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Let’s Understand the concept of Taxation structure for Expats in UAE

By Shivangi - 24 Nov 2021 Last Updated: 04 May 2022
Let’s Understand the concept of Taxation structure for Expats in UAE

Dubai's tax-free lifestyle has long drawn competent expats from all over the world. Working in Dubai and having the possibility to develop your own wealth without paying taxes is, indeed, very enticing.

One of the benefits of living in Dubai is that the UAE Dubai income tax rate is zero. Dubai, like the rest of the UAE, relies heavily on the oil industry for revenue, and it takes use of its tax-free status to recruit qualified expats and international businesses in order to diversify and improve its economy.

However, doesn't it seem way too wonderful to be true? That's why, in this post, we'll lay out the facts about taxes in Dubai and the UAE taxation system, so you can see what you pay and don't pay in terms of taxes in Dubai.

Overview of the UAE tax system

Are the taxes in the UAE different from those in Dubai?

In the UAE, there is no uniform federal tax legislation. As a result, while most UAE tax policies and international agreements apply across the board, there are some instances when each emirate can determine its own tax standards.

Most DTTs, for example, cover the entire UAE, but the actual taxes in each emirate can be set at the municipal level.

Personal or capital taxes are not levied in the United Arab Emirates. It applies to both UAE residents and expats. As a result, expat workers in the UAE do not face any particular taxation because they are treated the same as nationals whether it comes to personal or capital income tax.

Taxes on rental properties

Most emirates levy a rental tax, albeit the laws change each emirate. For residential tenants, renting a house in Dubai, for example, adds 5% to the annual rent expense.

Expat tenants in Abu Dhabi pay 3% of their annual rent as a rental tax, whereas UAE citizens do not. In Sharjah, all tenants must pay a rental tax of 2% of their annual rent.

Municipalities often levy a service tax, which has an impact on your restaurant and hotel costs. It varies from Emirate to Emirate once more.

Tourist tax in the United Arab Emirates

Tourists may discover that they have been charged a 10% tax on their lodging rate, a 10% service charge, and a 10% municipality fee.

A city tax (varying from 6 to 10% ) and a 6% tourism fee may be charged by some tourist attractions.

Other taxes in the United Arab Emirates

If you transfer property in the UAE, you will be charged a property tax of 4% in the Emirate of Dubai and 2% in the Emirate of Abu Dhabi.

In the United Arab Emirates, there are no federal withholding taxes.

As of 2018, the UAE had signed 115 double-taxation treaties, the majority of which seek to avoid double taxation of income, capital gains, and dividends, as well as lower tax on tax-exempt savings.

Dubai's Taxes

Dubai is subject to all federal tax laws: there is no income tax in Dubai, VAT is imposed at the national level, and Dubai inherits and benefits from any DTTs signed by the UAE.

However, some Dubai taxes may differ from those in the rest of the UAE.

Dubai has a Tax on Income

In the near future, Dubai's zero income tax policy will not be amended.

Sheikh Mohammed bin Rashid Al Maktoum, the UAE's Vice-President and Prime Minister, as well as the Ruler of Dubai, has indicated that an income tax will never be implemented in the UAE to address the deficit.

This means that a tax on an individual's income in Dubai is unlikely to ever be imposed.

Residents of Dubai also benefit from tax-free rental income, no stamp duty, and no capital gains or inheritance taxes.

However, just because you live in Dubai does not imply you may earn money tax-free. The key concern is your place of residence for tax purposes.

Are you a Dubai tax resident?

This is a crucial question because it determines whether or not you must pay tax when working in Dubai.

You may be subject to taxation on your income if you earn it in Dubai but live in another country. This is because most expats pay tax based on where they live.

What state do you live in for tax purposes?

If you take a 6-month contract in Dubai and live and work in the emirate for only 6 months, you would most likely be considered an ordinary resident in your home country for tax purposes, and your earnings may be liable to taxation in your home country.

If you live overseas and have an Investment property in Dubai from which you make a rental income, you must disclose this income on your tax return in the country of your tax residency and, if your entire earnings exceed the nil rate band for income tax, you may have to pay tax on it.

If you move to Dubai for a long amount of time, or if you are abroad of your home country for a long enough period of time to qualify as a non-resident for tax reasons, you may be able to earn your pay in Dubai tax-free.

A tax-season Ruse

Many countries categorise their population for tax purposes according to the fiscal year. From this perspective, the question of when you should leave your home country for Dubai is critical.

If you spend the majority of the current tax year in your country of residence, you may be regarded a tax resident for that tax year by the tax authorities, and you will be taxed on your whole income for that year, even if part of it was generated in Dubai.

Even a year-long contract in Dubai, if you are a UK citizen and domiciled in the UK, may not be enough to relieve you from your income tax duties in the UK, since it may only cover half of the current tax year and half of the next tax year.

The good news is that you will most likely be able to enjoy your Dubai income tax-free as long as your stay in Dubai covers the qualifying part of a tax year in your place of abode.

Every person's situation is unique, and you must be completely aware of your tax status and tax obligations, whether at home or abroad. If you're doubtful, consult a certified professional.

Dubai's indirect taxes and tax rates

In terms of additional taxes in Dubai, contrary to popular assumption, they actually exist.

For starters, international banks and energy companies have their profits taxed at the federal level, which is definitely a good thing!

Importation of alcohol is substantially taxed. It costs 50% to bring it into the country, plus extra 30% if you have a liquor licence and purchase alcohol for personal consumption.

Read More: How does VAT works in the UAE?

Tourist tax in Dubai

Furthermore, every visit to a hotel in Dubai for a stay or even a dine out is charged. The charge, known as the Dubai tourist tax, adds 10% to your bill.

Every guest staying in a hotel, guestroom, or hotel apartment in Dubai is subject to this tourist fee, which is included in the bill.

As a result, depending on the sort of hotel and its rating, it might cost anywhere from 7 to 20 dirhams each night. A reasonably inexpensive guest house will charge 7 AED per night, whereas a 5-star hotel will price 20 AED.

Council tax and rental tax are two types of taxes

There is also a sort of council tax that is surreptitiously imposed when you pay your energy bills – and many people object to it because it is ostensibly for street lighting, rubbish collection, and other services, but most residents pay for it through maintenance fees.

So, in Dubai, you are effectively charged council tax twice – yes, and there is a 10% municipality tax as well as a 5% municipality tax on rental lodgings, both of which are collected via utility bills.

Departure tax in Dubai

When purchasing a plane ticket for a plane that arrives or takes off from one of Dubai's airports, you will be charged a departure tax.

The Dubai departure tax is included in the ticket price, regardless of where it is purchased.

The Dubai tourist tax does not apply to children under the age of two, transit passengers, or members of the cabin crew.

Dubai has a variety of taxes

Every time you cross a toll both in Dubai, you will have to pay a toll of 4 AED.

Using government services is also subject to a 10 AED knowledge tax and a 10 AED innovation tax.

If you use a centralised cooling system (district cooling), your bills may be significantly higher than if you used individual air conditioning units. Although it is not technically a tax, it is a payment that you must pay to the district cooling firms in exchange for their investments in modern technologies.

There may be additional payments as a result of the introduction of mandatory health insurance in Dubai, depending on your work contract. In some situations, it may mean that your potential tax savings are diminished due to additional healthcare bills.

Dubai imposes a Value Added Tax

VAT was implemented on a federal level in the UAE in January 2018.

The value added tax (VAT) is charged at a rate of 5%. Food, health, education, petroleum goods, social services, and bicycles are the only exceptions. The financial services and residential real estate industries are likewise VAT free (with certain exceptions).

Other taxes on consumption

In 2017, excise levies were imposed on three types of products: carbonated beverages (50%), cigarettes (100%), and energy drinks (100 percent)

Summary of the income tax structure in Dubai

If you are a tax resident in Dubai and have no additional obligations for the payment of tax on foreign-earned and sourced income, you may be able to earn your wage tax-free in the emirate.

Do you have to pay income tax if you live in the UAE?

The fact that the UAE is ostensibly a tax-free zone does not mean that expats are exempt from paying income tax.

Many new expats arrive in the country with a sigh of relief after leaving their high-taxed home country, but they are unaware that they may still owe taxes.

The tax authorities may still pursue you, especially if you have profits in your home country, such as rental income, dividend payments, savings interest and royalties, or capital gains on stocks or property.

The rules differ per country, so familiarise yourself with yours or risk being stung by severe penalties for tax evasion. If you get it wrong, you could be in for a rude awakening when you get home.

Conclusion

There is no income tax in the UAE for individuals who work there, regardless of their residency status. Those who are not UAE tax residents may still be required to pay income tax in their home country, depending on their own taxation regulations.

The United Arab Emirates has joined the Common Reporting Standard (CRS), a global standard for the Automatic Exchange of Information (AEOI) system. The Common Reporting Standard (CRS) is a legislative framework that allows countries to share tax information. This can be used to investigate tax evasion. Connect with our experts at Dhanguard to know more!! 

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