Taxes in Dubai: What you need to consider

Dubai is known for its favorable tax system, which is attractive for both private individuals and companies. One of the most outstanding features of Dubai is the lack of income tax on private income, which makes the city particularly attractive to investors and international business people. However, with the changes in recent years, even Dubai is no longer entirely tax-free.

Table of contents

The most important facts in brief
Is Dubai still a tax haven?
Why is Dubai tax-free?
Dubai's tax rates
Who is liable to pay tax?
What taxes are there in Dubai?
Income tax
What is meant by permanent establishment?
Indirect taxes
Value added tax
Special consumption tax
Vehicle tax
Corporate taxation - withholding tax
What taxes do you really pay in Dubai?
Who is exempt from paying tax?
Conclusion
FAQ
As an entrepreneur, do I always have to pay corporation tax?
Can corporation tax be avoided?
Do I have to pay tax as an employee?
How is my private income taxed?

The most important facts in brief

• Dubai is traditionally known as a tax haven.
• This is because no taxes are levied on private income.
• However, a VAT rate of 5% was introduced in 2018.
• 5 years later, specifically in June 2023, a corporation tax of 9% was then introduced.
• However, this is only levied if certain turnover thresholds are exceeded.

Is Dubai still a tax haven?

Dubai could certainly be described as a tax haven according to the usual criteria. Under certain conditions, the tax burden is as low as 0%. The only taxes other than VAT of 5% may be relatively low, lifestyle-dependent consumption taxes. In addition, Dubai and the other emirates of the UAE have managed to be removed from the blacklist of European tax havens, which strengthens their reputation as a reputable business location. But does this mean that Dubai is now completely exempt from taxes?

Why is Dubai tax-free?

Dubai has a reputation for being tax-free. But is that really true? At least in part, because Dubai has experienced a strong economic upswing in recent decades. The city and government have pursued a strict economic policy aimed at attracting potential investors. This economic policy is also one of the reasons why Dubai does not levy direct taxes on income. However, the corporate income tax introduced in June 2023 should be noted. Dubai's location also plays a decisive role when it comes to tax exemption. This is because the emirate is located on the Persian Gulf and therefore acts as an important transit and trade hub between Europe, Asia and Africa. As a result, it benefits from the prosperity of neighboring countries and at the same time boosts its own economy.

Dubai's tax rates

The most important tax rates in Dubai that you should bear in mind include the annual rental tax of 5% and social security contributions of 26% of gross wages. Social security contributions are only due for employees who are employed in the Emirates and are UAE nationals. These contributions are split between the employer at 15% and the employee at 11%. In addition, VAT of 5% is levied on products or services.

In addition to these tax rates, corporate income tax of 9% was added in June 2023, which is due for companies that exceed a certain turnover threshold.

Who is liable for 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 zone are obliged to pay corporate income tax. The same applies to subsidiaries of foreign companies and branch offices. There may be a special regulation for companies in free zones, provided they meet certain requirements.

Companies in the tourism industry can also benefit from these low tax rates.

But what is the corporate tax system for? Dubai wants to use the revenue from corporation tax to finance smaller start-ups and expand its infrastructure.

Corporate income tax

In principle, Dubai was known for not levying taxes on the turnover or profits of legal entities. However, this changed with the introduction of corporate income tax in June 2023. Since then, companies and individuals conducting business activities in the UAE have been charged a total of 9 % corporate income tax on their profits. However, there is also an exemption here. If a company does not exceed an annual turnover of AED 1,000,000, corporation tax is not applicable. This is intended to ease the burden on smaller companies and start-ups.

However, with a tax rate of 9%, which is very low by global standards, corporations can often easily and legally avoid this tax burden. For example, if the owners of a company also act as employees, they can easily minimize the company's profits by adjusting their salaries. This is because, as mentioned earlier, no tax is levied on income from dependent activities, which is why companies can save a lot in this way.

However, there are exceptions for certain economic sectors, such as the oil industry or banking, where companies have to pay tax on up to 55 percent of their profits. Foreign companies that have settled in one of the numerous free zones in Dubai or other emirates should also be taken into account. These companies often enjoy many more tax advantages than companies located directly in the city center.

In principle, corporation tax applies to the following cases:

-Legal entities (such as companies) incorporated in the UAE or foreign legal entities that are effectively managed and controlled in the UAE.Non-resident legal entities (foreign legal entities) that have a permanent establishment in the UAE.
-JNon-resident individuals that derive income from government sources.
-Non-resident entities that have a nexus in the UAE if they derive income from immovable property in the UAE.
-Natural persons carrying on business or business activities in the UAE and deriving a turnover in excess of AED 1,000,000 per calendar year from such business (sole proprietorship) or business activities.

What is a permanent establishment?

In connection with corporation tax, the criterion of permanent establishment should also be mentioned briefly.

The term "permanent establishment" refers to foreign companies doing business or owning real estate in Dubai. Such companies are required to pay taxes in Dubai and must have an official business address.

However, there are exceptions to this rule. For example, companies operating in one of Dubai's free trade zones are exempt from paying tax.

Background to the Corporate Income Tax Act

The announcement of a 9 percent corporate tax from June 2023 has caused heated debate in the United Arab Emirates, including Dubai. There is also speculation as to whether this would represent a turning point for the tax haven. However, these fears have yet to materialize. On the contrary, the government has emphasized 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 the free zones will remain exempt from this regulation in the future. The same applies to purely financial investments.

What additional taxes are there in Dubai?

Dubai continues to be known for its tax-free policy and for a long time financed itself primarily through the export of crude oil. However, for some time now the government has been initiating a program 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 goes hand in hand with the trade in gold and diamonds, for example, which have made Dubai a global center in the first place. Educational initiatives, such as the opening of an offshoot of Harvard University, are also part of this restructuring. Dubai is also beginning to levy taxes cautiously.

And even though Dubai still offers favorable conditions for companies and private individuals do not pay income tax, the government is currently implementing reforms that have led to Dubai being removed from the European list of tax havens. The emirate is therefore slowly moving away from the tax-free approach. 

Nevertheless, the tax burden in Dubai should remain minimal. There is no inheritance tax and the sale of real estate is only subject to a 4% tax.

In order to benefit from Dubai's low taxes, a change of residence is usually required. An investor visa can be obtained by setting up a company or buying real estate worth around 250,000 euros. Employment with a local company also enables legal residence.

Now to the actual taxes:

Income tax

No changes to income tax are currently planned. Income from dependent employment is tax-free. However, the following should be mentioned at this point: Individuals who conduct business or business activities in the UAE and make a profit of more than AED 375,000 per calendar year from such business (sole proprietorship) or business activities will be taxed.

Indirect taxes

So far, we have always talked about direct taxes. However, indirect taxes or duties are also common in Dubai. Especially for goods and services. For example, indirect taxes are levied on hotel accommodation, water supply, driving on main roads or certain services. However, these are in the low single-digit euro range. However, these taxes play virtually no role in the cost of living. The most important indirect tax, however, is VAT.

Value added tax

In Dubai, a tax rate of 5% has been levied on a company's turnover since 2018. However, similar to Germany, this tax can be passed on to the customer if the transaction was concluded within Dubai. This is therefore a transitory item and a pure consumption tax.

There is also a regulation in Dubai that companies that do not exceed an annual turnover of AED 375,000 (exemption limit) 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.

VAT also serves as a diversification instrument for government revenue, which is intended to contribute to this,

It serves the United Arab Emirates and Dubai primarily as an instrument for diversifying their state revenues, which should make government business a little less dependent on revenues from oil exports and the world market price for crude oil.

Special consumption tax

Excise duty is a (selective) indirect tax levied on certain consumer goods: Generally, it is levied on goods that are 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 beverages - 50

Vehicle tax

In Dubai and the other emirates of the United Arab Emirates, there is also no road tax, as is the case in Germany, for example. This is because fuel is, as expected, very cheap there. Apart from the toll fee already mentioned, the only import duty payable is 5% when importing a vehicle. However, this does not apply 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. However, it should be mentioned at this point that the use of a car in Dubai is essential due to the local conditions.

Corporate taxation - Withholding tax

In the United Arab Emirates, the aim is to establish a simpler and at the same time more robust system of corporate taxation in order to reduce the tax burden for taxpayers. For this reason, a withholding tax is 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, due to the current tax rate of 0%, it is not assumed that there is an obligation to register or file.

What taxes do you really pay in Dubai?

Which taxes are you specifically affected by if you want to spend your retirement in Dubai? Specifically, you should at least keep this tax in mind if you are planning to run a business in Dubai or the UAE: corporate tax.

If you as a company exceed the allowance of AED 1,000,000 annual turnover, you will be liable for corporation tax at a rate of 9%.

However, it should be noted that the tax rate for

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

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

-In addition, a sales or value added tax of 5% applies.

All other taxes mentioned above do not have a significant impact on your living expenses. Please note, however, that real estate prices, rents and ancillary costs are comparatively very expensive and cannot be compared with the German level.

As an employee, your income is not taxed anyway, as all income from employment is tax-free.

Who is exempt from tax liability?

Certain entities, such as non-profit organizations 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 income tax - and is therefore no longer tax-free, strictly speaking - the emirate remains an attractive destination for foreign workers, tourists and business people.

Compared to other international locations, particularly in the free trade zones, Dubai and the UAE enjoy almost complete tax exemption. This is further enhanced by the absence of income and wealth taxes, which is why wealthy individuals, investors and highly qualified professionals will continue to find their way to the emirate.

The emirate is also investing heavily in education and tourism in order to make itself less dependent on income from the oil business, which explains the introduction of taxes, among other things. Dubai wants to position itself in the long term as a progressive Arab country that is open to the West and wants to make a contribution to climate protection, peace and prosperity in the region.

FAQ

As an entrepreneur, do I always have to pay corporation tax?

No, you don't have to. Although corporation tax was introduced in June 2023, this only applies to companies that exceed an annual turnover of AED 1,000,000.00 and a profit of AED 375,000.00 (approx. EUR 90,000). For these companies, corporation tax is then levied at a rate of 9% on the portion of taxable income that exceeds the profit amount of AED 375,000.00. However, if this limit is not exceeded, the tax rate is 0%.

Can corporation tax be avoided?

This is actually possible. This is because companies with an annual profit of less than AED 375,000.00 (approx. EUR 90,000) fall under the so-called basic tax-free allowance. Corporations could therefore adjust the salaries of their shareholders so that they fall below this limit and thus remain tax-free. As no income tax is levied 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 permanent employment relationship in Dubai, your salary is not subject to tax.

How is my private income taxed?

In Dubai, income from employment is tax-free. Income from business activities, on the other hand, is taxable.

In Dubai, as in many other countries, personal income typically includes all income that a person receives from various sources. Common types of personal income include:

1. Salaries and wages: Income from employment or self-employment.
2. Rental income: Income from the rental of 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: Gains from the sale of assets such as shares, real estate or other investments.
6. Pensions and annuities: Income from pension insurance or state/private pensions.

Do you still have questions about "Taxes in Dubai"? Our team of experts at Extent will be happy to advise you. Simply click on the link below to book a free consultation.

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