The primary reason that motivates businessmen worldwide to establish companies in the United Arab Emirates is the opportunity to reduce tax expenses legally. This is facilitated by a lenient tax system in the UAE and agreements signed with many countries to avoid double taxation of the country’s residents. In this article, we have conducted a detailed analysis of the taxes foreign citizens and their companies must pay when holding a residency visa and the mechanisms that allow for tax optimization in the UAE.
Optimal Tax System for Business in the UAE
The tax system in the United Arab Emirates allows for optimizing business maintenance costs. Until recently, there were neither VAT nor corporate income taxes in the UAE — they were introduced only in 2018 and June 2023. Therefore, it is a misconception to consider the UAE as a tax-free jurisdiction. To the question: Do you need to pay taxes in the UAE? The answer is unequivocally yes. As in any country, taxes must be paid here, but the main concern is the amount.
Taxes in the UAE for Individuals
For individuals who are citizens and residents of the United Arab Emirates, a zero tax rate is provided for the following:
- Capital gains.
- Interests, royalties, and dividends.
- Luxury items.
- Gifts and inheritance.
However, individuals living in the Emirates are required to pay the following:
- A vehicle registration fee is a one-time payment of $100-150, depending on the emirate. When purchasing a new car, the seller pays this fee, and for a used car — the buyer.
- Fees for real estate transactions:
- A residential or commercial property tenant pays 5% or 10% of the annual rental value.
- The seller pays 2% of the transaction value for the transfer.
- The buyer pays the remaining expenses in the sales contract — a transfer of 2% and a registration fee of 2000 AED for properties valued up to 500,000 AED and 4000 AED for properties valued over 500,000 AED. Additionally, buyers of commercial properties pay a 5% VAT. For the transfer of property ownership to another person, a fixed payment of 540 AED is required, which includes the transfer fee.
Furthermore, individuals working as freelancers or who have registered a sole proprietorship (similar to individual entrepreneurship) pay for the cost of the license and its annual renewal.
Taxation of Legal Entities in the UAE
Tax optimization in Dubai and other emirates of the UAE through company registration in this jurisdiction is possible due to the absence of several taxes that legal entities in most countries worldwide typically pay. In the Emirates, the following are not subject to tax:
- Qualified intra-group transactions.
- Capital gains.
- Legal entity reorganization.
However, companies registered in the UAE are required to pay:
- Corporate tax — a 0% rate is set if the company’s net income does not exceed 375,000 AED, and 9% for the part of the profit above this amount, which is significantly lower than in most other countries. A higher rate of this tax is set for legal entities operating in the oil and gas industry (55%) and branches of foreign banks (20%). Legal entities registered in free economic zones (of which there are 45 in the UAE today) and generating income from qualified activities are exempt from corporate tax.
- VAT at a rate of 5% is paid by companies with an annual profit exceeding 375,000 AED, while legal entities engaged in certain activities or registered in one of the free zones are exempt from paying this tax.
- Excise tax — this fee applies to companies that import, store, and produce goods harmful to health and the environment. The UAE government has established excise tax rates for products and soft drinks containing sugar and sweeteners (50%), energy drinks, tobacco products, and electronic cigarettes (100%).
- Import tax is 5% of the value of most goods, except for tobacco products and alcohol (import duty for them is 50% and 100%).
Legal entities registered in free zones are exempt from import tax and income from foreign sources.
In addition to tax payments, companies conducting business in the Emirates pay the license cost annually.
Tax Optimization Mechanisms in the UAE
Registering a company in the Emirates can significantly reduce the tax burden for businesses, and obtaining tax residency status exempts foreign investors from paying taxes in their home country. Additionally, by conducting tax planning in the UAE, various mechanisms for tax optimization can be used:
- Scaling the business by providing services and selling goods in favorable tax jurisdictions such as Singapore, Hong Kong, etc.
- Creating a group of companies that includes investment funds registered in the Netherlands, Luxembourg, Liechtenstein, Malta, and other jurisdictions, depending on the specifics and direction of the business.
- Refinancing foreign assets.
The information presented in our article should not be considered as consultation. It is purely for informational purposes. If you want to receive comprehensive legal advice on tax planning and optimization in the UAE and the mechanisms that can be used for this purpose, please contact the managers of Dynasty Business Adviser! Our specialists will provide professional advice and actual assistance in reducing tax pressure.