The UAE Federal Government has exclusive jurisdiction to legislate UAE taxes. However, no federal tax laws have been issued to date. Instead, most of the Emirates enacted their own general corporate 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 companies operating in the UAE, except for the following cases. Firstly, certain petrochemical companies and companies engaged in upstream petroleum activities, which are subject to tax as per the relevant concession agreement. Secondly, specific banking tax regulations have been enacted by certain Emirates (i.e. Dubai, Sharjah, Abu Dhabi, and Fujairah), under which income of UAE 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” (i.e. 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%. Entities established in a free trade zone (FTZ) may benefit from guaranteed tax holidays for renewable periods of 15 to 50 years.
The UAE government is looking to introduce a VAT along with the other GCC states, and has been studying the possible introduction of a federal corporate income tax regime
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 organization 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.
A chargeable person in Abu Dhabi shall be charged taxes on a sliding scale as noted below. Taxable income is computed after the deduction of all costs and expenses that are incurred by a chargeable person earning such income. Deductible costs and expenses include the cost of goods sold, 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.
As in the other Emirates in the UAE, tax is currently not actually levied under the Abu Dhabi Tax Decree on most companies operating in the Emirate of Abu Dhabi, except for foreign banks and companies engaged in oil and gas exploration and production activities.
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.
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. 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. There are no withholding taxes in the UAE and, likewise, there is no capital gains tax in the UAE. For taxpaying entities, capital gains are taxed as part of business profits.
Generally, a customs duty of 5% is imposed on the cost, insurance, freight (CIF) 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 exemptions, as do manufacturers on the import of their machinery, raw materials, and spare parts used for industrial purposes. Although there are currently no excise taxes levied as such in the UAE, the GCC States have recently agreed in principle to introduce excise taxes on specific goods, which is expected by 2017.
Value Added Tax
Currently, there is no VAT in the UAE. However, GCC Finance Ministers have approved in principle a VAT treaty, which will constitute the common framework for the introduction of VAT in the GCC. The treaty will form the basis for the issuance of national VAT legislation by each GCC State. The envisaged system will be a standard fully-fledged VAT system that will apply at 5% across the GCC. The expected date for VAT to be introduced in the UAE and a number of other GCC counties is January 2018 as per official statements made by relevant Government officials. However, legislation has yet to be published setting out the specific details of the VAT regime in the UAE including the exact introduction date.
Personal income tax & social security
No personal taxation is currently levied in the UAE and 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. A sum of 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.
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 Authority collecting the tourism fee from restaurants and hotels. From April 2016, Abu Dhabi introduced a municipality fee of 3% on premises rented by expatriates based on the annual rental value. It is generally the tenants’ obligation to pay the tax; however, the tenants’ employer will typically pay the tax on behalf of the employee. In addition 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 AED1m 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.
All companies are required to maintain proper accounting records. There is no national 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 labor law requirements together with certain mandatory requirements such as Wages Protection System (“WPS”). WPS applies to employees registered with the UAE Ministry of Labour (“MOL”). A key requirement under WPS is to pay employees in local currency into their local bank accounts and from a local bank account.
Double tax treaties
The UAE has entered into tax treaties with several countries, including the following, which are in-force: Algeria, Armenia, Austria, Azerbaijan, Bangladesh, Belarus, Belgium, Bosnia and Herzegovina, Brunei, Bulgaria, Canada, China, Cyprus, Czech Republic, Egypt, Estonia, Finland, France, Georgia, Germany, Hong Kong, Hungary, India, Indonesia, Ireland, Italy, Japan, Kazakhstan, Korea, Kyrgyzstan, Latvia, Lebanon, Lithuania, Luxembourg, Malaysia, Malta, Mauritius, Mexico, Montenegro, Morocco, Mozambique, Netherlands, New Zealand, Pakistan, Panama, 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.
In addition, there are tax treaties pending with Albania, Barbados, Benin, Ethiopia, Fiji, Greece, Guinea, Kenya, Libya, Slovakia, South Africa, and Uruguay.
Tax treaties have been signed with Andorra, Belize, Bermuda, Comoro Islands, Gambia, Jersey, Jordan, Kosovo, Liechtenstein, Macedonia, Mauritania, Nigeria, Palestine, Senegal, Uganda, and the UK in early 2016; however, they have yet to be ratified.