Tax, taxes, taxation in Dubai and the UAE
Taxes in Dubai and the UAE, tax advisors, expat resident tax obligations in their home country, a brief guide to tax - terms such as tax-resident, non-resident, domicile, and what working in a tax-free country really means.
Tax on foreign exchange fund transfers and remittances to other countries from the UAE
- 30 Sep 2013 - The National had an update on the Bloomberg story, indicating that the proposal would only apply within the emirate of Dubai (which means one way to avoid the tax would be to go to a foreign exchange office in another emirate) saying that Hamad Buamim, chief executive of Dubai Chamber of Commerce and a member of the UAE Central Bank board, said he he had heard that the levy was being considered by the Dubai government. But the Bloomberg report referred to the federal ministry of finance, not the Dubai ministry. The report also quoted Ali Al Nuaimi, a Federal National Council (FNC) member for Ajman (why someone from Ajman?) and an ex-banking head, as saying "If it is at the federal level, it will take a long time. Nothing official has been said to us, maybe the government is discussing this internally, but no information has come out. It is just talk for now."
- 26 Sep 2013 - Bloomberg news reported that the UAE Ministry of Finance (MOF) was considering a proposal to tax foreign exchange remittances out of the UAE, based on comments from anonymous bankers about a private memo sent to banks by the MOF (The federal Ministry of Finance has sent a circular to banks proposing the tax and invited suggestions from them on the levy, the bankers said). Bloomberg asked the MOF for a comment but received nothing. Bloomberg did quote a very diplomatic sounding Simon Williams, chief Middle East economist at HSBC in Dubai, as saying the proposal "looks like a preliminary discussion that I would not expect to lead to policy action ... Implementation would be extraordinarily difficult, and would likely offer only very limited returns." Yes, quite, to say the least. Nevertheless, ideas can become plans, and plans can be implemented, and there have been previous ideas implemented in the UAE which negatively affected a large number of people before being abolished or revised.
Income tax in the UAE
The UAE does not have any federal income tax on wages or salaries. Each emirate can impose income taxes but none do, and it would be very unlikely for that to change in the near future although there has been talk of introducing income tax in the past. Look to Saudi Arabia as a guide, where the idea has been mooted more often or more seriously, but usually dismissed. If it ever does happen there, the UAE could follow suit.
The International Monetary Foundation (IMF) has occasionally suggested income tax would be advisable for the Gulf Co-operation Council (GCC) countries. The beginning of the walk down the slippery road to filling in W-2s and P45s was begun by Bahrain in June 2007 when they announced the introduction of a 1% income tax to fund an unemployment scheme. Many wondered about the anomaly of expatriates paying income tax for a benefit they were not eligible for, however the Bahrain Ministry of Labour said that under certain circumstances (of their choosing), expatriates could receive unemployment benefit. There were protests against the scheme and some Islamic scholars said that such a tax was "haram", or un-Islamic.
Watch this space.
- Emirates Business 24-7 (a UAE newspaper) reported at the end of December 2008 that GCC countries had agreed in principle to bring in both corporate and individual income tax by 2012, and possibly sooner.
UAE toying with taxes as a new source of income ... maybe
- Reuters had a report with the alarming headline "UAE toying with taxes as a new source of income", or "UAE preparing to impose taxes" as reprinted in some sources, on 08 September 2010, but it turned out to be a summary of recent measures by the UAE, especially Dubai, to collect money owed by, or increase fees collected from, residents for parking fees, car registration, road tolls, Emirates ID cards, etc.
- Which are taxes of a sort but not significant amounts relative to most people's income in the UAE, and a somewhat underwhelming read given the bold headline.
- The effect was even more diluted with some rather obvious comments such as "The imposition of road tolls and other fees goes hand-in-hand with the provision of infrastructure and services and these measures could have a predominantly revenue-raising angle," according to Giyas Gokkent, head of research at National Bank of Abu Dhabi (NBAD). Er, well, yes of course the imposition of fees is designed to raise revenue and pay for services and infrastructure. Governments don't just raise or impose fees because they're bored and feel like annoying residents. Well, not in the UAE or in most other countries.
- The report ends with the comment "If a business had set up in a free trade zone and had qualified for a tax holiday and then those tax holidays were withdrawn, potentially this could have an impact on the sovereign (political) risk profile of the UAE," from a tax specialist at PricewaterhouseCoopers in Dubai - Dean Rolfe. A bit of a red herring sounding comment, but it adds drama to the report. It's a bit like saying that if it snows in Dubai then it will be cold. True on the face of it but irrelevant since snowfall in Dubai is extremely unlikely. If Dubai reneging on the promised tax holidays in the free zones really was a serious concern, one wouldn't have expected international companies such as PricewaterhouseCoopers to have based themselves in Dubai in the first place.
- Reuters also pointed out (correctly) that there was a budget deficit of AED 6 billion in Dubai for 2010, or 2% of GDP. There are many other countries and states with a far more worrying deficit as a proportion of GDP. Whilst there are legitimate and serious concerns about the level of debt in Dubai, one should remember that Dubai is part of a wealthy federation of emirates, and as such, is far less likely to be at risk of bankruptcy than Greece, Ireland, Spain, Italy, and so on.
Sales tax in the UAE
Sales tax already exists, or some form of it does, in the UAE. For example:
- Alcohol in Dubai attracts 30% sales tax (or none if you buy it illegally - one reason why many do)
- Hotel services and entertainment attract a 5% municipality tax ie rooms, food, other services.
- Restaurants often add a service charge of 5-15% so you will usually see "++" written on menus indicating plus municipality tax plus service charge. And in case you're wondering, that service charge rarely ends up in the pockets of the service personnel. Just another one of Dubai's many ironies.
- Cigarettes attract some tax, so yes, in answer to that perennial question, they are slightly cheaper at airport duty free. And the limit was reduced to 200 cigarettes (1 carton) from 2000 (10 cartons) several years ago. Not that anyone seems to take any notice.
VAT / GST in the UAE and GCC
Value Added Tax (VAT), as it's known in the UK, or Goods and Services Tax (GST), as it's known in Canada and New Zealand, is more likely to be implemented than income tax.
- In May 2008, several reports said that the UAE was considering the introduction of VAT of 2-5% (various figures seen), possibly by January 2009 in just the UAE, or as late as 2012 across all GCC countries.
- In August 2008, there were reports that VAT would not be introduced in the UAE before 2010. Both reports based on comments from various UAE government officials.
- 06 April 2010 update: Gulf News reported that VAT in the GCC might be delayed until mid-2013, and quoted Ehtisham Ahmad, Adviser in the UAE Prime Minister's Office, as saying "The problem of trying to get an integrated VAT by 2012 when the free trade agreements kick in, is going to be very tight," so it looks like there's still some time to do tax-free (mostly) shopping in the UAE.
The impact of VAT may not be that noticeable, as one plan calls for it to replace customs duties which would be phased out as Free Trade agreements are signed between the UAE and other countries. Sales taxes presently in place (for example 10% for hotel bookings) would also be replaced. Cigarettes are likely to attract a 100% tax, alcohol could be on a higher rate along with some luxury items. Also under consideration is a proposal to exempt some essential food products, other consumer staples, education and health services, from VAT to reduce the impact on low-income groups. Tourists should be able to reclaim VAT paid when visiting the UAE, after its introduction.
- Foreign banks are subject to a 20% corporation tax on profits earned in the emirates of Abu Dhabi, Dubai, and Sharjah (according to government.ae, the UAE government website). Local banks do not have any UAE tax bills.
- Oil companies are subject to a 55% tax rate in Dubai and 50% in other emirates, in addition to royalties.
A PricewaterhouseCoopers (PWC) report (Global Effective Tax Rates 14 April 2011) rated the UAE as the country having the second lowest effective corporate tax rate for 2006-2009 for international or foreign companies, out of 59 countries surveyed. Worst in the list with 38.8% effective tax rate was Japan. The UAE had 2.2%, and only Venezuela was better, the only country with a negative rate, of -3.4%.
Some companies have an agreement, or requirement, to pay royalties to the government. For example Etisalat, the bigger and older of the UAE telecom companies, pays royalties. And says that since there is now a competitor (Du Telecom), who is not paying royalties, it is time to renegotiate the royalty fee.
General import duty is 10% on luxury goods, and 4% on everything else. That includes goods shipped out of a UAE free zone to somewhere else in the country (which is why your car gets checked when leaving Jebel Ali Free Zone). The amount of duty imposed can vary, and might be as little as 1%.
Alcohol and cigarettes are in a separate category with higher rates of customs duty. About 30% or 33% for alcohol - if you go to an alcohol shop in Ajman or Umm Al Quawain, you can choose between showing your alcohol license and paying the 30% tax, or not showing it and getting the booze cheaper (and illegally).
Expats paying taxes in their home country or country of origin
This is not tax advice - you should see a qualified tax accountant or tax lawyer for proper tax advice. Tax information can be complicated, this section is a very simplified introduction and is insufficient for proper tax planning.
Generally, people pay taxes in the country they live and/or work in, whether it be income tax, and/or a tax on consumption (eg VAT in the UK, MwSt in Germany, GST in Canada and New Zealand, etc. Tax is also paid on income derived from within a country whether or not you live there eg rental property, investments.
People living in one country and working in another should only pay tax in one country - double taxation agreements are so you don't get stung in both countries.
There are three terms to familiarise yourself with.
- Country of domicile - usually the country you or your father was born in, and usually the country of your passport.
- Country of residence - where you normally live.
- Country of tax residence - the country which you pay taxes in, for most people it's the same as the country of residence.
There are exceptions to the general explanations given, and different ways of using the terms (domicile of residence, domicile of tax residence, blah blah blah). Watch out that complicated sounding terms used by tax departments and offices have the same meaning as complicated sounding terms used by tax advisors, especially unqualified ones, that might be intended to confuse you into paying for their advice.
Different countries have different criteria for determining if you are tax resident. Those criteria are rarely set in stone, it is the intent rather than the actions that the country's Inland Revenue Department look at to decide if you are resident for tax purposes. For example
- You were born in the UK, you live in the UK, you work in the UK. Obviously you will probably be tax resident in the UK.
- You were born in Dubai but have British parents and a British passport, you have lived all your life in Dubai, you work in Dubai. Your country of domicile will be the UK, in the eyes of the UK tax authorities, your country of residence will probably be the UAE (whether or not you have a residence visa), and your country of tax residence will probably be the UAE although that's a moot point since you don't pay income tax.
- You were born in the UK, lived there, worked there but your employer sent you to Dubai for a 6 month job contract, and then you returned to the UK. Your domicile is the UK, you will probably be tax resident in the UK, you may be "resident" in Dubai for 6 months.
- You quit your UK job and took a 2 year contract in Dubai but left after 1 year and returned to the UK. You will probably be "tax resident" in the UK for the time you were in Dubai.
What does being "resident for tax purposes" mean?
Being declared tax resident for a country usually means you are supposed to pay tax according to that country's tax laws on any and all income. That includes wages, salaries, benefits (school fees, company car, accommodation provided, etc), income from investments (bank deposits, stocks and shares, rental income), no matter where it is sourced from.
Double taxation agreements mean that if you are taxed in one country, you don't pay tax again on the same income in another country. For example you live in Holland but work in Germany and your employer deducts tax before paying your salary. You are probably "tax resident" in Holland but shouldn't pay tax there on your salary, you might pay tax on your investments held in Holland though. The UAE has double tax agreements with many countries but they have little relevance to most expats working in Dubai.
Expats who move to a tax-free country like the UAE usually have no problems with the tax authorities in their home country if they clearly have taken up residence in the UAE for a medium to long-term period (at least 2 years). If you own a property in your home country, consider selling it or at least renting it out long term - having accommodation available for your use is a red flag to tax authorities. However, in some countries, renting out your home is insufficient to escape the tax man (Canada is possibly an example of this). Other things that can throw up red flags (remember these are not hard and fast criteria, and individually may not be a problem, it's the overall impression that the tax department looks at).
- Property owned and purpose for which it is used.
- Accomodation available (holiday home vs primary residence vs room in parent's house)
- Bank accounts
- Close family staying in home country (meaning spouse and/or young children)
- Car left in family member garage or in own garage for personal use
- Leave of absence from company rather than resignation
Some countries are clear on which criteria matter, and how they matter. Others, less so.
Find the website of the tax authority or inland revenue department of your home country and study it. Usually there will be a section or department for non-residents and their tax obligations. Telephone them to ask questions. They are not always the enemy and can be very helpful.
Non-resident status for British nationals resident in the UAE
Since 06 April 2009, the information booklet IR20 about tax liability in the UK for residents and non-residents has been replaced by HMRC6 for UK citizens working and living abroad. Those who are wondering about their tax status should carefully read Chapter 8, especially if a tax adviser, or a mate at a BBQ, tells you not to worry as long as you don't return to the UK for more than 90 days per year.
British citizens living in the UAE do not pay tax on their UAE income if they are declared non-resident by the UK tax authorities (HMRC - Her Majesty's Revenue & Customs). This happens when the citizen makes a clear break in their ties to the UK in terms of where they live and work, which is the same principle that applies in most or all other countries in determining your residency status for tax purposes.
- It is a common misconception amongst Brits abroad that as long as they stay out of the UK for 183 days or more in a tax year, and do not visit for an average of more than 90 days per year over 4 years, then their overseas income will be safe from the taxman.
- By and large, that assumption is probably correct for most people that go and live and work abroad but UK tax department statements appear to be carefully worded so that the non-resident status is not guaranteed under that assumption.
- Also remember that the 90 and 183 day rules for the purposes of determining tax-resident status apply to those who have left the UK. They do not apply to those who have not left the UK, who remain tax-resident irrespective of the number of days in or out of the country. The tricky bit is that what you think means "leaving the UK" is not necessarily the same as what the tax department thinks is "leaving the UK". Instead of using the expression "leaving the UK", think in terms of "severing your ties with the UK." Physically departing the country does not always mean you have severed enough ties in the eyes of the tax department.
- The HMRC website FAQs say (www.hmrc.gov.uk/cnr/faqs_general.htm):
- Q3. In what circumstances would I become non resident?
- A3. Normally if you leave the UK to work abroad full-time, you will become not resident and not ordinarily resident in the UK if:
- your absence and employment from the UK covers a complete tax year (that is 6 April to 5 April)
- you spend less than 183 days in the UK during the tax year
- your visits to the UK do not average 91 days or more a tax year over a maximum of four years
- Q13: In what circumstances will I be treated as a UK resident for UK tax purposes?
- A13: To be treated as resident in the UK you must normally be physically present in the country at some time in the tax year.
- You will always be treated as resident if you are here for 183 days or more in the tax year. There are no exceptions to this. You count the total number of days you spend in the UK - it does not matter if you come and go several times during the year or if you are here for one stay of 183 days or more.
- If you are here for less than 183 days, you may still be treated as resident for the year if you visit the UK regularly and your visits average 91 days or more a tax year over a period not exceeding four years.
- The normal rule is that days of arrival in and departure from the UK are ignored in counting the days spent in the UK.
- Note the use of the word "normally" in their answers. That could be interpreted as meaning that the HMRC might treat you differently in a situation they consider abnormal. As Mr Robert Gaines-Cooper discovered in February 2010 when the UK Court of Appeal said that despite him living in the Seychelles, he was deemed to be resident in the UK for tax purposes since the "centre of gravity of his life and interests" remained in the UK (The Times, 25 February 2010). Leaving him with a bill of £30 million worth of backdated taxes apparently.
- The same report had this comment from a UK law firm: However, Matthew Woods, a partner at the City firm Withers, says the case has not changed the advice his firm routinely gives that the only safe way to become non-resident “is to leave and sever as many links as possible”. It is only once you have shown that distinct break that the 90-day limit comes into play.
- The UK tax guide HMRC6 says in Chapter 8 about how you know if you've stopped being resident in the UK:
- If you have been resident and ordinarily resident in the UK, the act of leaving the UK to go abroad does not mean that you will automatically become non-resident and/or not ordinarily resident. After you leave the country, your UK residence and ordinary residence position will be affected by a number of factors which include:
- the reason you have left the UK (for example to work or live abroad permanently)
- what visits you make to the UK after you have left
- what connections you keep in the UK such as family, property, business and social connections.
- An older case from July 2005 concerned that of a British pilot (Shepherd v HMRC) who spent more than 183 days out of the UK by flying planes, and staying in a house he had in Cyprus. But because he still had a family home in the UK that he also stayed in (for 80 days during the year in question), the Special Commissioners ruled that he was still UK tax-resident.
- These cases illustrate that just because the UK tax department says that if you are deemed to be tax resident when you are in the UK for 183 days or more in a tax year, the opposite does not necessarily apply. Sure, most of the time for most people it will, but not always. Mind the gap.
Last update Thursday 03-Oct-2013