How People Live In Dubai For 0% Tax?
Table of Contents
Introduction
Expats want to flock to Dubai. Apart from the high quality of life, the foremost reason for such enthusiasm for Dubai is the fact that Dubai is a tax-free nation. There is no income tax on income generated in Dubai. Also, there is no sales tax on the majority of goods and services.
Contrary to the financial policies adopted virtually everywhere globally, Dubai stands out as a notable exception. The United Arab Emirate (UAE) is famous for a few things; its high-rise buildings, oil, shopping, and the policy of no income taxes. The country is touted as a haven for expats as earnings are not taxed.
But how true is this? How does the UAE government fund its many ventures? Surely, the government must be making money. After all, the Middle-eastern country approved a balanced budget of AED 61.35 billion for the year 2020. This means that the government’s expenses were balanced out completely by the revenues earned, with a zero financial deficit.
Nomadic Explorers: Chasing Tax Residency Globally
Some expats opt for a nomadic lifestyle, spending just the required three months in Dubai to secure tax residency. These individuals, often termed “Nomads,” leverage their newfound tax status while traversing the globe. Working remotely, they may choose to live in Europe, Southeast Asia, or even return to their home country for part of the year. While this lifestyle provides flexibility, it can pose challenges in terms of establishing a stable work environment.
Seasonal Residents: Balancing Sunshine and Summers
Many expats, including myself, find a middle ground by spending approximately 5 to 8 months in Dubai each year. This group, the “Seasonal Residents,” strategically avoids the scorching summer months, opting to travel to cooler destinations in Southeast Asia, Europe, North America, or South America. This lifestyle offers a balance between enjoying Dubai’s advantages and escaping the extreme heat during the summer.
Year-Round Dwellers: Navigating Employment Commitments
Some individuals find themselves in Dubai year-round due to employment commitments. These “Year-Round Dwellers” often work traditional jobs and are required by their employers to remain in Dubai for the entire year. While they don’t have the flexibility of the nomads or seasonal residents, they are deeply entrenched in the local culture and work environment.
Benefits of Being a Seasonal Resident or Year-Round Dweller
VAT in the UAE
Since January 2018, a 5% VAT is levied on the majority of goods and services in the UAE, at the point of sale. The revenue generated by the VAT is used to support government public services. The UAE government also intends for the VAT to lessen the country’s reliance on oil and other hydrocarbons as a source of revenue.
VAT Registartion
- Taxable supplies and imports of a UAE-based business exceed AED 375000 per annum
- Non-UAE based business makes taxable supplies in the UAE, regardless of its value, and there is no other person obligated to pay the due tax on these supplies in the UAE.
- Meanwhile, VAT is optional for businesses whose supplies and imports exceed AED 187500 per annum.
VAT Applicability in Free Zone
The VAT applies to all tax-registered firms in the UAE, including the Free Zones. However, if the UAE Cabinet designates a certain Free Zone as a “Designated Zone,” it must be taxed as being outside the UAE. The transfer of goods between designated zones is tax-free.
Corporate Tax in the UAE
Corporate Tax is a form of direct tax levied on the net income or profit of corporations and other entities from their business.
In January 2022, the UAE Ministry of Finance announced that it will impose federal CT on the net profits of businesses. Only oil companies and international banks were subject to corporate taxes in the past. On 9 December 2022, the FTA released the final version of the CT law through Federal Decree Law No. 47 of 2022.
The CT will take effect depending on the Fiscal year followed by the businesses:
- Any business that adopts a fiscal year starting on June 1, 2023, and ending May 31, 2024, will be subject to CT starting June 1, 2023. The first tax return filing is likely to be due towards the end of 2024.
- Any business that adopts a calendar year starting January 1, 2023, and ending December 31, 2023, will be subject to CT starting January 1, 2024 and filing is likely to be due towards mid-2025.
Entities Subject to Corporate Tax
- All Businesses: conducting business activities under a commercial licence in the UAE
- Free Zone Businesses unless such businesses or their branches fulfil certain conditions and continue to benefit from 0% corporate taxation on income from qualifying activities and transactions
- Foreign Entities only if they conduct a trade or business in the UAE in an ongoing or regular manner
- Banking Operations
- Businesses engaged in real estate management, construction, development, agency and brokerage activities.
Entities Exempt from Corporate Tax:
- Business engaged in the extraction of natural resources are exempt from CT as this business will remain subject to the current Emirate level corporate taxation.
- Dividends and capital gains earned by a UAE business from its qualifying shareholdings will be exempt from CT.
- Qualifying intra-group transactions and reorganizations will not be subject to CT, provided the necessary conditions are met.
DOUBLE TAXATION
The UAE has 142 agreements in place with other countries to minimise double taxation on foreign investments. The agreements on Double Taxation Avoidance are intended to:
Promote the country’s development goals and diversify its sources of national incomeEliminate double taxation as well as additional, indirect taxes and tax evasionEliminate any obstacles related to cross-border trade and investment flowsProvide protection to taxpayers from double taxation, whether direct or indirectPromote free interchange of products and services as well as the free movement of capital.
ECONOMIC SUBSTANCE REPORTING
In April 2019, the UAE announces economic substance regulations which were repealed in August 2020, Cabinet Resolution No.57 of 2020, which imposed a requirement for UAE entities to maintain an adequate “Economic Presence” in the UAE relative to the activities they undertake.
The UAE economic substance requirements apply to all UAE onshore and free zone companies and certain other business that engage in one or more “Relevant Activity” for fiscal years commencing on or after 1 January 2019.
What are the Relevant Activities?
- Banking activities
- Insurance activities
- Fund management activities
- Financing or leasing activities
- Headquarter activities
- Shipping activities
- Holding companies
- Intellectual property holding or exploitation
- Distribution of goods purchased from foreign connected persons
- Provision of services to foreign connected persons
Entities that meet the requirements to be considered as “Exempt” do not need to demonstrate economic presence in the UAE. However, such entities must file a Notification and provide sufficient evidence to support their exempt status.
COUNTRY-by-COUNTRY REPORTING (CbCR)
Country-by-Country Reporting requirements are applicable to the UAE-based that are part of a multinational group consisting of two or more enterprises that are tax residents in different jurisdictions and have consolidated revenues equal to or greater than UAE Dirhams 3,150,000,000 in the preceding fiscal year starting on or after January 1, 2019.
CbC Report should provide a breakdown of the Multinational Group’s global revenue, profit before tax, income tax accrued, and some other economic activity indicators for each jurisdiction in which the MNE operates.
The purpose of CbC Reporting is to eliminate any information gap between taxpayers and tax administrations with regard to information on where the economic value is generated within the MNE Group and whether it matches where profits are allocated and taxes are paid on a global level.
UAE CUSTOMS DUTY
Customs Duty on most commodities are determined at 5% of the Cost, Insurance and Freight (CIF) value. Some categories are exempted. Most notably, alcohol is subject to a 50% tariff, while tobacco items are subject to a 100% duty.
PROPERTY TRANSFER TAX
Property transfer tax applies when a property is bought or sold in the UAE. This varies according to the specific Emirate, for example 4% in Dubai while Abu Dhabi charges only 2%. The transfer fee is usually divided equally between the buyer and the seller.
TAXES IN TOURIST FACILITIES
Restaurants, hotels, hotel apartments, resorts etc. in the UAE might charge one or more of the following taxes, which vary per *Emirate.
- 10% Tax on Room Rate
- 10% Service Charge
- 10% Municipality Fees City Tax (Ranging from 6-10%)
- 6% Tourism Fee
*In Dubai, hotels charge ‘Tourism Dirham Fee’ per room per night of occupancy (for a maximum of 30 consecutive nights) ranging from AED 7 to 20 depending on the category or grade of the hotel.
*Abu Dhabi would charge a new additional fee of 4 percent of hotel stay bill and AED 15 charges per night per room.
*Abu Dhabi would charge a new additional fee of 4 percent of hotel stay bill and AED 15 charges per night per room.
MUNICIPALITY (RENTAL) TAX
Taxes on rented properties vary between the Emirates.
In Dubai, residential tenants pay 5% of their annual rent in rental tax, while 10% is added onto commercial tenants.
However, in Abu Dhabi, UAE citizens are not taxed on their properties, but their expat counterparts pay 5%.
In Sharjah, all tenants pay a rental tax of 2%.
The municipality tax is calculated as 5% of your rental contract’s value for all premises, with a minimum amount to pay of AED 450 per annum. Although the total fee applies from the first day of the rental contract, the annual fees are broken down into monthly instalment to make payments easier.
SOCIAL SECURITY LEVY
Social security contributions for UAE national employees, are calculated at a rate of 20% of the employee’s gross remuneration as stated in the local employment contract.
Out of the 20%, 5% is payable by the employee, 12.5% is payable by the employer, and an additional 2.5% contribution is made by the government. A higher rate of 26% is applied in the Emirate of Abu Dhabi, where the contribution of the employer is increased to 15%, the government’s contribution is increased to 6%, and the employee’s contribution remains 5%.
Employees of enterprises and branches registered in a Free Trade Zone (FTZ) are also subject to social security duties.
Social security contributions for other GCC nationals working in the UAE are determined in accordance with their home country social security legislation.
CONCLUSION
The UAE is well-known as a tax haven, offering a tax-friendly environment for businesses. However, in order to fuel the country’s economic growth and development, the UAE government has implemented taxes in recent years. As a result, the UAE will lose its tax-free status, but businesses will benefit from enhanced transparency and recognition of the country as a fully globally compliant jurisdiction with suitable structure.
Dubai offers a spectrum of lifestyles for expats, from globetrotting nomads to those committed to year-round residency. Choosing the right lifestyle depends on personal preferences, work commitments, and the desire for a stable and favorable tax environment.
If you’re considering a move to Dubai, our team at GenZone can guide you through the process of setting up your business, obtaining residency, and opening bank accounts. Book a call with us to explore your options and make an informed decision tailored to your needs.
