Taxation in the UAE: What Investors Should Know
The United Arab Emirates (UAE) is a country filled with investment potential, attracting investors from all around the globe. Its unique taxation system provides an excellent environment for development. This article will introduce the UAE’s taxation system, highlighting its advantages in attracting investments, offering tax incentives, and ensuring compliance.
In general, the UAE’s taxation system has several important features. Firstly, there is no personal income tax, meaning individuals can enjoy tax-free income within the UAE. Secondly, the corporate income tax rate is low, ranging from 0% to 9%. This is a significant advantage for businesses, as it effectively increases profitability and competitiveness. Additionally, the UAE implements a value-added tax (VAT) system with a rate of 5%, applicable to most goods and services transactions. Lastly, the UAE’s customs and import tax policies are relatively open, providing favorable conditions for international trade.
1. Corporate Tax
The corporate tax in the UAE is equivalent to China’s corporate income tax. In the past, the UAE had a 0% corporate tax rate. However, on January 31, 2022, the UAE Ministry of Finance announced the implementation of a new corporate tax regime, which came into effect on June 1, 2023.
The corporate tax is divided into three tiers:
(1) Companies with annual taxable profits below AED 375,000 are subject to a zero tax rate.
(2) Companies with annual taxable profits exceeding AED 375,000 are subject to a 9% tax rate.
(3) Multinational enterprises falling within the scope of Pillar Two of the Organization for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) 2.0 framework, with global consolidated revenue exceeding AED 3.15 billion, will be subject to different tax rates under the OECD’s BEPS rules.
The UAE’s corporate tax rates are lower than those of most Gulf countries, except for Bahrain, which will stimulate economic growth and attract foreign investment, further solidifying the UAE’s position as an investment-friendly destination.
The corporate tax covers all companies engaging in commercial activities within the UAE’s various emirates, including foreign banks.
However, there are exceptions. Companies engaged in the extraction of natural resources will comply with the tax regulations issued by their respective emirates. Additionally, individuals receiving income as individuals (e.g., salaries and investment returns) are exempt from tax if such business activities do not require a commercial license. Similarly, companies registered in free zones may be exempt from paying corporate tax if they meet the respective rules.
2. Value-Added Tax (VAT)
The UAE started implementing VAT on January 1, 2018, with a rate of 5%.
VAT applies to most goods and services provided in the UAE. However, some certain businesses and services are exempt from VAT, including:
(1) Basic food items
(2) Education and healthcare services
(3) Utilities
(4) Financial services
(5) Real estate
(6) International goods and passenger transportation
The introduction of VAT in the UAE was to comply with the Gulf Cooperation Council’s (GCC) unified agreement to introduce VAT in the region. This decision aimed to create a sustainable source of revenue for the UAE government to support public services and infrastructure development.
3. Excise Tax
The UAE started implementing excise tax in 2017. Excise tax is an indirect tax levied on specific goods harmful to human health or the environment.
The UAE government aims to reduce the consumption of unhealthy and harmful goods while increasing government revenue for beneficial public services. According to the UAE government’s regulations on excise tax in 2019, the excise tax rates are as follows:
(1) Carbonated beverages: 50%
(2) Tobacco products: 100%
(3) Energy drinks: 100%
(4) E-cigarettes and electronic devices: 100%
(5) E-liquids used in electronic devices: 100%
(6) Products with added sugar or sweeteners: 50%
4. Personal Income Tax
Currently, the UAE does not levy personal income tax. Therefore, individuals do not need to register or report personal income taxes.
According to the UAE Corporate Tax Law, natural persons engaged in commercial or business activities within the UAE may be subject to a 9% corporate tax if the income from such business or commercial activities exceeds the government-prescribed threshold.
5. Tourism Fee
Restaurants, hotels, hotel apartments, resorts, and similar establishments in the UAE may charge tourists one or more of the following fees:
(1) 10% facility fee on room rates
(2) 10% service charge on room rates
(3) 10% municipality fee on room rates
(4) 6% to 10% city tax on room rates
(5) 6% tourism fee on room rates
In practice, Dubai’s hotels charge a tourism fee called “Tourism Dirham” ranging from AED 7 to AED 20 per room per night (up to 30 consecutive nights), depending on the hotel’s category/class. Abu Dhabi’s hotels started charging a 4% new additional fee on hotel accommodation costs, as well as AED 15 per room per night.
In Ras Al Khaimah, hotels charge a tourism fee of AED 15 per room per night.
6. Double Taxation
The UAE has signed 94 agreements with other countries to avoid double taxation on overseas investments. Double taxation refers to two countries levying similar taxes on the same taxpayer on the same tax base, which can undermine cross-border trade in goods, services, capital, and technology.
To pursue its development goals, the UAE has signed 137 agreements to avoid double taxation with most trading partners.
Both public and private companies operating in the UAE, investment companies, aviation companies, and other companies, as well as residents, benefit from the agreements to avoid double taxation. On July 1, 1994, China and the UAE signed the Agreement between the Government of the People’s Republic of China and the Government of the United Arab Emirates for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion, which came into effect on July 22, 1994.
Conclusion:
The UAE’s taxation system holds distinct advantages in attracting investors. Low tax rates, tax incentives and exemptions, tax transparency, and compliance, along with various supportive measures, make the UAE a sought-after destination for investors. Chinese investors seeking to invest in the Middle East should seize the opportunities provided by the UAE, enjoy its favorable tax environment, and actively participate in the UAE’s thriving economy.