Understanding All Types of Taxes in the UAE

This article is written by Marina Zhirnova, Managing Partner at UPPERCASE Accounting 

 

The United Arab Emirates (UAE) is well-known for its advantageous tax environment, which has made it a popular choice for businesses and expatriates. Nevertheless, the UAE has implemented various taxes to broaden its revenue base and conform to global tax practices. This detailed guide examines the different types of taxes in the UAE, providing insights into their impact on businesses and individuals.

Value Added Tax (VAT)

Value Added Tax (VAT) was introduced in the UAE on January 1, 2018. This indirect tax is levied at each stage of the supply chain where value is added. The introduction of VAT marked a significant shift in the UAE’s taxation landscape, aligning it with global practices.

The standard VAT rate in the UAE is 5%. This rate applies to most goods and services, making it a broad-based consumption tax. Businesses with an annual turnover exceeding AED 375,000 are required to register for VAT. Voluntary registration is available for businesses with turnover below this threshold but above AED 187,500.

Businesses can reclaim the VAT they have paid on their purchases (input tax) against the VAT they collect on their sales (output tax). This mechanism ensures that the tax burden ultimately falls on the end consumer.

Corporate Tax

The UAE introduced a federal Corporate Tax (CT) system effective June 1, 2023. This move aligns the UAE with global tax practices and aims to enhance transparency and economic stability.

The corporate tax rates in the UAE are as follows:

0% on taxable income up to AED 375,000.

9% on taxable income exceeding AED 375,000.

Corporate Tax applies to:

•       Companies and other legal entities incorporated in the UAE.
•       Foreign entities with a permanent establishment in the UAE.
•       Free zone companies, provided they do not conduct business with the mainland UAE and meet all regulatory requirements.

Certain entities are exempt from Corporate Tax, including:

•       Government entities and government-controlled entities.
•       Extractive businesses (e.g., oil and gas companies) and non-extractive natural resource businesses, subject to specific criteria.
•       Charities and public benefit organizations.
•       Investment funds, under certain conditions.

Taxable income is calculated based on the accounting net profit of a business, as reported in its financial statements, with adjustments as specified by the UAE Corporate Tax Law. Allowable deductions include operational expenses, salaries, depreciation, and interest expenses, subject to certain limitations.

Excise Tax

Excise tax was introduced in the UAE in October 2017 to discourage the consumption of goods harmful to human health or the environment and to generate additional revenue for public health initiatives.

The excise tax rates in the UAE are:

• 50% on carbonated drinks (excluding sparkling water).
• 100% on tobacco products.
• 100% on energy drinks.
• 100% on electronic smoking devices and tools.
• 100% on liquids used in such devices and tools.
• 50% on any product with added sugar or sweeteners.

Businesses dealing in excise goods must register with the FTA, file monthly excise tax returns, and maintain accurate records. Excise tax is payable at the point of importation, production, or release for consumption within the UAE.

Customs Duties

The UAE is part of the Gulf Cooperation Council (GCC) Customs Union, which imposes a standard customs duty on imported goods. Customs duties are a significant source of revenue for the UAE and help protect local industries.

The standard customs duty rate in the UAE is 5% of the cost, insurance, and freight (CIF) value of most goods imported into the region. Certain essential items, such as medicines and food products, may be exempt or subject to lower rates.

Goods imported into UAE free zones are typically exempt from customs duties as long as they remain within the free zone. However, if these goods are moved to the UAE mainland, customs duties apply.

Tourism Dirham Fee

The Tourism Dirham fee was introduced in Dubai to support tourism and infrastructure development. This fee is charged per night of occupancy in hotels and similar establishments.

The fee varies depending on the hotel's rating:

• AED 7 per room per night for 3-star hotels.
• AED 10 for 4-star hotels.
• AED 20 for 5-star hotels.

Hotels collect the fee from guests and remit it to the Dubai Department of Tourism and Commerce Marketing (DTCM). The funds are used to enhance tourism infrastructure and services.

Municipality Fees

Various emirates in the UAE impose municipality fees on residents and businesses to fund local services and infrastructure projects. These fees vary by emirate and are often included in utility bills or property-related payments.

Dubai: In Dubai, a housing fee equivalent to 5% of the annual rent is charged to tenants and included in their monthly utility bills. Restaurants and hotels also charge a municipality fee of 7% on the total bill amount.

Abu Dhabi: Abu Dhabi imposes a 3% municipality tax on hotel bills and a 5% municipality fee on the annual rental value of properties.

Sharjah: Sharjah charges a 5% municipality fee on hotel services.

Other Local Taxes and Fees

Specific Local Taxes

Different emirates may impose specific local taxes and fees tailored to their economic and social needs. These taxes and fees support various public services and infrastructure projects.

Examples

Waste Management Fees: Some emirates impose waste management fees to cover the cost of waste collection, recycling, and disposal services.

Parking Fees: In certain areas, municipalities charge parking fees to regulate traffic and fund the maintenance of parking facilities.

Double Taxation Agreements (DTAs)

The UAE has entered into numerous DTAs to avoid double taxation and encourage cross-border trade and investment. These agreements provide relief from double taxation on income and capital, benefiting businesses and individuals operating internationally.

Compliance and Reporting

Registration

Businesses operating in the UAE must register with the relevant tax authorities, such as the FTA, to comply with tax regulations. Registration involves submitting an application and providing necessary documentation.

Record-Keeping

Accurate record-keeping is crucial for compliance with tax regulations. Businesses must maintain detailed records of all transactions, including invoices, receipts, and financial statements, for a specified period, typically five years.

Filing Tax Returns

Tax returns must be filed regularly, depending on the type of tax. For instance:

VAT Returns: Quarterly filing is required, with returns due within 28 days of the end of the tax period.

Corporate Tax Returns: Annual filing is required, with returns due within nine months of the end of the financial year.

Excise Tax Returns: Monthly filing is required, with returns due within 15 days of the end of the month.