Taxes in Dubai: What You Need to Consider

Dubai is renowned for its favourable tax system, which is attractive to private individuals and companies alike. One of Dubai's most notable features is the absence of income tax on private income, which makes the city particularly appealing to investors as well as to international entrepreneurs. However, in light of the changes of recent years, even Dubai is no longer entirely tax-free.

Table of contents

The key points at a glance
Is Dubai still a tax haven?
Why is Dubai tax-free?
Dubai tax rates
Who is subject to tax?
What are the taxes in Dubai?
Income tax
What is a permanent establishment?
Indirect taxes
VAT
Excise tax
Motor vehicle tax
Corporate taxation - withholding tax
What taxes do you actually pay in Dubai?
Who is exempt from tax liability?
Conclusion
FAQ
As an entrepreneur, do I always have to pay Corporate Tax?
Can Corporate Tax be avoided?
Do I have to pay taxes as an employee?
How is my private income taxed?

The key points at a glance

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

Is Dubai still a tax haven?

By current criteria, Dubai could indeed be described as a tax haven. Under certain conditions, the tax burden is even 0%. Aside from the 5% VAT, the only taxes that may apply are relatively modest consumption taxes linked to lifestyle. Dubai and the other UAE emirates have also succeeded in being removed from the European blacklist of tax havens, strengthening their reputation as a reputable business location. But does this mean that Dubai is entirely exempt from taxes?

Why is Dubai tax-free?

Dubai carries the reputation of being tax-free. But is that really the case? At least in part, because Dubai has experienced strong economic growth in recent decades. The city and its government pursue a strict economic policy aimed at attracting potential investors. This economic policy is also the reason why Dubai does not directly tax income. However, the Corporate Tax introduced in June 2023 must be taken into account. Dubai's location likewise plays a decisive role in its tax exemption. The Emirate is situated on the Persian Gulf and therefore serves as an important transit and trade hub between Europe, Asia and Africa. As a result, it benefits from the prosperity of neighbouring countries while at the same time boosting its own economy.

Dubai tax rates

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

In addition to these tax rates, a new Corporate Tax of 9% was introduced in June 2023, which is payable by entrepreneurs who exceed a certain turnover threshold.

Who is subject to tax?

The new Corporate Tax system has been 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 Tax. The same applies to subsidiaries of foreign companies and to branches. Special rules may apply to companies in free zones, provided that they meet certain conditions.

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

But what is the purpose of the Corporate Tax system? Dubai intends to use the revenue from Corporate Tax to finance smaller start-ups and to expand its infrastructure.

Corporate Tax

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

Nevertheless, with a tax rate of 9%, which is very low by global standards, companies can often avoid this tax burden easily and legally. For example, if the owners of a company also act as employees, they can readily minimise the company's profit by adjusting their salaries. As mentioned earlier, no tax is levied on income from employment, which is why companies can save a considerable amount in this way.

There are, however, exceptions for certain sectors of the economy, such as the oil industry or banking, where companies must pay tax on up to 55 percent of their profits. Foreign companies that have established themselves in one of the numerous free trade zones in Dubai or the other Emirates should also be taken into account. These companies often enjoy considerably more tax benefits than companies located right in the centre, for example.

In principle, Corporate 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.
-Non-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 carry out a 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 Corporate Tax, the criterion of the permanent establishment should be briefly mentioned.

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

There are, however, exceptions to this rule. Companies operating in one of Dubai's free trade zones, for instance, are exempt from tax liability.

Background to the Corporate Tax Act

The announcement of a 9 percent Corporate Tax from June 2023 sparked heated debate in the United Arab Emirates, including Dubai. There has also been speculation as to whether this would represent a turning point for the tax haven. However, these concerns have not yet been confirmed. On the contrary, the government has emphasised 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 exempt from this regulation if they meet certain criteria. It is also expected that companies in free trade zones will remain exempt from this regulation in the future. The same applies to purely financial investments.

What are the additional taxes in Dubai?

Dubai is still known for its tax-free policy and was for a long time financed primarily by the export of crude oil. For some time now, however, the government has initiated a programme to diversify the economy, in order to no longer be 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 established Dubai as a global hub in the first place. Educational initiatives, such as the opening of a branch of Harvard University, are also part of this restructuring. Dubai is likewise beginning to levy taxes cautiously.

And even though Dubai still offers favourable conditions for companies and private individuals pay no 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 its tax-free policy approach.

Nevertheless, the tax burden in Dubai should remain minimal. There is, for example, no inheritance tax, and the sale of real estate is subject only 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 by purchasing real estate worth around 250,000 euros. Employment with a local company likewise makes a lawful stay possible.

Now to the actual taxes:

Income tax

There are currently no changes to income tax. Income from employment, for example, is tax-free. However, the following should be noted here: individuals who carry out a 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 subject to tax.

Indirect taxes

Up to this point, the discussion has focused on direct taxes. However, indirect taxes and duties are also common in Dubai, particularly when it comes to goods and services. Indirect taxes are levied, for example, on overnight hotel stays, on water supply, on the use of main roads or on certain services. These are, however, in the low single-digit euro range. Such taxes play virtually no role in the cost of living. The most important indirect tax, though, is value added tax.

VAT

Since 2018, Dubai has applied a tax rate of 5% on a company's turnover. However, as in Germany, this tax can be passed on to customers if the transaction was concluded within Dubai. It is therefore a pass-through item and a pure consumption tax.

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

Value added tax also serves as a tool for diversifying government revenue, which is intended to contribute to

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

Excise tax

The excise tax is a (selective) indirect tax levied on certain consumer goods. In general, it is imposed on goods 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 likewise no motor vehicle tax of the kind known in Germany, for example. As one would expect, fuel there is very cheap. Apart from the toll fee already mentioned, there is therefore only an import duty of 5% when importing a vehicle. This does not apply, however, 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. It should be noted at this point that the use of a car in Dubai is essential given the 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. Withholding tax is therefore 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 subject to withholding tax and the associated tax rate can be determined by a cabinet decision. However, given the current tax rate of 0%, no obligation to register or file is assumed.

What taxes do you actually pay in Dubai?

Which taxes specifically affect you if you wish to settle in Dubai? Specifically, you should at the very least keep this tax in mind if you are planning to run a company in Dubai or the UAE: Corporate Tax.

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

It should be noted here, however, that the tax rate is

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

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

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

All the other taxes mentioned earlier do not significantly affect your cost of living. Note, however, that property prices, rents and ancillary costs are comparatively very high and cannot be compared with German levels.

As an employee, your income is not taxed in any case, because all income from employment is tax-free.

Who is exempt from tax liability?

Certain entities, such as non-profit organisations 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 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 with other international locations, particularly in the free trade zones, Dubai and the UAE enjoy almost complete tax exemption. This is further reinforced 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 in order to make itself more independent of income from the oil business, which, among other things, explains the introduction of taxes. Dubai wants to position itself in the long term as a progressive Arab country that is open to the West and seeks to contribute to climate protection as well as to peace and prosperity in the region.

FAQ

As an entrepreneur, do I always have to pay Corporate Tax?

No, you do not. Although Corporate Tax was introduced in June 2023, it applies only to companies that exceed an annual turnover of AED 1,000,000.00 and a profit of AED 375,000.00 (approximately 90,000 euros). For these companies, Corporate Tax of 9% is then charged on the portion of taxable income that exceeds the profit amount of AED 375,000.00. If this threshold is not exceeded, however, the tax rate is 0%.

Can Corporate Tax be avoided?

That is, in fact, possible. Companies with an annual profit of less than AED 375,000.00 (approximately 90,000 euros) fall under the so-called basic allowance. Companies could therefore adjust the salaries of their shareholders in such a way that they fall below this threshold 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 a genuine employment relationship in Dubai, no tax is levied on your salary.

How is my private income taxed?

In Dubai, income from employment is tax-free. Income from economic activity, on the other hand, must be taxed.

In Dubai, as in many other countries, private income typically comprises 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 shares, real estate or other investments.
6. Pensions: income from pension insurance or state/private pensions.

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

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