Taxation in the UAE
1) General information
Most Emirates have issued local tax decrees. In general, these decrees are not very detailed and prescribe the basis for taxation in the relevant Emirate. In reality, these decrees are only enforced for oil and gas companies and branches of foreign banks.
Companies registered in the Free Zone, are generally not liable to corporate income tax for a specific period of time (normally 15-50 years).
2) Tax Residency in the UAE
Due to the fact that the tax decrees in UAE do not contain specific provisions in regards to corporate tax residency and corporate income tax, currently, there is no clear concept of corporate tax residency in the UAE. The Federal Tax Authority issues Tax Residency/Domicile Certificates (TRC) to companies incorporated and managed in the UAE if they meet specific requirements set by the FTA and a pertinent double tax treaty.
In order to obtain a TRC, the company should exist and operate in the UAE for at least one year from the date of issue of the company’s trade license. Several documents shall be submitted upon the application for a TRC, such as:
a) Valid trade license
b) Establishment contract certified by the relevant authority
c) Passport, UAE residence visa and Emirates ID of the authorized signatory mentioned on the trade license
d) Most recent certified audited financial statements
e) Certified bank statements from a local UAE bank for the 6 most recent months
f) Tenancy contract/title deed for business premises in the UAE
g) Proof of authorization document for the authorized signatory
h) Tax registration number and VAT registered email address (for VAT registered companies only)
Offshore registered companies and UAE branches of foreign companies are usually not eligible to obtain a TRC in the UAE, while Free Zone companies can apply from the MOF on the basis of an existing agreement concluded between the MOF and the Free Zone in question.
3) Withholding Tax
Currently, there are no withholding taxes in the UAE.
4) Capital Gains
As per the current legislation, capital gains are not taxable, unless derived by a company that is taxable under any of the income tax or banking tax decrees.
5) Tax Incentives
Several free trade zones have been established and offer numerus benefits, such as:
15-50 year tax holiday (renewable), no restrictions on foreign ownership, no restrictions on capital and profit repatriation, exemption from import duties on goods brought into the zone.
6) Country-by-Country Reporting
The UAE rules of CbC reporting apply if the consolidated group revenue is at least AED 3.15 billion in the financial year immediately preceding the reporting period. The CbC report should be submitted within 12 months of the end of the reporting period and non compliance with the CbC regulations could result in penalties of up to AED 2,250,000. Multinational enterprise groups, with their headquarters outside of the UAE, are exempt from the CbC reporting.
7) Foreign income and tax treaties
The UAE has concluded numerous double taxation treaties. The UAE has double taxation agreements with over 115 countries/jurisdictions.
8) Real Estate transfer fees
Even though there are no property taxes in the UAE, there is a registration/transfer fee on all direct and, in some cases, indirect transfer of property. The rate varies and depends on the Emirate in which the property is located (For Dubai the rate is 4%).
The purchase of property in the UAE is generally allowed only for UAE/GCC nationals, but some exceptions apply for foreigners if the property is situated within the designated areas of the UAE.
9) Economic Substance Rules (ESR)
All UAE onshore and Free Zone entities that are involved in specific activities have to meet Economic Substance (ES) requirements, as per the current local rules and regulations. Failure to comply could result in penalties.
Companies (including branches) involved in the following activities should comply with ESR:
c) Finance and Leasing
d) Fund Management
f) Headquarters Business
g) Holding companies
h) Intellectual property holding
i) Distribution and Service Centre
All businesses involved in the aforementioned sectors should comply with the three ES tests:
a) The “directed and managed” test
The entity needs to be directed and managed in the UAE (i.e. board meetings, quorum of directors physically present, minutes of meetings kept in the country etc.)
b) The “core income generating activities (CIGA)” test
The entity shall prove that the relevant CIGAs have been undertaken in the UAE. The criteria of this test depend on the relevant activity of the entity.
c) The “adequate” test
The entity needs to have an adequate number of qualified employees in the UAE, incur adequate expenditure in the jurisdiction and have an adequate physical presence in the country. The exact criteria of the aforementioned test vary on a case by case basis.
In order to meet the ES tests criteria, all entities falling into the related business sectors shall satisfy all the aforementioned tests in the relevant time period and shall need to meet the following compliance/reporting requirements:
b) Report submission
Noncompliance with the ESR could result in financial penalties, exchange of information with the shareholder’s/UBO’s jurisdiction and suspension of the relevant trade license.
10) Value added tax (VAT)
As a rule of thumb, there’s an applicable VAT of 5% in the UAE on taxable supplies of goods and services, imports of goods into the UAE outside of the GCC. However, some exemptions exist and certain supplies qualify for a zero-rating or exemption under the current legislation. Zero rated supplies are treated as taxable supplies in all aspects, including the right to recover VAT incurred on expenditure, while exempt supplies do not require VAT to be accounted for and VAT incurred on expenditure is restricted.
11) Personal tax
Currently, physical persons are not imposed to personal income tax and no income tax returns need to filed.
12) Physical Persons’ tax residency
As individuals are not subject to any tax laws in the UAE, there is no concept of personal tax residency. However, the MOF, under certain circumstances, issues TRCs to individuals who have a physical presence in the UAE for a period of at least 183 days in a 12-month period. Applicants shall present the following documents at the time of application:
b) UAE residence visa
c) Emirates ID
d) Certified UAE bank statements for the last 6 months
e) Letter from the company stating the position and remuneration of the individual or certified salary certificate
f) Tenancy contract for personal residency in the UAE
g) Report from the General Directorate of Residency and Foreigners Affairs specifying the date and times at which the individual has entered/exited the UAE since obtaining their residence visa
*DISCLAIMER: This article and its publication are intended to provide a brief introduction and act as a general guide. This is provided for information purposes only and cannot be utilized as a substitute for professional advice. This document does not represent a legal opinion and one must not rely on it without receiving independent advice based on the particular facts of its own case. No responsibility is accepted by the author or the publishers for any loss suffered from acting or refraining from acting based on the contents of this publication.
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