A straight-forward model for taxation in Abu Dhabi

The UAE federal government has exclusive jurisdiction to legislate in relation to UAE taxes. However, no federal tax laws have yet been established. Instead, most of the emirates enacted their own general income tax decrees in the late 1960s (tax decrees).

In practice, the tax decrees have not been enforced to date and, consequently, tax is generally not levied under the decrees on firms operating in the UAE, except for the following industries/activities:

• Firms operating in the upstream oil and gas industry are subject to tax rates specifically negotiated in the relevant concession agreements (up to 55%);
• Specific banking tax regulations have been enacted by certain emirates (for example, Dubai, Sharjah, Abu Dhabi and Fujairah) which apply to UAE branches of foreign banks.

Under these banking tax decrees, the income of branches of foreign banks is subject to income tax at the rate of 20%. The tax decrees share common characteristics in the way they have been drafted. The decrees limit the scope of taxation to “bodies corporate” (for example, companies, branches or similar business registrations) carrying out a trade or business activity in the respective emirate, and there is no provision for the taxation of individuals or unincorporated businesses owned by individuals. Generally, the existing tax decrees levy income tax on companies operating in the respective emirates at rates of up to 55%.

Furthermore, entities established in the free trade zones (FTZs) are entitled to guaranteed tax holidays for renewable periods of 15 to 50 years.

Corporate Income Taxes In Abu Dhabi 

The Abu Dhabi Income Tax Decree of 1965 (and its amendment of 1966) is based on the French concept of territoriality. The Tax Decree specifies that an organisation that conducts trade or business in Abu Dhabi shall be subject to taxation as follows: A “chargeable person” means 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 a 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 so 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 the parent body corporate as a chargeable person.

“Carrying on trade or business” means:

• Selling goods or rights in 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 Abu Dhabi shall be charged taxes on a sliding scale as noted (see table). Taxable income is computed after the deduction of all costs and expenses that are incurred by a chargeable person earning such income. In the UAE the various deductible costs and expenses include acquisition costs of goods, the expenses of operating the business, allowances for depreciation, obsolescence and exhaustion of both tangible and intangible assets, and losses sustained by the chargeable person in connection with the business.

According to the Abu Dhabi Income Tax Decree, all companies carrying on trade or business in Abu Dhabi 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, taxes are only paid by two groups of companies:

• Oil and gas producing firms which pay taxes at rates specified in their concession agreements. Oil companies are additionally required to pay royalties on their production output;
• Branches of foreign banks pay tax at a flat rate of 20% on annual profits. The taxable income of banks is calculated by reference to their audited financial statements.

The UAE is looking into a possible introduction of a federal corporate tax. There have been no public announcements from the UAE regarding the potential introduction of corporate income tax, beyond references from the IMF to economic impact studies carried out by the UAE government and general statements from the UAE government in the media. As a result there is no visibility on the scope of application of a future federal corporate income tax framework (if any), or on the interaction between a federal income tax and the existing emirates tax decrees.

Investment Incentives

There are approximately seven industry focused FTZs in Abu Dhabi that offer a combination of tax and business incentives that are introduced to attract foreign investment.

The incentives usually include tax holidays for a guaranteed period. For example, most FTZs offer a tax holiday of 50 years. The extension of 100% foreign ownership is also common, as is the suspension of any Customs duties within the free zone and the provision of “one-stop shop” administrative services.

Withholding Tax

There are no withholding taxes in the UAE.

Capital Gains Tax

There is no capital gains tax in the UAE. 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 imports. Other rates may apply to certain goods, such as alcohol and tobacco, and certain exemptions may also be available. Goods imported and intended for re-export often benefit from Customs duties discounts or exemptions, as do manufacturers on the import of their machinery, raw materials and spare parts used for industrial purposes. Currently, there are no separate excise taxes levied in the UAE.

Value-Added Tax

There is no VAT in the UAE at present. However, it has been confirmed that VAT will be introduced to the UAE in January 2018. Staple food items, healthcare, education and social services will be exempt from VAT. It is expected that VAT will also be introduced across the wider GCC region, though an exact timeline for this has yet to be finalised. The GCC member states will implement a common framework that will form the legal basis for the introduction of a VAT in all six member states.

Personal Income Tax

No personal taxation currently exists in the UAE.

Social Security

The UAE does not impose social security on expatriates. There is a social security regime in the UAE that applies to GCC national employees only. Social security contributions are calculated at a rate of 17.5% of the employee’s gross remuneration as stated in the employment contract, regardless of whether those employees are employed by entities that operate in a FTZ and subject to tax holidays. 5% is payable by the employee and the remaining 12.5% is payable by the employer. For non-UAE-GCC nationals working in the UAE, employee contributions are determined in accordance with social security regulations of their home country. The liability to withhold is on the employer. These levies and rates may be administered differently by each emirate, and the emirate government may also make additional contributions.

Municipal & Property Tax

A 10% service charge and 6% government tourism fee are imposed on hotel charges. These charges are usually included in the customer’s bill, with the Abu Dhabi Tourism & Culture Authority collecting the tourism fee from restaurants and hotels. Abu Dhabi does not levy a municipality tax on rented premises but landlords are required to pay certain license fees.

Real Estate Fees

Registration fees are charged on a transfer of title relating to real estate in Abu Dhabi at 2% of the value of the property up to a maximum fee of Dh1m ($227,200) per transaction. Although typically the seller and purchaser each pay 1%, this is subject to the parties agreeing otherwise and in practice the purchaser pays the full 2% fee. There are no separate stamp taxes levied 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 other companies. The requirement to prepare statutory financial statements (“SFS”) varies within each regulatory authority. Most authorities request audited SFS at the time of renewing the annual trade license. In some cases an exemption from preparing and filing audited SFS may be available, but generally companies prefer to prepare SFS as part of good corporate governance and best practice.

As for payroll, although there are no personal income tax obligations in the UAE, it is important to comply with all labour law requirements together OBG would like to thank PwC for its contribution to THE REPORT Abu Dhabi 2016 with certain mandatory requirements such as the Wages Protection System (WPS). The WPS applies to employees registered with the UAE Ministry of Labour. A key requirement under WPS is to pay employees in local currency, into their local bank accounts and from a local bank account. Employers non-compliant with WPS could face financial penalties and problems with renewing or processing new visas for their workforce.

Foreign Exchange Controls

There are no exchange controls on the remittance of profits or repatriation of capital, and there is a relatively small number of restrictions on foreign trade.

Double Tax Treaties

The UAE has entered into tax treaties with several countries, including the following: Algeria, Armenia, Austria, Azerbaijan, Belarus, Belgium, Bosnia and Herzegovina, Brunei, Bulgaria, Canada, China, Cyprus, the Czech Republic, Egypt, Estonia, Finland, France, Georgia, Germany, Hong Kong, India, Indonesia, Ireland, Italy, Japan, Kazakhstan, Korea, Latvia, Lebanon, Lithuania, Luxembourg, Malaysia, Malta, Mauritius, Mexico, Montenegro, Morocco, Mozambique, Netherlands, New Zealand, Pakistan, Panama, the Philippines, Poland, Portugal, Romania, Russia, Serbia, Seychelles, Singapore, Slovenia, Spain, Sri Lanka, Sudan, Switzerland, Syria, Tajikistan, Thailand, Tunisia, Turkey, Turkmenistan, Ukraine, Uzbekistan, Venezuela, Vietnam and Yemen.

Tax treaties have been signed with Andorra, Belize, Bermuda, the Comoro Islands, Gambia, Lichtenstein, Macedonia, Mauritania, Palestine, Senegal, Uganda and with the UK in early 2016; however, these treaties have yet to be ratified. In addition there are tax treaties pending with Albania, Bangladesh, Barbados, Benin, Ethiopia, Fiji, Greece, Guinea, Kenya, Kyrgyzstan, Libya, Slovakia, South Africa and Uruguay.