Dubai: Income Taxation for residents and non-residents
The UAE is known to be the only country with almost no taxation. Such taxes as VAT, sales tax or personal income tax are not collected at all. The fact is that there is no federal legislation governing taxation. It means that each Emirate is vested with the right to impose any kind of taxation. Nevertheless, no Emirate is going to introduce neither personal income tax nor other types of taxes. The UAE Government and the local authorities reject all suggestions from the International Monetary Foundation (IMF) to impose income taxation.
According to the Dubai tax law, all major companies are liable to taxation at a maximum rate of 55%. However, in practice, this applies only to oil companies and foreign banking institutions.
Foreign companies, which are engaged in oil exploration, are liable to the corporate income taxation at the general tax rate of 55%. However, the actual tax rate varies in different Emirates, ranging between 55% and 85%. Its amount depends on the special terms agreed in each specific case. The local governments of every single Emirate sign special agreements with the oil and gas companies. These agreements specify the way of calculating the tax rate.
Foreign banking institutions are also liable to corporate income taxation on the territory of the UAE, but it does not apply to all the Emirates. The corporate income tax at the rate of 20% is levied on the representative offices of the foreign banks in the Emirates of Abu Dhabi, Dubai, Fujairah and Sharjah. Corporate taxation rules of the Emirates of Dubai, Fujairah and Sharjah are based on their own legislations, whereas Abu Dhabi does not have special legislation dealing with taxation of branches of foreign banking institutions.
There are special degrees governing taxation of the UAE joint venture companies. All the other types of business and personal income are completely tax-free. This also applies to all the forms of foreign remittances in the form of royalties, interests, dividends or fees for technical services and other types of capital gains of any nature.
In spite of the fact that special income tax decrees were adopted in some Emirates, they have no real force. Any major company, which carries on business on the territory of the UAE, can make arrangements with the local authorities of the respective Emirate in order to avoid high taxation. The same applies to the foreign companies, which are looking to reduce the applicable tax rate stated in the decree.
To summarize – the personal income of whatever nature is taxed in UAE at zero rate. The currently discussed potential changes in the UAE legislation applies only to potential introduction of VAT and no changes expected in regards to personal taxation.
On corporate entities – there is no difference in taxation whether the company is UAE tax resident or not. Same favourable terms apply to both types.