You've probably heard that the United Arab Emirates is a tax haven for businesses and individuals. In fact, at first glance, the tax system seems straightforward and friendly. Oil companies and foreign banks are exempt from corporate tax. Taxes are imposed on certain goods that are harmful to human health or the environment. There is a value-added tax on most goods and services, but it is lower than the global average.
Does that mean you only need to worry about that when moving or doing business in the UAE? If so, what is the catch?
We will now consider the tax responsibilities of legal entities engaged in entrepreneurial activities in the country.
Profits from business are not taxed under a federal system in the United Arab Emirates. According to local decrees, each Emirate determines its own corporate taxation rules.
According to general rules, corporate tax is a progressive tax that can amount to up to 55% of the company's profits. Foreign banks are taxed at a flat rate of 20%.
However, most businesses shouldn't be overshadowed by this. Currently, the corporate tax applies almost exclusively to foreign oil companies engaged in exploration and production of oil, as well as to foreign bank branches.
Free zones have their own rules and regulations, and they usually offer tax breaks for businesses established within the zone for a period of 15 to 50 years (usually with the possibility of extension).
As a result, most organizations registered in the United Arab Emirates do not pay corporate tax.
Value Added Tax
VAT (Value Added Tax) was introduced in the UAE on January 1, 2018. VAT was totally absent in the country prior to this deadline, and now it is only 5 percent. The need for VAT was primarily related to the need for the country to receive a reliable source of income. Another important reason for the introduction of the VAT was the implementation of a program to reduce the country's dependence on oil and other hydrocarbons as a source of income.
Across the UAE mainland and in free zones, VAT applies equally to tax-registered companies. There are, however, some exceptions. For tax purposes, these jurisdictions are considered to be located outside the UAE when moving goods and services between them, as well as outside the UAE. There is no VAT in such cases.
As long as the goods are not imported into designated zones, the importer is required to pay VAT when shipping them into the UAE. However, if the imported goods are exempt from customs duties, this does not automatically mean they are exempt from paying VAT. This is a general rule.
Businesses from abroad can also recover the VAT they have paid in the UAE.
Furthermore, not all companies operating on the territory of the state must register as VAT payers and fulfill the relevant tax obligations. A company is required to register as a VAT payer if its taxable local supplies and imports exceed AED 375, 000 per year. Voluntary registration is also available for companies whose supply and import volume exceeds AED 187,500 per year. A tax group of companies can be registered as a single taxable person by virtue of the legislation.
Registered taxpayers have the following rights and obligations:
- levying VAT on the taxable goods or services they provide;
- maintaining business records that will enable the government to verify the accuracy of its actions.
- providing the state with information on the amounts of VAT paid and received on a regular basis;
- refund of VAT paid on goods or services related to the business;
Businesses registered as VAT payers, or taxpayers must file a tax return with the Federal Tax Administration (FTA) each tax period. The return sums up the value of the supplies and purchases made by the taxpayer during the tax period and displays the taxpayer's VAT liability.
For any given tax period, the amount payable to the budget is the difference between the incoming tax (VAT paid on purchases) refundable for that tax period and the incoming tax (VAT levied on supplies).
The difference between the outgoing and incoming taxes must be paid to the FTA. A taxpayer who incurs more incoming tax than he pays out will be reimbursed for the excess input tax; he will be allowed to count the overpayment against the subsequent tax payment.
In order to receive a refund of input VAT, the following conditions must be met:
- the wearer must be a value-added taxpayer;
- VAT should have been charged correctly (i.e. excess VAT is not refundable);
- the application must have documentation confirming the VAT paid (e.g. a valid invoice);
- the acquired goods or services are used for taxable purposes;
- VAT may only be claimed on amounts paid or expected to be paid before the expiration of 6 months after the agreed date of payment for delivery.
Generally, tax returns are filed electronically through the FTA portal: eservices.tax.gov.ae within 28 days of the end of the tax period for each business type. The standard tax period for businesses with an annual turnover of less than AED 150 million is the quarter. In the case of enterprises with an annual turnover of 150 million UAE dirhams, this period is shortened to 1 month.
For certain types of businesses, the FTA may elect to assign a different tax period. If a tax return is not paid within a specified timeframe, it will be considered a violation and penalized.
In 2017, the UAE introduced excise duty on certain goods that harm human health or the environment. These products include:
- any carbonated drinks other than carbonated odorless water. In addition to carbonated beverages, any powder, gel, or extract is used to make them.
- energy drinks contain stimulants that provide mental and physical stimulation, such as caffeine, taurine, ginseng, and guarana. It includes all substances that have the same effect as those listed above. In addition, it includes any concentration, powder, gel, or extract intended to be turned into an energy beverage.
- tobacco and tobacco products (including all items listed in Appendix 24 of the General Customs Tariff of the GCC);
- electronic smoking devices and tools, as well as liquids used in such devices;
- sugary beverages;
In accordance with Cabinet of Ministers Decree No. 52 of 2019, the rate of the excise tax is:
- 50% on carbonated drinks;
- 100% on tobacco products;
- 100% on energy drinks;
- 100% on electronic cigarettes;
- 100% on the liquid used in electronic cigarettes.
- 50% on drinks with added sugar or sweeteners.
Every business engaging in the import, production, or accumulation of excisable goods in the UAE, as well as any individual responsible for managing an excise warehouse, for example, the warehouse owner, must register for excise tax.
The state uses the excise tax to reduce the consumption of unhealthy and harmful goods. In addition, it is the state's responsibility to increase government revenues that can be spent on useful public services. As the tax is indirect, it is included in the price of the goods. Therefore, the burden of the tax falls on the taxpayer, who will pay more for goods that are harmful to human health or the environment.
Dubai levies import duties on commercial goods based on various factors, including whether the business is registered on the mainland or in the free zone. This includes what the products and services are, where they are sourced and where they are going, and whether the UAE has tax agreements with the exporting country.
The UAE has adopted a single tariff from the Cooperation Council for the Arab States of the Gulf (GCC), and customs duties are set at 5% of the CIF value of most goods. However, alcoholic, carbonated and sweetened beverages are subject to a duty of 50%, and e-smoking devices (tools and liquids used in them) and tobacco products are subject to a customs duty of 100%. Agricultural products and pharmaceuticals are exempt from customs duties.
A free zone does not levy customs duties on goods imported into its territory. A company registered in a free zone can import goods without paying customs duties.
Customs duties are also exempt from taxes in countries participating in the Greater Arab Free Trade Agreement of 1998.
Taking all of the above into consideration, it should be noted that the United Arab Emirates has created the most business-friendly conditions.
Direct tax obligations are rarely incurred by companies. VAT and excise duty are indirect taxes that ultimately fall on the shoulders of consumers. Customs duties are generally low, or in some cases absent altogether.
Companies operating in free zones are virtually tax-free if they conduct no internal business. Entrepreneurs planning their activities in free zones only need to consider the costs of opening and maintaining their company (for more information, see the article How much does it cost to open a company in the UAE?). A company's turnover, however, determines how significant such expenses are. Also, it is important to point out that fees associated with state and municipal services fall equally on individuals and corporations (see Taxation of individuals in the UAE). However, from the company's perspective, they don't appear so significant.