Collecting dues: An explanation of the tax decrees specific to the emirate

The federal government of the UAE has not promulgated any tax laws. Most of the individual emirates have issued corporate tax decrees, but in practice, taxes are only imposed on oil- and gas-producing companies at rates set forth in their government concession agreements, and on branches of foreign banks at rates established in specific tax decrees or fixed in agreements with the rulers of the emirates in which the branches operate.

The income tax decrees that have been enacted in each emirate provide for tax to be imposed on the taxable income of all bodies corporate wherever incorporated and their branches that carry on trade or business at any time during the taxable year through a permanent establishment in the relevant emirates. Bodies corporate are taxed if they perform trade or business directly in the emirate or indirectly through the agency of another body corporate.

TAXATION IN DUBAI: According to the Dubai Income Tax Decree, all companies carrying on trade or business in Dubai are required to pay tax on their earnings. The rates of tax are on a sliding scale up to a maximum of 55%. In practice, however, only oil- and gas-producing companies pay tax at rates specified in the relevant concession agreement and branches of foreign banks pay tax at a flat rate of 20% on annual profits. The taxable income of banks is calculated by referencing their audited financial statements.

The Dubai Income Tax Ordinance of 1969 and the Dubai Income Tax Decree (and its amendment in 1970) specify that an organisation that conducts trade or business in Dubai shall be subject to taxation according to the following.

A “chargeable person” refers to a body corporate wherever incorporated, or each and every branch thereof, carrying on trade or business of any type during an income tax year through the permanent establishment situated in the emirate whether directly or through the agency of another body corporate and not entitled under an agreement with the ruler to an exemption from liability to income tax. Two or more such branches of a body corporate carrying on trade shall each be treated as separate chargeable persons. The fact that a body corporate has a secondary body corporate carrying on trade or business through a permanent establishment in the emirate shall not in itself constitute that parent body corporate as a chargeable person.

“Carrying on trade or business” is defined as:

• Selling goods or rights to such good in the emirate;

• Operating any manufacturing, industrial or commercial enterprise in the emirate;

• Letting any property located in the emirate; or

• Rendering services in the emirate (excluding the mere purchasing of goods, or rights in such goods in the emirate). A chargeable person in Dubai shall pay taxes on a sliding scale as described above except that the tax so charged shall be reduced by the credit aggregate of oil dealt in for that fiscal year so long as the total of all reductions granted to all chargeable persons in that fiscal year shall not exceed the credit aggregate of oil dealt in for that fiscal year.

Taxable income is computed after the deduction of all costs and expenses incurred by a chargeable person earning such income.

Deductible costs and expenses include the acquisition cost of goods, the expenses of operating the business, the allowances for depreciation, the obsolescence and exhaustion of both tangible and intangible assets, and losses sustained by the chargeable person in connection with the business.

INVESTMENT INCENTIVES: Dubai has free zones that offer tax and business incentives aimed at making it a global business and commercial centre. These usually include tax holidays for a guaranteed period (most free zones offer a tax holiday of 50 years), 100% foreign ownership, no Customs duty within the free zone and “onestop shop” administrative services.

WITHHOLDING TAX: Currently, there are no withholding taxes in Dubai or in the wider region of the UAE.

PERSONAL INCOME TAX: No personal taxation currently exists in the UAE.

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

CUSTOM DUTY: Customs duties are low and there are many exemptions and levied generally at the rate of 5%. Goods imported and intended for re-export often benefit from exemption from Customs duty as do manufacturers on the import of machinery, raw materials and spare parts used for industrial purposes.

VALUE-ADDED TAX: There is no value-added tax in the UAE at present.

SOCIAL SECURITY: The UAE does not impose social security taxes on expatriates. Emirati employees contribute to retirement and pension funds in accordance with specific regulations.

MUNICIPAL TAX & PROPERTY TAX: Municipal taxes are imposed on hotel services and cinema shows. Service charge percentages vary among the emirates. A service charge of 5-10% is charged on food purchased in restaurants. Hotels charge a 10-15% service charge per night on room rates. These charges are usually included in the customer’s bill, which the municipality will collect from restaurants and hotels. Hotels also charge a 15% charge on their services.

In most of the emirates, property tax is payable by residential and commercial tenants by reference to the annual rent of residential property, generally at a rate of 5% and for commercial property at a rate of 5-10% payable to the local municipality. REAL ESTATE SALE/PURCHASE FEE:A sale registration fee of 1% of the value of the sale is imposed on the seller, payable to the Dubai Land Department. A purchase registration fee of 1% of the value of the sale is payable by the buyer of the property. The rate can differ in other emirates.

FOREIGN-EXCHANGE CONTROLS: There are no exchange controls on the remittance of profits or repatriation of capital and there are virtually no restrictions on foreign trade.

TAX TREATIES: The UAE has entered into tax treaties with several countries, including Algeria, Armenia, Austria, Belarus, Belgium, Bulgaria, Canada, China, the Czech Republic, Egypt, Finland, France, Germany, India, Indonesia, Italy, Lebanon, Malaysia, Mauritius, Morocco, Mozambique, New Zealand, Pakistan, Poland, Romania, Singapore, South Korea, Spain, Sri Lanka, Syria, Tajikistan, Thailand, Turkey, Ukraine and Yemen. Treaties have been concluded with Bosnia-Herzegovina, Jordan, Luxembourg, Malta, Mongolia, the Netherlands, Philippines, Seychelles, Sudan, Tunisia and Uzbekistan but they have not formally entered into force.

PRACTISING BUSINESS IN DUBAI: Prior to operating business in Dubai, the steps outlined below must be taken in order to meet the legal requirements of all concerned government authorities and to guarantee maximum commercial benefit for the business owner:

• Determine, in the beginning, the category/categories (commercial, industrial and/or professional) and type of business activity/activities to be practised. Please determine all the related business activities that can be included within each business licence, subject to a maximum of 10 activities per licence.

• Determine the appropriate business legal form for your business taking into consideration the desired business activity/activities and the number and nationalities of the business owners.

• Confirm all the requirements of the licence to be issued.

• Determine the trade name of the business.

• Submit an application to the department for an initial approval and register the trade name, either by a personal visit to the department offices and its external branches or through the internet services that are available on the website.

• After getting the initial approval you can lease premises and contact the counter of the Planning Department of Dubai Municipality in order to verify that this said premise is suitable for the business;

• Prepare all required documents and submit an application to the department or one of its external branches to pay the required fees to obtain a final licence;

• Submit an application to one of the department’s external branches for a signboard permit for a business trade name as per the economic regulations.

TERMS & CONDITIONS FOR UAE NATIONALS: UAE nationals may operate any commercial, professional and industrial activity, when they fulfil all terms and conditions. They may carry on activities through any of the following legal forms:

• Individual establishment;

• Limited/joint liability company;

• Private/public shareholding company;

• Civil business company.

GCC NATIONALS: GCC nationals may carry on most commercial, professional and industrial activities when they fulfil all terms and conditions (except for activities of haj and umrah, trade agencies, houses of disabled and old people, community service, and journal and magazine publishing and printing houses, as they are limited only to UAE nationals). They may carry on activities through any of the following legal forms:

• Individual establishment;

• Limited liability company; two or more GCC nationals may establish a limited liability company to practise a specific commercial activity. However, if there is one or more partners who are not GCC nationals, one or more of the partners is required to be a UAE national, with a shareholding of not less than 51% of the paid-up capital

• Private/public shareholding company; three or more GCC nationals may establish a private shareholding company to practice a specific commercial activity. However, if there is one or more partners who are not GCC nationals, one or more UAE national partners is required, with a shareholding of not less than 51% of the paid-up capital. For example, in the case that one partner is a GCC partner or foreign partner, it is a must to have a partner from the UAE.

• Civil business company; two or more GCC nationals may establish a civil business company to practise a specific profession without a local services agent. However, if there is one or more partners who are not GCC nationals, a local services agent who is a UAE national shall be appointed or included as a partner.

NATIONALS OF OTHER COUNTRIES: Nationals of other Arab or foreign countries may carry on economic activities through any of the following forms:

• Individual establishment, which may be established to practise any professional activity only by appointing a local services agent who is a UAE national;

• Limited liability company, which shall be established to carry on any commercial or industrial activity, including one or more UAE partners whose share holding shall not be less than 51% of the paid-up capital;

• Private shareholding company, which shall be established to carry on any commercial or industrial activity, including one or more UAE national partners whose shareholding shall not be less than 51% of the paid-up capital;

• Civil business company, which may be established by two or more persons to practise a profession, provided that a local services agent who must be a UAE national is appointed or included as a partner.

FOREIGN COMPANIES: Any company incorporated outside the UAE may operate any commercial, industrial or professional activity through one of the following legal forms:

• Branch of a foreign company

• Limited liability company, which shall be established to carry on any commercial or industrial activity, including one or more UAE partners whose shareholding shall not be less than 51% of the paid-up capital;

• Private shareholding company, which shall be established to carry on any commercial or industrial activity, including one or more UAE national partners whose shareholding shall not be less than 51% of the paid-up capital; ANNUAL FILINGS: Under the UAE Commercial Companies Law, most companies or branches are required to have their accounts audited locally, and these accounts then need to be filed with the appropriate emirate-level authorities on an annual basis as part of the licence renewal filing process.

There is also an annual licence renewal fee to be paid which is based on the type of licence, entity and its activities. The requirement for the free trade zone entities is similar, although the requirements and fees vary and need to be considered based on the legal entity set up and its location.

AUDIT & ACCOUNTANCY: Joint stock and limited liability companies must appoint one or more auditors. All legally incorporated companies have to file their audited financial statements with the Ministry of Economy or relevant authority in order to renew their trade licences. There are no exceptions available or restrictions on appointment of auditors. Companies generally prepare their accounts on a calendar year basis and banks are specifically required to do so by the Central Bank of the UAE.

Listed companies (including banks) are also required to file quarterly reviewed financial statements and annual audited financial statements in English and Arabic with the Securities and Commodities Authority.