Dubai is widely known for its spectacular skyscrapers, luxury, and shopping, but above all for the lack of taxes both at a personal and corporate level.
This absence of taxes has allowed Dubai to attract thousands of companies and millions of dollars in investment, making it a technological and financial hub that undoubtedly leads the way in the Middle East.
However, in recent years, both the United Arab Emirates and Dubai have undergone significant tax changes with the aim of simplifying their tax system and aligning it with international best practices while diversifying their state revenues.
The main tax changes were as follows:
- Implementation of Value Added Tax (VAT) in January 2018.
- Introduction of Economic Substance Regulations (ESR) to ensure that companies are not ghost or shell companies.
- Introduction of Country-by-Country Reporting (CbCR) regulations in April 2019, aligning Dubai with international standards.
But undoubtedly the most notable change is the introduction of a corporate income tax. As a result, the United Arab Emirates, and therefore also Dubai, has started to tax corporate profits.
There is much confusion as to how this Corporate Tax will affect existing companies and Dubai-based entrepreneurs, who were used to paying no tax and are now threatened by a tax bill.
In fact, such a stir has been raised that the Emirates Finance Authority itself has issued a statement to deny inaccurate interpretations of the Corporate Tax, accusing them of undermining Dubai’s reputation and attractiveness as an attractive destination for entrepreneurs.
In order to clarify the new situation, in this article we are going to unravel the new UAE Corporate Tax.
When was corporate income tax approved in Dubai?
The Corporate Tax in Dubai was approved on January 31, 2022, and it came into effect for fiscal years beginning on or after June 1, 2023.
Any company adopting a fiscal year starting on June 1, 2023, and ending on May 31, 2024, will be subject to the Corporate Tax starting from June 1, 2023. The first tax declaration is likely to be due towards the end of 2024.
Companies adopting a calendar year from January 1, 2023, to December 31, 2023, will be subject to the Corporate Tax from January 1, 2024, and the filing of the tax return will probably take place in mid-2025.
What is the tax rate for Corporate Tax in Dubai?
The standard tax rate for Corporate Tax in Dubai is 9%.
However, there is a three-tier system:
- Annual taxable profits up to AED 375,000 (approximately $102,000) are subject to a 0% tax rate.
- Annual taxable profits exceeding AED 375,000 (approximately $102,000) are subject to a 9% tax rate.
- Multinational enterprises falling within the scope of Pillar 2 of the BEPS 2.0 framework are subject to different rates based on the OECD rules (consolidated global revenue exceeding AED 3.15 billion).
Thus, if your company is obliged to pay taxes in Dubai according to the Corporate Tax regulations, it would pay 0% on the first $102,000 of profit and 9% on profits exceeding that amount.
For example, a company with $200,000 in profit would have an effective tax rate of less than 4.5%.
How does Corporate Tax work in Dubai?
Corporate Tax in Dubai applies to all companies and commercial activities operating in the seven emirates of the United Arab Emirates, including Dubai.
It is levied on the profits earned by the company after deducting expenses from the income. Generally, all expenses related to the business are tax-deductible.
However, there are certain types of income that are exempt from Corporate Tax in the United Arab Emirates:
- Dividend income received by the UAE company from its qualified participations (to be defined in the law), known as the participation exemption.
- Capital gains.
- Profits from group reorganizations.
- Profits from intra-group transactions.
- There will be no UAE tax withholding on domestic and cross-border payments.
Additionally, the OECD transfer pricing rules will be applicable in the United Arab Emirates, including companies based in Dubai. All companies must comply with transfer pricing rules and documentation requirements.
Which companies have to pay Corporate Tax in Dubai?
All companies operating within the seven emirates of the United Arab Emirates, including Dubai, are required to pay Corporate Tax unless they are exempt.
Corporate Tax in the United Arab Emirates does not apply to the following types of entities:
- Companies operating in the extraction of natural resources, which will continue to be subject to the tax decrees issued by the respective emirate.
- Individuals receiving personal income (such as salaries or investment income) as long as the income-generating activity does not require a commercial license.
- Companies registered in the Free Trade Zones, provided they meet all regulatory requirements and do not conduct business with companies based in the United Arab Emirates.
In general, if your company is operating in Dubai, has annual taxable profits exceeding AED 375,000 (approximately $102,000), and conducts business with companies based in the Emirati territory (mainland business), it will be subject to Corporate Tax in Dubai.
However, if your company is registered in a Free Trade Zone and does not conduct business in the mainland territory of the United Arab Emirates, it may be exempt from Corporate Tax as long as it meets all regulatory requirements.
For example, a company providing hospitality services to hotels in Dubai, which are considered mainland business, would be subject to Corporate Tax. On the other hand, a company incorporated in a Free Trade Zone that provides online affiliate marketing services outside of the United Arab Emirates would not be liable for Corporate Tax.
Are Free Trade Zone companies required to pay taxes in Dubai?
As mentioned above, companies registered in the Dubai Free Trade Zones may be exempt from corporate income tax provided that they do not do business with the UAE mainland and comply with all regulatory requirements.
However, it is very important to note that in all Free Trade Zones a corporate tax return has to be filed annually -even if only for information purposes-.
How is it possible for a Free Trade Zone company not to pay taxes?
A company registered in a Dubai Free Trade Zone must either generate all its income from abroad the United Arab Emirates or be considered a ‘Qualifying Free Zone Person’ to continue enjoying a 0% tax rate.
To achieve this, the Free Trade Zone company in Dubai must:
- Have appropriate economic substance in accordance with the regulations of the United Arab Emirates (ESR) https://www.moec.gov.ae/en/economic-substance-regulations
- Earn income that qualifies as ‘Qualifying Income’, which is a list of activities defined by the Government of the United Arab Emirates.
- Comply with transfer pricing rules and maintain relevant transfer pricing documentation.
- Not have voluntarily opted to be subject to Corporate Tax.
In summary, a company registered in a Dubai Free Trade Zone can be exempt from corporate taxes if it meets the above requirements and does not conduct business with companies based in the Emirati mainland:
|Tipo de sociedad y tipo de renta
|Base imponible no superior a AED 375,000, todos los ingresos del extranjero o “Qualifying Income” de una “Qualifying Free Zone Person”
|Base imponible superior a AED 375,000,
“Non-Qualifying Income” de una “Qualifying Free Zone Person” o ingresos de empresas situadas en Emiratos no calificadas como “Qualifying Free Zone Person“.
Is it worth moving to Dubai after the implementation of Corporate Tax?
There has been discussion about whether Dubai would lose its competitiveness with the implementation of Corporate Tax.
However, nothing could be further from the truth.
The Corporate Tax in Dubai is one of the most attractive internationally, with an effective tax rate well below the OECD average.
It is easy to understand, provides exemptions in various relevant areas, and creates a relatively limited compliance burden, primarily focused on small and medium-sized enterprises.
Furthermore, we believe that the majority of potential clients of Relocate & Save (digital nomads, successful entrepreneurs, professional athletes, and innovators) would not be subject to taxes in Dubai because their companies, registered in a Free Trade Zone, do not invoice companies located in the United Arab Emirates. 100% of their income comes from outside the UAE.
How to take the first step?
At Relocate & Save, we have been assisting entrepreneurs, high-net-worth individuals, athletes, and cryptocurrency professionals in relocating their tax residency to Dubai over the past years.
In fact, our presence and connections in Dubai make us an ideal partner to understand whether you should pay this new tax and to help you settle in Dubai and relocate your residency with us.
Relocate & Save is an official partner of IFZA, one of Dubai’s leading Free Trade Zones, offering world-class infrastructure, state-of-the-art facilities, and business-friendly regulations, making it an ideal destination for foreign investors looking to establish and develop their business.
If you have any doubts and would like assistance with the visa application process, please write to us at [email protected] or through the contact form.