Tax System in the UAE

Although taxation in the Emirates is significantly simplified, the state strictly adheres to the legislation. Therefore, expatriates need to know the specifics and nuances of the tax system in the UAE in order to legally reside in the country, have the opportunity to register their business, obtain documents, and find employment.

Ignorance does not exempt from responsibility. If a person for any reason fails to pay one of the state taxes, the consequences will follow immediately: from minor fines to the blocking of bank accounts and deportation.

How to Become a Tax Resident of the UAE

Only individuals with the status of tax residents of the UAE can pay taxes. A tax resident is a natural or legal person who falls under the tax legislation of the country due to a prolonged stay or significant connections: work, family, etc.

In the UAE, the tax residency certificate is issued by the Federal Tax Authority (FTA). The certificate remains valid for one year.

For Individuals

For an individual, resident status is determined by the duration of stay in the country, as well as other criteria established by national legislation.

Individuals must reside in the country for at least 180 days a year and provide documentary evidence that the UAE is their primary place of residence and the center of their professional and financial activities. Therefore, to obtain this status, a resident visa and a bank account are required. Upon obtaining a resident visa, an expatriate automatically becomes a taxpayer.

For Legal Entities and Companies

In accordance with the provisions, a legal entity is recognized as a tax resident if it is registered or recognized within the territory of the UAE and meets the criteria for tax residency status in accordance with current legislation. Branches and representative offices of foreign companies cannot claim tax resident status.

The following supporting documents must be provided by a legal entity:

Corporate documents of the company (license, articles of association) containing basic information about the organization and its activities;

Office lease agreement;

Copies of the passport, Emirates ID, and resident visa of the company owner;

Bank statement for the last six months;

Certified copy of the annual audit report on the financial position of the company.

The state must be confident in the solvency and reliability of the organization.

Similar to individuals, a company receives a certificate for one year. It must be renewed annually thereafter.

Taxes for Individuals

The tax system for individuals remains one of the simplest and most lenient. Conditions are mostly similar for both local residents and expatriates, which is another significant advantage of the UAE tax system.

Income Tax

Individuals are completely exempt from income tax – an unfamiliar fact for citizens of Russia and CIS countries. Instead, the country imposes a 5% value-added tax (VAT) on the purchase of goods and services. VAT is applied at all stages of supply, ultimately shifting to the consumer. It's quite straightforward.

Inheritance

Inheritance is the transfer of property rights, as well as rights and obligations from a deceased relative. Real estate, financial assets, personal belongings, and debts fall under inheritance rights and obligations.

In the UAE, there is no inheritance tax. Unlike Russia, where heirs can refuse inheritance, after which it can only be inherited by one person, in the UAE, inheritance is automatically accepted by the entire line of heirs. It's also important to consider Sharia law.

Any inheritance matters are regulated in accordance with Islamic law, and Sharia establishes rules for the distribution of inheritance. The first rights to inheritance are given to direct descendants and older males. Next in line are spouses, children, parents, and in some cases, siblings. The remaining portion of the inheritance can be distributed according to the deceased's will within certain limits but considering compulsory shares. If the deceased has non-Muslim heirs, their share of the inheritance may be significantly limited.

Property Disposal

This is the process of transferring ownership rights of any property or asset from one individual (or organization) to another. Examples of property disposal include real estate sales, transfer of company shares, and estate bequests. In each case, there is a change in ownership or control of the property between parties.

Property disposal tax is individual for each emirate. The average tax rate in Dubai is 4% of the final property value.

Taxes for Legal Entities and Companies

Taxation for legal entities is more complex. Significant changes occurred in 2023. In January 2022, the Ministry of Finance announced the introduction of a federal corporate income tax in the United Arab Emirates. The tax officially came into effect on June 1, 2023, and is applicable to all emirates. Enterprises whose tax year begins in January will start paying taxes only on income received after January 2024. VAT, excise taxes, and customs duties also remain in place.

Corporate Tax

Corporate tax in the UAE is levied on the net income or profits of companies and legal entities. If a company's net profit exceeds 375,000 dirhams or 100,000 dollars, it will be subject to a 9% tax. Companies with lower incomes are still exempt from taxation and will remain subject to a zero rate, but they are required to keep accounting records and must register for CT.

Additionally, the government announced the introduction of a 15% tax for large multinational corporations with global profits exceeding 750 million euros or 3 billion dirhams, corresponding to the global minimum corporate tax rate.

Multinational corporations are large companies that operate in their own country as well as in other states through a foreign subsidiary, branch, or other form of presence/registration.

Businesses whose financial year begins on July 1, 2023, and ends on June 30, 2024, fall under the scope of the UAE's corporate tax from July 1, 2023. These companies will be given a period from June 1, 2024, to February 28, 2025, to file CT declarations and make CT payments.

Businesses whose financial year (calendar year) begins on January 1, 2024, and ends on December 31, 2024, are subject to the UAE's corporate tax from January 1, 2024. These companies must file a declaration and make payments from January 1, 2025, to September 30, 2025.

Only one corporate tax declaration will be required for each financial period.

Corporate tax will not apply to the salary of an individual or other income from work, regardless of whether it is received in the public or private sector.

Corporate Tax for Free Zone Businesses

Individuals conducting business in a Free Zone are those who meet the following conditions:

• Comply with transfer pricing regulations and documentation;
• Earn qualified income;
• Have a genuine business activity in the UAE.

Individuals meeting these conditions are subject to a tax rate of 0%. If they cease to meet any of these conditions during the tax period, they will be subject to a 9% tax rate from the beginning of the tax period.

A Free Zone entity meeting the requirements has the right to choose whether to be subject to a 9% corporate tax rate.

Businesses established in a Free Zone must register and file a corporate tax declaration.

Despite the government's innovations, taxation for legal entities in the UAE remains low compared to other countries.

VAT

VAT is levied on goods and services at each stage of production and distribution. Instead of being levied directly on the profits of companies or the income of individuals, VAT is included in the price of goods or services.

Companies with turnover exceeding 375,000 dirhams are required to pay VAT. They must register themselves as taxpayers and file a declaration with the Ministry. If a company's turnover is 187,500 dirhams, it may voluntarily register for VAT payment.

Excise Tax

Excise tax was introduced in the UAE in 2017. Excise tax is levied on goods that may have a negative impact on society: alcohol, tobacco products, energy drinks, electronic cigarettes, etc. Excise is imposed to regulate the consumption of harmful goods and as an additional source of government revenue.

In 2019, the following items were added to excise goods:

• Carbonated drinks. All carbonated beverages, except plain water without sugar, sweeteners, preservatives, or flavor enhancers. Tax rate: 50%;
• Energy drinks. All drinks advertised or intended as energy drinks containing stimulating components that promote physical and mental activity: caffeine, taurine, ginseng, guarana, high sugar content, etc. This also includes all substances used to create energy drinks. Tax rate: 100%;
• Cigarettes, tobacco, tobacco products, chewing tobacco, as well as electronic cigarettes and all related goods, including nicotine liquids. Tax rate: 100%.

Companies importing excisable goods into the UAE and manufacturers of excisable goods released for consumption in the country must register to pay excise tax. Warehouses of excisable goods and those responsible for supervising an excise warehouse or a designated zone are also required to pay this tax.

Customs Duty

Customs duty is a form of tax imposed on the import or export of goods across the customs border. It is a certain percentage of the value of goods or a fixed amount set by state customs authorities. Customs duties are used by the government to regulate trade, protect local producers, and as a source of revenue.

In the UAE, registration with the customs service is mandatory for all commercial companies. They must provide information about the value of imported goods, an invoice, a certificate, and obtain permission for the import and export of goods. After that, the company receives a unique customs code from local customs authorities and the right to import/export goods. The code is valid until the expiration of the license, which must be renewed annually.

The general rate for most goods is 5% of the value, including insurance and transportation costs to the destination point. For certain categories of goods, rates may be higher, for example, for alcoholic beverages from 50 to 100%, and for tobacco products – 100%. Goods imported from Gulf Cooperation Council (GCC) countries are considered local.

Tourism Taxes

Tourism tax in the United Arab Emirates is levied on tourists for the use of various tourist services or accommodation in tourist places. More often, it is already included in the cost of services and hotel accommodation.

The government uses tourism taxes for the development of tourism infrastructure, support for local culture and art, as well as to ensure the service of tourists. The tax amount varies in each emirate.

Traditional fees that local hotels, cafes, restaurants, and entertainment venues are entitled to charge include:

• Room fee – 10%;
• Mandatory service charge – 10%;
• Municipal fees – 10%;
• City tax – 6-10%;
• Tourism fee – 6%.

Hotels in Dubai additionally charge fees for each room per night for no more than 30 consecutive days. The fee varies from 7 to 20 dirhams depending on the category and level of the hotel.

Also, tourists are subject to a 5% VAT. The government provides the opportunity to receive a partial refund of VAT for purchases made in the country. To participate in the program, you must be a non-resident of the United Arab Emirates, reach the age of majority, and purchase goods in one of the accredited stores for an amount of at least 250 dirhams. After making a purchase, you should obtain a Tax Free label. The goods eligible for a refund must be exported from the country in a sealed condition within three months.

Cash or non-cash refunds are possible. Cash refunds are limited. The program does not apply to alcoholic and tobacco products, pork, weapons, and ammunition.

What to Do If You Have Tax Delinquency

Tax delinquency is a serious violation that should be avoided if possible. For each month of delinquency, a penalty of 14% per annum is charged on the unpaid amount. The maximum penalty cannot exceed 200% of the amount of unpaid taxes regardless of their types.

Criminal liability is provided for intentional fraudulent tax manipulations, deliberate evasion of payment, and providing knowingly false statements to the Federal Tax Authority (FTA). For each of these violations, a penalty of 200–300% of the amount of unpaid taxes is provided. In case of deliberate and repeated violations, imprisonment is possible.

To avoid such a situation, follow these rules:

Identify the reasons for the delinquency to develop an effective plan to rectify the situation.

Contact the relevant tax authority in the UAE to determine the amount of the debt and the procedures for its settlement.

Develop a plan for phased repayment of the debt, taking into account your financial capabilities.

Adhere to the repayment deadlines. Follow the developed plan and make sure to submit payments on time. This will help avoid the accrual of additional penalties.

Consider the possibility of settling the debt. In some cases, it may be possible to negotiate a repayment plan or a reduction in the amount of the debt. Discuss this with a representative of the tax authority.

Learn about tax exemptions and discounts that may apply to your situation.

Maintain budget and financial discipline to avoid future delinquencies.

Try to prevent a recurrence of the situation. Take measures to prevent future delinquencies, such as improving your accounting and financial control system. Always cooperate with tax authorities. Maintain open and honest communication, providing all necessary information.

If you encounter difficulties while setting up your business in the UAE, contact The Level Consulting agency. We will help you officially register your company in the UAE, obtain all necessary documents and licenses, work visas for company employees, accounts in foreign banks and payment systems. We will provide legal support and accompany you at all stages of the transaction. We will develop a step-by-step action plan for you to navigate and evaluate the quality of the work done.

Conclusion: Pros and Cons of Opening a Business in the UAE

Opening a business in the UAE is a reliable and liquid solution, as the Emirates remain a leading country in terms of economic growth. The government actively participates in improving the tax system and develops new incentives for entrepreneurs, engages in open dialogue with companies, and supports their activities.

Advantages of doing business in the UAE:

• Favorable tax system. The UAE has one of the lowest tax rates in the world.
• Confidentiality. The Emirates have no public register of companies, providing your business with protection from the exchange of banking information.
• Simplified business registration and reporting procedures with tax authorities.
• No restrictions on ownership of foreign assets.
• Convenient strategic location of the UAE, providing access to markets in the Middle East, Asia, and Africa.
• Income without deductions and additional expenses. Tax resident status allows for income outside the UAE without taxation in other countries.
• Simplified accounting reporting.
• Stable exchange rate of the dirham to the dollar.
• Highly developed infrastructure and constant innovations in various sectors.
• Maintenance of zero tax rates for most types of income.

Despite being open, the UAE still maintains cultural norms and traditions that may require adaptation for successful business operations.

The Emirates actively develop their economy, invest in various industries such as tourism, technology, finance, and infrastructure. This creates favorable conditions for the development of new enterprises and, consequently, strengthens competition.

However, the UAE is recognized as one of the world's economic leaders, and the local tax system is considered one of the best in terms of quality. Opening a company in the Emirates is advantageous, especially if you familiarize yourself with all the conditions, legislative norms, and are knowledgeable about taxation matters.