Dubai, the UAE Tax System. Main Features and Specifics of Local Laws on Taxation

If we compare the national tax system of Dubai, the UAE with the other traditional schemes and taxation practices, one can distinguish some features and properties. In particular, taxation in Dubai, the United Arab Emirates fully eliminates some obligatory taxes, which are withdrawn from businesses and private individuals on the territory of the other countries. Besides, the local tax legislation provides for the possibility of each of the seven independent Emirates (Abu Dhabi, Dubai, Ajman, Fujairah, Ras al Khaimah, Sharjah, and Umm al Quwain) to determine its tax policy independently.

It is worth noting that due to the peculiarities of taxation in Dubai, the UAE, it became a major international financial and business center in a relatively short period of time. The peculiarities of Dubai tax regulations have become a major incentive for attraction the significant investment inflows from abroad.

The Emirate of Dubai, which has become the region's largest financial center, thousands of branch establishments and international companies in Dubai, which are engaged in production, trade, services, logistics, tourism industry, etc., are registered every year in Dubai, the UAE and that is mainly due to a tax-free environment. In fact, a tax-free environment is the main one. The resort area of Dubai, the United Arab Emirates is of an enormous demand worldwide, and it attracts potential foreign investors into Dubai. Besides, undoubtedly, there is a great influence on the free economic zones (also free from any taxes) which attract business representatives from the various countries in Dubai.

Dubai, the UAE: the index of economic freedom

The well-known international analytic centers, such as the Wall Street Journal and The Heritage Foundation, determine and publish annually the important economic indicator – the Index of Economic Freedom of the various countries. Over the past year, Dubai, the United Arab Emirates, after the analysis of benefits for business, total tax level/tax payments within the country and the degree of economic freedom, was assigned the 99.9 index.

This index suggests that the tax system of Dubai, the UAE is at the high level of attractiveness and advantages for business, and meets the best international standards. At the same time, Dubai’s rate of this index reflects a very important factor that the country provides businesses and residents of Dubai with the most favorable climate for labor and entrepreneurship.

Dubai tax system: local peculiarities

Speaking about the peculiarities of the tax system of Dubai, the UAE, it is necessary to say that the system of taxation in Dubai, the UAE, completely eliminates the direct taxation of the residents, and the government revenues are derived from the indirect taxation. The following taxes are not charged in Dubai, the United Arab Emirates:

• Taxes on the incomes of the physical persons;
• Corporate taxes;
• Value-added tax;
• Income tax;
• Capital-gains tax.

However, the tax systems of Dubai, the UAE can provide for certain forms of corporate taxation in the individual areas of activities.

Exceptions in the UAE tax system of Dubai

In Dubai, the corporate taxes, including the taxes on income and capital gain taxes, are levied on companies and financial institutions, which operate in the banking and oil and gas sector of the economy.

Besides, the financial activities of the companies with large turnovers are a subject to corporate taxation in Dubai. In this case, the tax rate directly depends on the amount of the working capital of the company. In particular, the following tax levels are applied in Dubai:

Table 1 – Tax rate (%) depending on the amount of company capital in Dubai (Dirhams)

At the same time, in practice, the abovementioned taxes are not levied on the majority of the activities in Dubai, but the income taxes are levied only on three abovementioned activities – banks, oil, and gas sector and tourism.

In this case, the obligatory payments to the budget (taxation of the hotel services and taxes on organizing the leisure activities and restaurants) are limited by the tax rate of 5% or 10% in Dubai.

Taxation of the real estate in Dubai

As to the real estate, there is the following taxation scheme in Dubai, the UAE: when purchasing the immovable property in Dubai, the one-time cadastral tax in the amount of 4% of the purchase price of the property is charged. This tax is imposed both to buyer and seller, respectively, 2% and 2%. When renting the residential premises, the 5% tax is charged. The tax rate of the lease, in the area of commercial real estate is 10%.

International tax planning in Dubai

Companies and enterprises in Dubai, which possess the status of a tax resident of Dubai, the UAE, have the opportunity to optimize the taxable base at the international level. Owing to the operation of the bilateral international agreements, which are aimed at avoiding double taxation of business, it is possible to optimize taxation in other countries where the company, registered in Dubai, the UAE, operates.

The tax-free free trade zones of Dubai

The specialized economic zones became a key element of the economic success of Dubai the United Arab Emirates (due to their tax-free environment). Since the registration of the first specialized free zone area, they have enjoyed immense popularity for creating profitable international business solutions in Dubai. Today, the tax-free specialized economic zones of various orientation operate on the territory of the country.

The economic and commercial activities of the enterprises in the tax-free zones of Dubai are regulated by the specialized government body, which registers the international companies and grants governmental licenses. It should be noted that the companies, which are registered in the special tax-free economic zones have some limitations when operating in Dubai, the UAE.

A favorable tax climate is the main advantage of the free trade economic zones of Dubai and other Emirates. Both the companies and employees are fully exempted from taxation in Dubai. Moreover, to register such a company, you do not have to look for a local sponsor/citizen, as the 100% foreign participation is possible in Dubai.

The companies in the free trade economic zones of Dubai are guaranteed the tax-free repatriation of the investment capitals at the legislative level and also are provided with the benefits for the customs duties.

The tax system in Dubai, the UAE – Conclusion

Summarizing the peculiarities of taxation in Dubai, the UAE, we can say that local taxation system in Dubai, the UAE is intended to provide international investors with an ideal tax-free environment for creating a business. And such attitude toward the business is evident in the whole government policy of Dubai. First of all, it is the absence of the barriers to the international trade, exclusion of the state financial control and quoting, infrastructure development for business, no taxes on import and export when working via the FTZ and other tax benefits.