Overview of the taxation system in the United Arab Emirates
Direct and Indirect Tax Rates and Rules for UAE
Key information:
Direct Taxes: In practice, although there are Emirate-based income tax decrees which may apply to all businesses, these decrees are currently only enforced in respect of income generated from business activities related to exploration and production of oil and gas. Such an income may attract a tax at a rate of 20% to 55%.
At its Federal level, the UAE does not levy any tax on income earned by corporates or individuals and currently there is no legal framework for tax on income within the UAE Federal Legislation. Upon certain conditions (including management and direction), businesses established in the UAE may able to obtain tax domicile certificate from the Ministry of Finance based on which they can prove their tax residence in the UAE and also benefit from Double Tax Treaties where applicable.
In addition to the Emirate-based Decrees, branches of foreign banks operating in the Emirates of Abu Dhabi and Dubai are also subject to income tax at a flat rate of 20%.
There is no withholding tax, surtax, capital gains tax, Dividends tax or inheritance tax in the UAE. The UAE also does not impose stamp duty on transfer of shares, but Free Zone Authorities normal levy administrative fees for such a transfer. Nonetheless, Municipality fees may apply to income from rent or sale of real estate property and hotels operations. The rate of such fees may vary for an Emirate to another.
Considering that there is no income tax, the UAE also have no thin capitalization rule, or general anti avoidance rule. The UAE has established several free trade zones that offer tax incentives of 15 to 50-year tax holidays without restrictions on foreign ownership or capital and profit repatriation. The free zones also provide an exemption from import duties on goods brought into the concerned free zones.
With respect to the income earned by individuals, the only applicable tax is the social security contributions of 12.5% payable by the employer and 5% payable by the employees who are from the Gulf Cooperation Council (GCC) countries (i.e., Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and UAE).
Indirect Taxes:
Under the agreement with the Gulf Cooperation Council (GCC) countries, the UAE applies 5% customs duty. The same rate i.e. 5% is also applicable as a Value Added Tax (VAT) on supply of goods and services in the UAE. Additionally, the UAE also applies excise tax at rate between 50% to 100% on tobacco products, alcohol, energy drinks and sweeten beverages.
The UAE and the OECD’s BEPS Project:
The UAE has joint the Inclusive Framework (IF) of the Organization for Economic Co-operation and Development’s (OECD) on Base Erosion and Profit Shifting (BEPS) in May 2018. As a result, the UAE has signed The OECD multilateral instrument (MLI) which entered into force for the United Arab Emirates on 1 September 2019. The UAE also introduced a domestic regulation for Country-by-Country Reporting (CbCR) as well as Economic Substance Regulations (ESR).
However, currently there are no rules or regulations in the UAE with respect to the transfer pricing, interest deduction limitation, controlled foreign company or anti hybrid.
Tax Authorities:
Ministry of Finance is overseeing the reporting an compliance with respect to CbCR, ESR and also issues tax residence certificates to corporates and individuals. The Federal Tax Authority (FTA) is entrusted to collect indirect taxes, conduct tax assessment and implement administrative penalties where necessary, and General Pension and Social Security Authority is responsible for social security collection.
Income tax:
Tax Residence:
Emirate-level income tax decrees (see “Basis” below) do not contain specific provisions relating to corporate tax residence, so there is no clear legal concept of corporate tax residence in the UAE. Nevertheless, the Ministry of Finance (MOF) issues tax residence certificates to companies that are incorporated in and managed from the UAE and meet the requirements of the MOF (e.g., at least one UAE resident director, a fixed place of business) and any relevant tax treaty.
Legal basis:
Although the UAE does not have a federal Corporate Income tax (CIT) regime; however, most of the Emirates introduced their own income tax Decrees, and taxation is therefore determined on an Emirate-byEmirate basis. However, currently the local income tax Decrees are not enforced on most businesses and as a result, there is no Corporate taxation.
Notwithstanding the above, oil and gas exploration and production companies are subject to income tax, but usually under the specific terms of a concession agreement (or fiscal letter) signed with the government. The fiscal terms under such agreements generally supersedes the provisions of the Emirati income tax Decrees.
In addition to the upstream supply chain of oil and gas industry, branches of foreign banks are subject to income tax under separate banking tax decrees in the Emirates of Dubai and Abu Dhabi.
Taxable income: The applicable income tax decrees (or the concession agreement) and banking tax decrees include basic deductibility rules that need to be taken into account when determining taxable income. More specifically, eligibility to deduct certain expenses and intra-banks charges is limited.
Tax Rate:
1. Oil and gas exploration and production companies are taxed at progressive rates of up to 55% under the applicable Emirate-level income tax decree, although in practice different rates may be agreed with the relevant authority under specific government concession agreements.
2. Branches of foreign banks are taxed at rates according to the banking tax decree of the Emirate in which they operate, generally at a flat rate of 20%.
Losses:
Businesses subject to income tax on oil and gas operations, may carry forward losses indefinitely. However, branches of foreign banks may only carry forward losses for two years. Losses may not be recovered retrospectively i.e. from the income of the previous years.
Social security contributions:
Social security contributions are due only in respect of nationals of the Gulf Cooperation Council (GCC) countries (i.e., Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and UAE). For UAE national employees, the employer and employee pension contribution rates are 12.5% and 5%, respectively, and contributions are based on the monthly contractual salary, including basic allowances, as agreed in the local employment contract. The contribution rates and bases for other GCC nationals vary, but broadly are in line with those for UAE nationals.
Under UAE labor law, non-GCC national employees are entitled to an end-of-service benefit (EOSB) if their employment contract is terminated after completion of at least one year of service. EOSB is payable by the employer and calculated as 21 days per year of basic wages for the first five years of employment, for each additional year of service thereafter, the EOSB will be 30 days per year of basic wage. However, the maximum EOSB payment shall not exceed two years’ remuneration.
