Tax in Dubai

Dubai and UAE tax

Friday 21 November 2008 (UAE)

Tax, taxes, taxation in Dubai and the UAE

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.

Sales tax / VAT / GST in the UAE

Sales tax already exists, or some form of it does, in the UAE. For example:

Alcohol 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.

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.

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.

Corporation Tax

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). 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.

Royalties

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 points out that since there is now a competitor (Du Telecom), who is not paying royalties, it is time to renegotiate the royalty fee.

Customs Duty

General import duty is 10% on luxury goods, and 4% on everything else. That includes goods shipped out of a 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 may 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.

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.

Tax residence

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
Investments
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.