A comprehensive view of Dubai's corporate tax framework

The UAE currently has no system of federal income taxation. Instead, most of the emirates – including Dubai – enacted their own corporate tax decrees in the late 1960s. These emirate-level decrees are of general application and remain in force as amended. These corporate tax decrees are similar in nature and text, and deal in broad terms with the identities of taxable persons, rates, administration, taxable profits and loss relief. The decrees limit the scope of taxation to “bodies corporate” carrying out a trade or business in the respective emirates. These decrees are technically still applicable and allow corporate income tax to be levied on all companies. In practice, however, corporate income tax is only enforced on oil and gas companies engaged in upstream activities, certain petrochemicals companies and, under separate banking tax decrees, branches of foreign banks. This practice is unlikely to change in the future, partly because the relevant mechanisms with which to implement the emirates’ corporate tax decrees more widely have not yet been established. There is currently no withholding tax, stamp duty nor personal income tax in the UAE.

Entities established within designated free trade zones (FTZs) are subject to the rules, regulations and tax regime of that FTZ, as well as applicable federal tax regulations such as value-added tax (VAT). FTZs generally offer companies and branches a complete exemption from all emirate-level taxes or a 0% tax rate. The length of these tax holidays typically ranges from 15 to 50 years from the date that the entity registers with the FTZ, with a possibility of renewal upon expiry.

Future Landscape

Based on public sources, we understand that the UAE is looking into the possibility of introducing a federal corporate income tax. No official statements have been made in this regard beyond general comments in the media and references to carrying out impact studies. As such, there is neither visibility on the scope of application of any future federal corporate income tax regime, nor on the interaction between a federal corporate income tax, the existing emirate corporate taxes and tax holidays currently offered by FTZs.

The UAE’s two financial FTZs – Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM) – are the only FTZs established by federal decree. Accordingly, only DIFC and ADGM may potentially offer protection against a future federal corporate income tax (if introduced). Other FTZs established under emirate decrees may only offer exemptions from emirate-level taxation, and would therefore need to be specifically exempted or grandfathered in with regard to a potential federal corporate income tax.

Global Developments 

The UAE was placed back on the EU’s list of non-cooperative tax jurisdictions on March 12, 2019 after insufficient progress was considered by the EU to have been made in implementing economic substance regulations by the agreed deadline of December 31, 2018. In response to this, the UAE has since put in place its economic substance regulations, on April 30, 2019 applicable to the financial year commencing on or after January 1, 2019. Regulations on country-by-country reporting have also been issued by the UAE, effective April 30, 2019. These regulations issued by the UAE are largely similar to those already issued by other jurisdictions.

The UAE ‘s economic substance regulations have since been reviewed by the OECD and the EU, and are deemed to be compliant with the requirements. As a result, the UAE was removed from the EU’s list of non-cooperative tax jurisdictions on October 10, 2019.

Dubai Corporate Tax Regime

As originally issued in 1969 and amended in 1970, the Dubai income tax decree is based on the French concept of territoriality. It provides that any person liable who conducts trade or business in Dubai is subject to corporate income tax at progressive rates of up to 55%.

A “person liable” is defined as “a body corporate, whenever established, which would not be liable to exemption from the responsibility of paying income tax imposed but for the provisions of the [decree] or any branch thereof, which conducts trade or business at any time during the income tax year through a permanent organisation based in Dubai, either directly or through the agency of another body corporate”.

A “permanent organisation” is defined as “a place of administration or any location designated for work, but does not include the agency unless the agent is a corporate body which has the authority to conclude agreements on behalf of such corporate body and exercises the said authority as a matter of custom”.

“Conducting a trade or business” is defined as including the following activities:

• Selling goods or rights to such goods in Dubai;

• Managing any industrial or commercial projects in Dubai;

• Letting any property located in Dubai;

• Rendering services in Dubai, excluding the mere purchasing of goods or rights in such goods; or

• Producing petroleum and other hydrocarbons materials in Dubai. In practice, however, corporate income tax is currently applied only to the following:

• Upstream oil and gas companies, which pay corporate tax at rates specified in their concession agreements or specific fiscal letters;

• Foreign bank branches, the annual profits of which are subject to a 20% tax, and for which taxable income is calculated by reference to audited financial statements and subject to certain adjustments, as per the Dubai banking tax decree; and

• Certain other companies and activities on an ad hoc basis.

Investment Incentives

There are over 30 industry-focused FTZs in Dubai offering a combination of tax and business incentives that were introduced to attract foreign investment. The incentives usually include a 15-to 50-year tax holiday with the possibility of renewal upon expiry. Furthermore, FTZs allow for 100% foreign ownership of companies established within the zone, while “fenced” FTZs also offer a suspension of Customs duties on goods imported into the FTZ.

Withholding Taxes

There are no withholding taxes in the UAE or in Dubai.

Capital Gains Tax

There is no capital gains tax in the UAE or in Dubai. For taxpaying entities, capital gains are taxed as part of business profits.

Customs Duty

Generally, a Customs duty of 5% is imposed on the cost, insurance and freight value of imported goods. Other rates may apply to certain goods, such as alcohol and tobacco, while some exemptions may also be available. Goods imported and intended for re-export often benefit from relief on Customs duties, as do manufacturers on the import of their machinery, raw materials and spare parts used for industrial purposes. Additional Customs duty relief measures and exemptions are available for certain activities and goods originating in certain countries.

Excise Tax

A 50% excise tax on carbonated drinks was introduced in the UAE on October 1, 2017. Energy drinks and tobacco products are subject to excise tax at a rate of 100%. Further, from December 1, 2019, a 100% excise tax will apply to electronic smoking devices and the liquids used in those devices and tools. Any products with added sugar or other sweeteners will be subject to a 50% excise tax.

VAT

VAT came into effect in the UAE on January 1, 2018. The tax applies to most supplies of goods and services at the standard rate of 5%. A 0% rate applies to goods and services that are exported, the first sale of residential buildings, and supplies in specific areas such as health care and education. VAT exemptions also apply to certain financial services, local transport and other aspects of residential real estate. Designated FTZs are treated as being outside the territory of the UAE, resulting in the supply of certain goods not being subject to UAE VAT, though services in those zones remain subject to VAT. Mandatory VAT registration is set at a threshold of Dh375,000 ($102,000) in annual turnover, while voluntary registration is made available for yearly turnover of at least Dh187,500 ($51,000). VAT grouping of UAE entities is possible if certain conditions are met. Where businesses have an excess of input VAT on expenditures, such input VAT can be claimed back from the UAE Federal Tax Authority.

Personal Income Tax

No system of personal taxation currently exists in the UAE.

Social Security

The UAE social security regime applies only to GCC and UAE national employees. Social security levies and rates are administered differently by each emirate.

Contributions in Dubai are calculated at a rate of 17.5% of an employee’s fixed remuneration – salary and fixed allowances – as stated in the employment contract. In the private sector, shares of those contributions are divided among three parties: 2.5% is payable by the employee, 2.5% is payable by the government of Dubai and the remaining 12.5% is payable by the employer. Within the public sector, 2.5% is payable by the employee and the remaining 15% is payable by the employer. For other GCC nationals working in the UAE, employee contributions are assessed according to the social security regulations of their native country. The liability to withhold falls on the employer.

Municipal & Property Tax

A 7% municipal tax is imposed on hospitality and entertainment services, while a 10% charge is levied on the total invoice value of hotel stays. A nominal tourism fee is also levied on hotel guests and tenants of service apartments, ranging from Dh7 ($1.91) to Dh20 ($5.44) per room, per night.

Most municipalities impose a tax on properties that is usually assessed with reference to a property’s annual rental value. It is generally the tenants’ obligation to pay the tax. In some cases, separate fees are payable by both tenants and property owners. In Dubai the municipality tax on property is levied at 5% of the annual rental value for tenants, or at 5% of the specified rental index for property owners.

Real Estate Registration Fees

Land registration fees are charged on the transfer of Dubai real estate – including long-term leases – at 4% of the property’s sale value. This fee is shared equally between the buyer and seller and is payable to the Dubai Land Department. This fee may also apply to the transfer of shares of companies that either directly or indirectly own real estate. No real estate transfer taxes or stamp duties are levied on the transfer of real estate in the UAE.

Reporting Requirements

All companies are required to maintain proper accounting records. There are no national generally accepted accounting principles (GAAP) in the UAE and no specific language requirement for the purpose of keeping books and records, although English is widely used. International financial reporting standards are mandated by the Emirates Securities and Commodities Authority and the Central Bank of the UAE, and adopted as the default GAAP by most firms. The requirement to prepare statutory financial statements (SFS) varies with each regulatory authority. Most authorities request audited SFS at the time when a company’s annual trade licence is renewed. In some cases, an exemption from preparing and filing audited SFS may be available, though generally companies prefer to prepare SFS as measures of good corporate governance and best practice. Branches are permitted to prepare and submit consolidated financial statements to their head offices. For payroll obligations for companies operating in Dubai, although there are no personal income tax obligations in the UAE, it is important to comply with all aspects of labour law, as well as with certain requirements, like the wages protection system (WPS). The WPS applies to employees registered with the UAE Ministry of Labour.

A key requirement under the WPS is that employers must pay their employees in local currency, from the local bank accounts of the employers to the local bank accounts of the employees. Employers that are found to be non-compliant with the rules of the WPS can face financial penalties and problems with renewing or processing visas for their workforce.

Foreign Exhange Laws

There are no foreign exchange controls or other restrictions on capital flows in and out of Dubai or the UAE, and there are virtually no restrictions on foreign trade.

Double Taxation

The UAE double tax treaty network is large, especially for a country that historically has had little taxation. As of November 5, 2019 the UAE had 92 such treaties in force, making its double tax treaty network wider than those of Cyprus, Hong Kong, Ireland, Luxembourg, Singapore and Mauritius.

The UAE has double tax treaties with the following countries: Albania, Algeria, Andorra, Argentina, Armenia, Austria, Azerbaijan, Bangladesh, Barbados, Belarus, Belgium, Bosnia and Herzegovina, Brunei Darussalam, Bulgaria, Canada, China, Comoros Islands, Croatia, Cyprus, the Czech Republic, Egypt, Estonia, Fiji, Finland, France, Georgia, Germany, Greece, Guinea, Hong Kong, Hungary, India, Indonesia, Ireland, Italy, Japan, Jersey, Jordan, Kazakhstan, Kenya, Kosovo, Kyrgyzstan, Latvia, Lebanon, Lichtenstein, Lithuania, Luxembourg, Malaysia, the Maldives, Malta, Mauritius, Mexico, Moldova, Montenegro, Morocco, Mozambique, the Netherlands, New Zealand, North Macedonia, Pakistan, Panama, the Philippines, Poland, Portugal, Romania, Russia, Saudi Arabia, Senegal, Serbia, the Seychelles, Singapore, Slovakia, Slovenia, South Africa, South Korea, Spain, Sri Lanka, Sudan, Switzerland, Syria, Tajikistan, Thailand, Tunisia, Turkey, Turkmenistan, Ukraine, the UK, Uruguay, Uzbekistan, Venezuela, Vietnam and Yemen.

The UAE has also signed and entered into tax treaties with an additional 36 countries: Angola, Antigua and Barbuda, Belize, Benin, Belarus, Bermuda, Botswana, Burundi, Brazil, Cameroon, Chad, Colombia, Costa Rica, Ecuador, Ethiopia, Equatorial Guinea, The Gambia, Gabon, Guyana, Iraq, Liberia, Libya, Mali, Mauritania, Niger, Nigeria, Palestine, Paraguay, Rwanda, San Marino, St Kitts and Nevis, St Vincent and the Grenadines, South Sudan, Suriname, Uganda and Zimbabwe.

OBG would like to thank PwC for its contribution to THE REPORT Dubai 2020