How are corporations taxed in Abu Dhabi?

The UAE currently has no system of federal income taxation. Instead, most of the emirates – including Abu Dhabi – enacted their own corporate tax decrees in the 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 firms and, under separate banking tax decrees, branches of foreign banks. This practice is unlikely to change in the near 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 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 – Abu Dhabi Global Market (ADGM) and Dubai International Financial Centre (DIFC) – are the only FTZs established by federal decree. Accordingly, only ADGM and DIFC 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 deadline of December 31, 2018. In response to this, the UAE put in place its economic substance regulations on April 30, 2019, applicable to financial years commencing on or after January 1, 2019. Regulations on country-by-country reporting were also issued by the UAE on April 30, 2019, with effect from financial years commencing on or after January 1, 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.

Abu Dhabi Corporative Tax Regime

As originally issued in 1965 and subsequently amended, the Abu Dhabi income tax decree is based on the French concept of territoriality. It provides that any chargeable person that carries on a trade or business in the emirate is subject to corporate income tax at progressive rates of up to 55%. A chargeable person is defined as “a body corporate wherever incorporated, or a branch thereof, practicing trade or business at any time during an income tax year through a permanent organisation located in the emirate, whether directly or through the agency of another body corporate”. A permanent organisation is “a branch, place of administration or any location designated for work, and does not include an agency unless the agent has and habitually exercises authority to conclude contracts on behalf of such body corporate”.

Practicing a trade or business is defined as including the following activities:

• Selling goods or rights to such goods in Abu Dhabi;

• Operating any manufacturing, industrial or commercial enterprise in Abu Dhabi;

• Letting any property located in Abu Dhabi; or

• Providing services in Abu Dhabi, excluding the mere purchasing of goods or rights in such goods. In practice, however, corporate income tax is currently only applied to the following:

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

• Branches of foreign banks, whose annual profits are subject to a 20% tax and for whom taxable income is calculated by reference to audited financial statements and subject to certain adjustments, as per the Abu Dhabi banking tax decree; and

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

Investment Incentives

There are eight FTZs in Abu Dhabi offering tax and business incentives to attract foreign investment. The incentives usually include a 15- to 50-year tax holiday with the possibility of renewal upon expiry. Moreover, 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 Abu Dhabi.

Capital Gains Tax

There is no capital gains tax in the UAE or in Abu Dhabi. 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 in regard to 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, since December 1, 2019 a 100% excise tax applies to electronic smoking devices and the liquids used in those devices and tools. Any products with added sugar or other sweeteners are also subject to a 50% excise tax.

VAT

On January 1, 2018 VAT came into effect in the UAE. 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 tax 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 Abu Dhabi are calculated at a rate of 20% of an employee’s fixed remuneration – salary and fixed allowances – as stated in the employment contract, whereas 5% is payable by the employee and 15% is payable by the employer. Further, the UAE government makes an annual social security contribution of 6% of the employee’s insured salary. 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 contributions falls on the employer.

Municipal & Property Tax

A tourism fee of 3.5% and a municipality fee of 2% are imposed on Abu Dhabi hotel stays. These fees are collected on a bi-annual basis from Abu Dhabi hotels and paid to the Abu Dhabi Tourism and Culture Authority. Municipality fees for hotel room is also payable at Dh10 ($2.72) per room, per night.

Real Estate Registration Fees

Land registration fees are charged on the transfer of Abu Dhabi real estate– including long-term leases – at 2% of the property’s sale value. In practice, the purchaser tends to pay the registration fee to the Abu Dhabi 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 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 Abu Dhabi, 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 Exchange Laws

There are no foreign exchange controls or other restrictions on capital flows in and out of Abu Dhabi or the wider 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 OBG would like to thank PwC for its contribution to THE REPORT Abu Dhabi 2020 has had little taxation. As of February 18, 2020 the UAE had 92 such treaties in force with countries around the world, 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, 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 federal government has also signed and entered into tax treaties with an additional 39 countries, which are as follows: Angola, Antigua and Barbuda, Belize, Benin, Bermuda, Botswana, Burkina Faso, Burundi, Brazil, Cameroon, Chad, Chile, Colombia, Costa Rica, Ecuador, Ethiopia, Equatorial Guinea, Gabon, the Gambia, Ghana, Iraq, Liberia, Libya, Mali, Mauritania, Niger, Nigeria, Palestine, Paraguay, Rwanda, San Marino, Sierra Leone, South Sudan, St Kitts and Nevis, St Vincent and the Grenadines, Suriname, Uganda, Zambia and Zimbabwe.