establishment” refers to foreign companies doing business in Dubai or owning real estate. Such companies are required to pay taxes in Dubai and must provide an official business address.

However, there are exceptions to this rule. For example, companies operating in one of Dubai's free trade zones are exempt from tax liability.

Background to the Corporate Income Tax Act

The announcement of a 9 percent corporate tax from June 2023 has caused heated discussions in the United Arab Emirates, including Dubai. There is also speculation as to whether this would represent a turning point for the tax haven. However, these fears have not yet been confirmed. On the contrary, the government emphasized that these reforms are aimed at tax transparency and compliance with international standards, and not primarily at increasing tax revenue. In addition, Freezone companies are exempted from this regulation if they meet certain criteria. It is also expected that companies in free trade zones will remain exempted from this regulation in the future. The same applies to pure financial investments.

What are the additional taxes in Dubai?

Dubai is still known for its tax-free policy and was financed primarily by exporting crude oil for a long time. But for some time now, the government initiated a program to diversify the economy in order to stop being dependent on oil reserves in the future and to prepare for a global economy independent of oil.

This approach includes trading in gold and diamonds, which have made Dubai a global center in the first place. Educational initiatives, such as the opening of a Harvard University branch, are also part of this restructuring. Dubai is also beginning to collect taxes cautiously.

And even though Dubai still has favorable conditions for companies and private individuals do not pay income tax, the government is currently implementing reforms that have resulted in Dubai being removed from the European list of tax havens. As a result, the Emirate is slowly moving away from the tax-free policy approach.

Nevertheless, the tax burden in Dubai should remain minimal. For example, there is no inheritance tax, and the sale of real estate is only subject to a 4 percent levy.

In order to benefit from Dubai's low taxes, a change of residence is usually necessary. An investor visa can be obtained by setting up a company or buying real estate worth around 250,000 euros. Employment with a local company also makes a legal stay possible.

Now on to the actual taxes:

income tax

There are currently no changes to income tax. For example, income from a dependent activity is tax-free. However, the following should be mentioned here: Individuals who conduct business or business activities in the UAE and earn a profit of more than AED 375,000 per calendar year from such transactions (sole proprietorships) or business activities are taxed.

Indirect taxes

Until now, there has always been talk of direct taxes. However, indirect taxes and duties are also common in Dubai. Especially when it comes to goods and services. For example, indirect taxes are levied on overnight stays in hotels, for water supply, for driving on main roads or certain services. However, these are in the low single-digit euro range. However, these taxes play virtually no role in the cost of living. However, the most important indirect tax is value added tax.

vat

Since 2018, Dubai has had a tax rate of 5% on a company's turnover. However, similar to Germany, this tax can be passed on to customers if the deal has been closed within Dubai. This is therefore a transit item and a pure consumption tax.

There is also a rule in Dubai that companies that do not exceed an annual turnover of 375,000 AED (exemption limit) are exempt from value added tax (VAT) and therefore do not have to register for it. This should benefit start-ups and smaller companies.

Value added tax also serves as a diversification tool for government revenue, which should contribute to

It serves the United Arab Emirates and Dubai primarily as a means of diversifying their government revenue, which is intended to make government business a bit more independent of income from oil exports and the world market price for crude oil.

Special consumption tax

The excise tax is a (selective) indirect tax that is levied on certain consumer goods: In general, it is levied on goods that are considered harmful to the health of the general public. The aim of excise duty is therefore to discourage the consumption of these specific goods by the general public.

The goods subject to excise duty in the UAE and the tax rates applicable to these goods are as follows:

Tobacco and tobacco products — 100%

Liquids used in electronic smoking devices and tools — 100%

Electronic smoking devices and tools — 100%

Carbonated drinks — 50%

Energy drinks — 100%

Sweetened drinks — 50%

motor vehicle tax

In Dubai and the other emirates of the United Arab Emirates, there is also no motor vehicle tax, as is known in Germany, for example. As expected, the fuel there is very cheap. Apart from the already mentioned toll fee, there is therefore only an import duty of 5% when importing a vehicle. However, this does not apply to vehicles purchased directly in Dubai. As a result, the cost of operating a motor vehicle in Dubai is significantly lower than in many European countries. However, it should be mentioned at this point that the use of a car in Dubai is essential due to local conditions.

Corporate taxation - withholding tax

In the United Arab Emirates, the aim is to establish a simpler yet resilient system of corporate taxation in order to reduce the tax burden for taxpayers. Therefore, withholding tax is levied on certain types of income generated in the UAE by non-residents, provided that this income is not attributable to a permanent establishment of the non-resident. The withholding tax rate is currently 0%. The specific types of income that are subject to withholding tax and the associated tax rate can be determined by a cabinet decision. However, due to the current tax rate of 0%, it is not assumed that there is an obligation to register or submit.

What taxes do you really pay in Dubai?

What taxes are you specifically affected by if you want to retire in Dubai? Specifically, you should at least remember this tax if you're planning to run a company in Dubai or the UAE: corporation tax.

If you, as a company, exceed the annual turnover allowance of AED 1,000,000, you will be subject to corporation tax of 9%.

However, it should be mentioned here that the tax rate for

- 0% is on the portion of taxable income that does not exceed AED 375,000.00, and

-9% is on the portion of taxable income that exceeds AED 375,000.00

-There is also a sales or value added tax of 5%.

All other taxes mentioned earlier do not significantly affect their livelihoods. Note, however, that real estate prices, rents and ancillary costs are comparatively very expensive and cannot be compared with the German level.

As an employee, your income is not taxed anyway, because all income from a dependent activity is tax-free.

Who is exempt from tax liability?

Certain entities, such as nonprofit organizations and government agencies, are exempt from tax liability. There are also cases in which the income and profits of foreign companies are not subject to taxation.

conclusion

Even though Dubai has introduced both a value-added tax and a corporate income tax and is therefore, strictly speaking, no longer tax-exempt, the Emirate remains an attractive destination for foreign workers, tourists and business people.

Because compared to other international locations, particularly in free trade zones, Dubai and the UAE enjoy almost complete tax exemption. This is further promoted by the absence of income and wealth taxes, which is why wealthy private individuals, investors and highly qualified specialists will continue to find their way to the Emirate.

The Emirate is also investing heavily in education and tourism to make itself more independent of income from the oil business, which also explains the introduction of taxes, among other things. Because Dubai wants to position itself in the long term as a progressive Arab country that is open to the West and wants to contribute to climate protection and peace and prosperity in the region.

FAQ

As an entrepreneur, do I always have to pay corporation tax?

No, you don't have to. Although the corporation tax was introduced in June 2023, it only applies to companies that exceed an annual turnover of AED 1,000,000.00 and a profit of AED 375,000.00 (approx. 90,000 euros). For these companies, corporation tax of 9% is then charged on the portion of taxable income that exceeds the profit amount of AED 375,000.00. However, if this limit is not exceeded, the tax rate is 0%.

Can corporate income tax be evaded?

That is actually possible. This is because companies with an annual profit of less than 375,000.00 AED (approx. 90,000 euros) fall under the so-called basic allowance. Corporations could therefore adjust the salaries of their shareholders in such a way that they fall below this limit and thus remain tax-free. Since there is no income tax on private income in the United Arab Emirates, the regular salary remains tax-free.

Do I have to pay taxes as an employee?

If you are an employee in an upright employment relationship in Dubai, there is no tax on your salary.

How is my private income taxed?

In Dubai, income from a dependent activity is tax-free. On the other hand, income from economic activity must be taxed.

In Dubai, as in many other countries, private income typically includes all income that a person receives from various sources. Common types of private income include:

1. Salaries and wages: income from employment or self-employment.
2. Rental income: Income from renting out real estate.
3. Interest income: Income from interest on savings accounts, fixed-term deposits, or other financial investments.
4. Dividends: Income from shares in companies, typically in the form of dividends.
5. Capital gains: Profits from the sale of assets, such as stocks, real estate, or other investments.
6. Pensions and pensions: income from pension insurance or state/private pensions.

Do you still have questions about taxes in Dubai? Our team of experts at Extent would be happy to advise you. Simply click on the link below to book a free consultation.

‍