History of UAE Tax System
United Arab Emirates is a country that is only 42 years old. State is federal and consists of seven independent emirates with the same name as the one of the major city: Dubai, Abu Dhabi, Sharjah, Umm Al Quwain, Ajman, Fujairah, and Ras Al Khaimah. Abu Dhabi is the capital of the United Arab Emirates Each of the seven Emirates has their sheikh (ruler) and state-level control exercised by the Supreme Council. For the last 10 years, the UAE has shown the highest grade of development, where quality is evident everywhere: in advanced construction industry, most ambitious projects in the hospitality sector, in service, in the social structure, in practicality of laws, in taking care of the public good.
The UAE property can be called one of the most promising investment tools for the USA and foreign buyers for a number of reasons: the UAE is beyond politics of confrontation or containment of external forces that have territorial or economic claims to the country. The UAE was established by the Cooperation Council of Arab Gulf states uniting six Gulf monarchies in 1981; besides the UAE, these are such as Bahrain, Kuwait, Qatar, Oman, and Saudi Arabia. The main purpose of such a union is to preserve and strengthen the stability of the region (Bahrain and Kuwait had political unrest in 2012), definitively establish unconditional internal security and defense of the 6 monarchies, as well as provide increased security against regional threats, primarily posed by large radical Islamist organizations, which are growing in a number of regions (Iraq, Libya, and Egypt).
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The UAE economy is affected by its potential, which consists in the raw material resources: in 2000, confirmed UAE oil reserves were ranked as 6th in the world, while proved reserves of natural UAE gas output are at the 4th place in the world (after Russia, Iran, and Qatar). However, since about the 2000s, the UAE economy has gradually reduced the load in terms of hydrocarbon production and gas consumption, as well as income from trade in natural resources. Within 42 years of existence of the UAE, the taxation system in the country has not changed, which is reflected in the stability of the existing international relations. Therefore, it seems valid to further examine existing types of taxation.
Types of Current UAE Tax
The UAE has no income tax or capital tax, except for the oil industry and the national banking sector, as well as branches of foreign banks. There is no income tax withheld from wages (withholding tax). The UAE has concluded several agreements on avoidance of double taxation with several countries with high taxation rates, so it now often appears in the tax plans of major corporations. With the help of a free trade zone consisting of about 1400 international companies unrelated to oil – exporting countries, country export increased by 200% in the period from 1986 to 1994. The country also has no exchange controls, quotas, or trade barriers.
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Import duties are extremely low, and most imported goods in general are not subject to a duty. Dirham is freely convertible into any currency and is tied in value to the U.S. dollar. Direct taxation is contrary to the traditions of the UAE, so its introduction is impossible in the near future. Foreigners have the right of official registration of purchase and status in the UAE Land Department. At the moment, registration fee is 2% of the purchase price, of which 0.5 % is charged to the seller and 1.5% to the buyer. It is possible that the interest rate may be revised in the nearest future.
System of taxation in the UAE consists in the fact that there is no federal corporate tax, and concerning companies registered in the UAE, the following tax rates are applicable:
- 10% – profit in the range of 1,000,000 – 2,000,000 UAE Dirham;
- 30% – profit in the range of 2,000,000 – 4,000,000 UAE Dirham;
- 40% – profit in the range of 4,000,000 – 5,000,000 UAE Dirham;
- 50% – on income of more than 5,000,000 UAE Dirham.
The UAE has also a tax on housing at a rate equal to 5%, tax on commercial property – 10 %, tax on hotel services – 5%, and one on entertaining activity – 5%.
Also, free economic zones are worth noting as any territory in the framework of the UAE has limits set favorably for economic and business customs, currency, tax, and visa.
Each free economic zone is governed by a separate state agency that registers businesses and gives them a license in the UAE.
Free economic zones provide foreign enterprises with the following advantages in comparison with registration in the rest of the United Arab Emirates:
- Foreigners are allowed 100%-ownership of enterprises registered in FEZs;
- Import and export of products and services of enterprises registered in FEZs are exempt from tax in the United Arab Emirates;
- Enterprises have a guarantee for repatriation of all profits and capital;
- Enterprises registered in FEZs are exempt from corporate taxes for 15 years. The law also provides the chance to prolong the term for next 15 years;
- Employees of enterprises are exempt from all taxes on personal income.
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Free economic zones offer registration of legal entities of various kinds, but, in general, a potential investor of the company in one of the free economic zones in the United Arab Emirates must bear in mind the following:
Authorized capital of the company varies from US $ 15,000 to US $ 250,000. The entire amount of capital is paid at the time of registration and shall be deposited in a local bank until all the registration formalities are over;
- Company will require from one to five stakeholders (either individuals or legal entities);
- A minimum number of directors (individuals or legal entities) varies in different FEZs;
- Appointment of a Secretary-General (an individual or a legal entity) may be required;
- The entity is required to maintain an office that in some FEZs is allowed to hold more than one company at the same time, a so-called Shared Office.
Future Taxes Proposals
One of the key ministers in the UAE has once again raised questions about the prospects for the introduction of direct taxation in order to accelerate diversification of the economy. Introduction of direct taxation would require an in-depth study of the situation at all levels in order to avoid a negative impact on low-income people, as well as a deterrent effect on the business and investment, and other distortions in the economy. It appears to prevent the addition of VAT to everyone’s tax burden. General sales taxes will be established in order to compensate loss and not to increase the amount of revenues. This initiative will be a part of the UAE’s policy to promote a more organic and modern budget legislation, which should lead to the budgeting based on the activities of all sectors. Implication is that the introduction of direct taxation will lead to a greater openness and transparency in the search for new ways to diversify the economy, which then would not depend on oil revenues.
How Will Tax Affect the Country’s Economy
I am confident that the introduction of direct taxation is a tool that is commonly used by the World Bank and the International Monetary Fund in order to achieve greater transparency in economic activity in the world, but it is not required in the case of the Emirates and for the future growth of its economy. International institutions want to achieve greater transparency to be able to easily monitor cash flow through the tax regulation. In terms of economic performance, the UAE does not need extra cash receipts. Despite the huge number of publications on this topic in recent years, the probability of an early introduction of income tax is low. On the example of property law, the design of which took four years, we can say that the changes in the local legislation require significant time. How taxes affect business and the UAE population will, in fact, depend on the level of new proposed taxes.
I do not believe that potential additional taxes could hamper infusion of foreign investments in the UAE. The only ones who would suffer are low-wage workers who, under the new tax burden and a constant increase in the cost of housing and general expenses, could simply decide to return to their countries. However, the major driving forces of the economy would not suffer. Each of the seven emirates in the United Arab Emirates has its own tax system with the extent of up to 40% of income taxes, but so far they are frozen in order to attract foreign investments. Rulers of the Emirates offer Seifert, a national law to maintain healthy competition. The government is likely to provide an overview of all the Emirates’ fiscal policies to create equal opportunities for the business on the territory of the Emirates.
Under the current UAE law, businessmen do not pay any sales tax from the total company income. The exceptions are banks and oil companies that pay up to 20% and 55% respectively of the income on taxation. Import tax has been increased to 5% by the GCC Customs Union, which was formed three years ago. Several categories of goods are not covered with general rules, such as food, building materials, medicines, and any goods intended for the free economic zone of Jebel Ali, Internet City, and the Dubai International Financial Center. For example, Dubai will also be charged a fee of 10% on all luxury goods under the agreement of the Gulf. Cigarettes are subject to 100% customs duty, and the municipal office of real estate is paid a fee of 10% of annual rent. The current state tax system is quite satisfactory for the country’s population and business in particular. The only thing that can improve this aspect and cancel the introduction of direct taxation is unification of tax systems in all the countries of the Gulf. For a long time, there have been talks about the introduction of a single currency, as well as other not yet catechumen’s initiatives. These actions would only simplify the tax system as a whole and ensure proper centralization in the region.