UAE: Features of Taxation, Tax Policy, Planning
First, let’s find out what is tax policy and how it influences international corporate tax planning strategies. Tax policy is a system of measures carried out by the country in the field of taxes, an integral part of fiscal policy. Conducting a specific tax policy is associated with the implementation of the fiscal and regulatory functions of taxes. With the help of centralized resources, the government promotes balanced production and favorable structural changes, maintains the social sphere and maintains political stability.
The International Association of consulting and accounting organizations UHY International conducted a rating examination and compiled a list of countries with a low level of taxation and their tax policies. Russia ranked fifth with 13% tax rate, such countries as, Netherlands, Germany, and Italy took the last places due to their tough tax policies. It should be noted that the United Arab Emirates with its unique tax policy took the leading position in this rating as the country, which has excluded the taxation of individual persons and legal entities.
Fiscal/tax policy of the United Arab Emirates
As for the UAE, its tax policy is a very successful result of reforms, which local government has implemented step by step. In this article, we consider the issues of its property taxation, the features of tax report preparation at the year-end and the reasons why the country is so popular among the foreign investors on the global scale.
The main feature of tax policy in Dubai and the UAE is the fact that not only individual persons but also companies involved in trading, services sector, manufacturing plants, etc. are exempted from taxes. Besides, the fiscal policy of the country eliminates such thing as a social tax payment. The UAE with its unique tax policy has a number of advantages and opportunities for creating the international business against the significant growth of the tax burden in developed countries. It is not a secret that due to the government tax policy, the United Arab Emirates remains a relatively attractive place for carrying on the working activities and business.
The United Arab Emirates, over the past decade, has become an ideal place for companies from all over the world, which develop their business and expand their marketing outlets. For them, Dubai with its zero-tax policy has become a profitable and stable base for successful development. The national economy of the UAE is not only the oil and gas sector, the income from which is not more than 30% of the gross national product. The active diversification of the economy and zero tax rates in free zones has made it possible to develop the other economic sectors such as tourism and international trade, the financial sector and the entertainment industry, industry and engineering industry, services sector and finance rapidly. The policy of no corporate taxation has made the United Arab Emirates attractive for the potential investors and entrepreneurs in a variety of industries.
Exceptions in the tax policy of the UAE
At the same time, the current tax policy provides that the certain economic sectors are liable to taxes on the general base. In particular, the corporate taxes are levied on the companies and institutions which are engaged in the banking and oil and gas sector directly in the UAE. It is known that the oil and gas sector has become the basis of the prosperity of the Emirates. The government of the United Arab Emirates, realizing the high profitability of this industry, had made an exception for it when developing own tax policy. For example, the tax rate for oil producers and processing companies, which work directly in the UAE, can be 50-55%. If your company is engaged in the field of oil production and oil processing, but its activities do not deal with the oil directly in the UAE, in this case, when opening a company in the UAE, you will also be fully exempted from the taxes according to local tax policy.
As to the banking sector, the Sharia rules are the basis of local tax policy. In the Arab world, the provision of the funds at interest is considered as the usury. But, such a situation does not prevent the creation of the modern banking system, which includes both foreign and local banking institutions. For institutions which are engaged in the banking sector in the UAE, according to the local tax policy, the average interest rate of taxation amounts to about 20%. Besides, the banking services are provided basing both on the Sharia principles and the usual international standards.
Thus, the fiscal policy of the United Arab Emirates provides the international and local business with more competitive advantages regarding competitiveness. Local tax policy also contributes to the attraction of the foreign investments to UAE and highly qualified labor force to the national economy.
Diversification as a basis of the economic development in local tax policy
The tax policy of the UAE does not consider the taxation incomes as the main source of the country revenues. It is important to understand that historically the backbone of the economy of the Emirates is the mining, processing, and export of oil products and that was the basis for local tax policy for decades. Revenues from the oil and gas sector have made it possible to ensure the rapid economic growth, diversification and the development of the other related industries. And at the same time this sector, as it was mentioned above, ceased to be so important.
In particular, owing to the diversification of the revenues coming from the oil and gas sector, there is the active development of the following areas in Dubai (free zones with own unique tax policies, significant buildings, and constructions):
- Jebel Ali economic zone and the Commercial Centre in Dubai;
- Ports of Jebel Ali, Rashid;
- Burj al Arab, Dubai Mall, and Burj Khalifa;
- Man-made islands World and Palm Jumeirah;
- The world's largest international re-export center;
- Platform for the consolidation of advanced international experience and technologies;
- The region's largest tourist center with modern infrastructure;
- Various specialized areas of preferential economic trade with own unique tax policies (FTZ).
All the above-mentioned projects are the powerful centers for the development of transport, industry, tourism, medicine, education, etc. These centers operate successfully and attract business, people and finance into Dubai and other emirates of the UAE due to unique opportunities they provide and favorable tax policy.
UAE: free economic trade zones
The specialized areas with the special economic status and own tax policies have become a major government project intended to attract the foreign investors into the national economy. Today, there are more than 60 such economic zones on the territory of the United Arab Emirates; they offer a number of advantages and opportunities for business:
- The possibility of the foreign ownership of business without the involvement of the local partners or sponsors;
- Provision of import and export privileges;
- Guarantee of the unlimited repatriation of the gained profits and investment assets;
- Long-term tax holidays (from 15 years) with the possibility of further extension;
- Dividends, augmentation of capital and royalties are also exempted from taxation;
- Exemption of the employees from taxation;
- No state currency exchange regulation;
- No state quotas and barriers for international trade;
- Simplified registration procedure and minimal costs on administration and maintenance of the company.
Another feature of local tax policy is a number of international agreements which are aimed at avoiding double taxation of the business. These double tax treaties make it possible to optimize the taxable base at the international level and have become an effective tool for large multinational companies and holding structures.
Thus, the tax policy of the United Arab Emirates is attractive not only for business but also for the international companies, which can make Dubai the hub of their business operations and receive all the benefits from the extremely favorable tax regime of UAE.