Taxation in the UAE: 5 Things Expatriates Should Know

The UAE is considered to be an expat’s paradise. With 88 percent of the population having a foreign origin, the emirate has done a lot to make expatriates feel at home here. By investing in the latest technology and world-class infrastructure, and introducing expat-friendly policies, the UAE is steadily progressing towards its 2021 vision of becoming one of the happiest nations globally.

In the past few years, the UAE has become the world’s top destination for expats and international businesses. This is primarily because the residents of this emirate enjoy a luxurious quality of life with plentiful malls, beaches, and plush residential villas.

For instance, real estate projects like Arabian Ranches Villas in Dubailand give expats full ownership of comfy and budget-friendly villas that are equipped with world-class, hi-tech amenities, encouraging them to settle in this country.

Similarly, the emirate’s decision to offer a positive corporate tax system and favorable business policies has made UAE attractive to far-off entrepreneurs.

UAE is widely known for its expat-friendly taxation system. Consequently, expatriates who leave their heavily-taxed countries often breathe a sigh of relief upon landing in the emirate.

If you are an expat living in the UAE, you should be aware of the nation’s taxation system like local corporate taxation, intended tax reforms, and social security, and how they will impact your life in the emirate.

This post offers valuable information about the taxation system in the UAE, enabling expats to evade unforeseen tax-related hassles.

1. UAE Does Not Levy Income Tax

If you live and work in the UAE, you definitely do not have to bother with paying income tax, the pesky expense bothering the working population in other parts of the globe. Thus, when you take up a job in Dubai, Abu Dhabi, or any other city in the UAE, your salary slip will show about the same gross and net incomes.

Like other Gulf nations, the UAE earns a major portion of its revenue through the oil industry. Hence, the emirate offers an income tax-free living for its citizens in order to attract fresh talent and global giants to enrich the economy.

Additionally, foreign citizens (other than the nationals of the GCC member states) aren’t a part of UAE’s social security system. Therefore, they do not have to pay for public pension and retirement funding.

However, expats should remember not to splurge this tax-free income, but invest it in procuring social security coverage for themselves and their family.

2. Tax-Free but Conditions Apply

The tax system in the UAE is extremely favorable for residents. However, it is a smart idea to consult a tax professional who can help you understand your worldwide tax obligations, protecting you from getting stuck with hefty fines and legal actions elsewhere.

For instance, if you work in the UAE and are a tax resident of your country of origin, you may be subject to taxation on your income. Similarly, if you live in another country and own a property in the UAE from which you earn a rental income, you are liable to declare this income and pay tax in your country of origin.

Thus, the tax-free benefit is only applicable to expats who permanently move to UAE, are out of their country for a complete tax year, or declare themselves a non-resident for tax purposes in that country.

Furthermore, most UAE-based expats fail to realize their ongoing tax liability on earnings like rental income, dividend payments, interest on savings, and capital growth on stocks in their home country. Failure to declare this income and pay taxes can attract heavy penalties in the future.

Therefore, before moving to the UAE, it is critical to understand your tax responsibilities towards your home country.

3. Corporate Tax Laws Exist

If you plan to start your own commercial venture in the UAE, it is wise to read up on the emirate’s corporate taxation and accountancy standards. Currently, foreign oil and gas firms are taxed at rates agreed upon by the government.

Similarly, branches of foreign banks operating in the emirate are subject to taxes fixed by the decree, although not all UAE cities enforce this law.

Application or renewal of trade license in the UAE is taxable as per the municipality issuing the permit. Further, if your venture is connected to the import or export sector, you need to comply with the custom duty statutes on imported goods like tobacco, alcohol, and aerated drinks.

The legal and taxation framework vary as per the zone. If you desire to set up your business in UAE, it is advisable to hire a local management consulting firm that is aware of the local company formation laws and tax regulations.

Expat entrepreneurs who lack the resources to kick-start their venture can resort to free zones in the UAE, that are exempt from regulations pertaining to business owners and corporate taxes for a stipulated amount of time, which can be extended on request.

4. Indirect Taxes Exist in Various Forms

Just because the UAE offers less hassle with taxes, doesn’t mean you can fire your tax advisor right away! Contrary to popular belief, several indirect taxes are imposed in this emirate.

For instance, service charges are levied in the hospitality sector. So, if you stay at a hotel or buy a meal in a restaurant, ten percent tax gets added to your bill.

Council and municipal taxes are levied on services like street lighting and garbage collection. The UAE municipalities may also demand taxes on rental income.

Currently, the UAE doesn’t levy capital gains tax, and estate or gift tax. However, effective January 2018, the GCC (Gulf Cooperation Council) member states implemented the value-added tax (VAT) of 5%, collected on taxable supplies of goods and services at each step of the supply chain in the UAE. Thus, it is critical for entrepreneurs and business owners to be aware of how VAT will impact their business in the UAE.

5. The DTAA Protects Expats from Paying Double Taxes

The emirate has signed the Double Taxation Avoidance Agreement (DTAA) with respect to taxes on income and capital with more than 60 countries across the globe. This agreement has been signed to ensure that foreign UAE residents do not get stuck paying taxes to two different governments on income earned in one country.

For expatriates, one of the biggest attractions of living in the UAE is the citizen-friendly taxation system. Nevertheless, foreign nationals planning to live and work here should be aware of the emirate’s current taxation system.

Whether you are a UAE-based expat or plan to move to this country in the near future, the information shared in this post will help you understand UAE’s tax system, enabling you to avoid the common tax-related hassles as you settle into a tax-free lifestyle.