Direct taxation of businessesi Tax on profits
There is no federal income tax law in the UAE, or any federal taxes on income (except as noted further below in this section). Accordingly, the pre-federation income tax decrees of the individual emirates remain applicable.
Corporate income tax statutes have been enacted in each of the emirates, but they are not implemented. Instead, corporate taxes are collected with respect to branches of foreign banks (at the emirate level) and courier companies (at the federal level). Further, emirate-level 'taxes' are imposed on the holders of petroleum concessions at rates specifically negotiated in the relevant concession agreements. There is no personal income tax.
Dubai and certain other emirates impose taxes on some goods and services (including sales of alcoholic beverages, hotels, restaurant bills, and residential and commercial leases).
Although there is currently no sales tax or value added tax (VAT) in the UAE, notable headway has been made in the move to introduce VAT and corporate tax in the UAE.
On 27 November 2016, the Member States of the GCC signed the Unified VAT Agreement for the Cooperation Council for the Arab States of the Gulf (the GCC VAT Framework Agreement). The GCC VAT Framework Agreement provides that each GCC state will be allowed to introduce its own VAT regime, providing that common principles are adopted by all GCC states.
The UAE has introduced a number of new laws to be able to prepare for the implementation of VAT. The Federal Tax Authority was established under Federal Law No. 13 of 2016, and will be in charge of managing and collecting federal taxes and related fines, distributing tax-generated revenues and applying the tax-related procedures in force in the UAE.
Following on the Federal Tax Authority, the Tax Procedures Law was then issued as Federal Law No. 7 of 2017. The Tax Procedures Law establishes the framework for federal taxes administration in the UAE.
Thereafter, Federal Decree-Law No. 8 of 2017 (the VAT Law) was issued, and a dedicated tax website launched for the Federal Tax Authority. The VAT Law is based on the common principles agreed in the GCC VAT Framework Agreement, and sets the general rules for the implementation of the new tax and includes some details on the goods and services subjected to VAT, as well as those that will receive special treatment. The VAT Law introduced a 5 per cent VAT starting January 2018, and this is imposed on a taxable supply of goods or services for consideration and deemed supplies by a taxable person conducting business in the UAE and the import of taxable goods. The supplier of the goods or services, the importer of taxable goods and the taxable person registered for VAT who acquires goods will be required to account for VAT. Registration is mandatory for any taxable person if the total value of its taxable supplies made within the UAE exceeds the mandatory registration threshold of 375,000 dirhams over the previous 12-month period or if it is anticipated that the taxable supplies will exceed the threshold in the next 30 days. VAT registration will be optional if the mandatory registration threshold requirement (375,000 dirhams) is not met, but the voluntary registration threshold (187,500 dirhams) has been exceeded. The VAT Law provides for tax grouping, which allows companies with common control or ownership to be combined together into one entity for the purposes of VAT. Zero-rated supplies include certain exports, international transportation, supply of certain education and healthcare services and related supplies, certain investment grade precious metals, supply of crude oil and natural gas, supply of newly constructed residential properties within three years of completion and supply of certain land, sea and air means of transportation. Exempt supplies will include certain financial services, residential supplies, bare land and local passenger transport. Provision is made for reverse charging VAT on certain transactions between entities within the GCC. As of October 2017, the Federal Tax Authority has commenced accepting registrations for VAT through its online portal.
While the VAT Law provides a framework for implementation of VAT in the UAE, the operative provisions are contained within the VAT Law's Executive Regulations, issued as Cabinet Decision No. 52 of 2017. The Executive Regulations provide additional legislative and procedural guidance to the application of VAT within the UAE, specifically where it concerns the tax treatment of free zone entities. Cabinet Decision No. 52 of 2017 also outlines supply of goods and services in all cases, including supply in special cases, supply of more than one component and exemption related to legal supply. The regulation also defines the mandatory and voluntary tax registration thresholds, exceptions from registration, tax grouping, as well as the process to apply for deregistration.
The UAE Ministry of Finance (MOF) has announced that it expects to generate US$2.7 billion in revenues collected from VAT in the first year of implementation alone.
Separately, the MOF has announced that it is still studying reforms to the UAE corporate tax regime, that the tax rate is under study and that businesses will be given at least one year to prepare for any changes. As there are still many stages to go through before a corporate tax law is enacted, there is still no firm timeline in place for the implementation of this corporate tax law.
Each emirate, except for Umm Al Quwain, has an income tax decree. The income tax decrees of the emirates of Fujairah (1966), Sharjah (1968), Ajman (1968), Dubai (1969) and Ras Al Khaimah (1969) are based on and broadly similar to the Emirate of Abu Dhabi Income Tax Decree of 1965 (together, as amended, Income Tax Decrees), which will be the basis for discussion here. No other taxes are imposed on corporate income.
Taxable persons are defined as juristic entities or any branches thereof, wherever organised, that conduct trade or business at any time during the tax year through a permanent establishment based in the respective emirate, whether directly or through the agency of another juristic entity, unless exempted. The Income Tax Decrees make no distinction between resident and non-resident corporations, but instead define a taxable person as, inter alia, having a permanent establishment within the respective emirate.Banks
The principal difference in the treatment of local and foreign commercial banks is that local banks are not subject to any taxation on their income, whereas foreign banks may be subject to taxation at the emirate level. Additionally, a foreign bank may not establish more than eight branches in the UAE. The tax paid by banks varies from emirate to emirate and also within each emirate where certain banks are allowed to make annual payment of an agreed sum without reference to the level of profits or losses. In Abu Dhabi, banks are required to pay a tax of 20 per cent on net profits.
The government of Dubai issued Regulation No. 2 of 1996 (Regulation No. 2) setting out guidelines to be used by branches of foreign banks in calculating income tax due to the government of Dubai from taxable income arising from the conduct of business in the Emirate of Dubai.
Foreign banks operate in the Emirate of Dubai without local equity participation pursuant to special arrangements with the government. Generally, foreign banks are required to pay 20 per cent of their net profits to the government of Dubai as an income tax. Regulation No. 2 enumerates the permissible deductions that foreign banks may take in determining taxable income. For example, a foreign bank may not deduct more than 2.5 per cent of its total revenue in any year for head office charges and regional management expenses combined. Furthermore, centralised or shared expenses (including regional management expenses) of foreign branches of banks operating in Dubai may be deducted on a prorated basis. Head office expenses must be reflected in the Dubai branch's books and certified by the external auditors of the bank's head office.
The guidelines also set out acceptable methods for calculating 'doubtful debts', losses, amortisation of assets and capital expenditures. Losses may be carried forward and set off against taxable profits in the next tax year. Losses, however, may not be deducted from a previous year's tax obligation.
Branches must file an annual tax declaration together with audited financial statements. The financial year for foreign banks operating in Dubai must be 1 January to 31 December. Taxes are due and payable to the Dubai Department of Finance no later than 31 March of the following year. The penalty for late payment has been fixed at 1 per cent for each 30-day period that such payment is in arrears.Oil companies
The revenue of oil-producing companies is subject to the payment of both a royalty and an income tax. Royalties are calculated as a percentage of total revenue derived from production, while the income tax is calculated on net profit after depreciation.
In the Emirate of Abu Dhabi, the Supreme Petroleum Council (SPC), created pursuant to Abu Dhabi Law No. 1 of 1988, was designated as the supreme authority responsible for petroleum affairs in Abu Dhabi in charge of formulating and implementing policy in the oil sector. However, Law No. 1 of 1988 did not delegate to the SPC any powers of the Ruler to, inter alia, levy taxes on petrochemical activities in Abu Dhabi according to the Abu Dhabi ITD. Accordingly, any royalties levied by the SPC on concessions in the Emirate of Abu Dhabi are not taxes levied in accordance with the Abu Dhabi ITD, but duties levied pursuant to the SPC's role as a petroleum policy and regulatory body, and distinct from the power of the sovereign or ruler of Abu Dhabi to impose taxes.
A taxpayer's taxable income is defined as its net income arising in the respective emirate from the conduct of trade or business, after making permitted deductions. Taxable income is to be computed by the method of commercial accounting regularly used by the taxpayer for its own records, provided that such method fairly reflects taxable income. Such method may be on either a cash basis or an accrual basis.
Costs and expenses incurred in the production of income are treated as deductions. Such deductions include:
- the direct costs to the taxable person of producing goods sold or of providing services rendered by it;
- other costs and expenses incurred by the taxable person for the purpose of carrying on trade or business;
- a specified annual allowance in respect of depreciation, obsolescence, exhaustion or amortisation of physical and intangible assets;
- uninsured losses sustained by the taxable person in connection with carrying on trade or business; and
- any net operating loss of the taxable person incurred in carrying on trade or business that is carried forward from a previous tax year.
Deductions allowed to a taxable person dealing in oil as costs and expenses incurred for the purpose of carrying on trade or business are specifically defined to include certain costs and expenses incurred for the exploration for and development of petroleum or other hydrocarbons, and certain royalties paid on crude petroleum dealt in by such taxable person, but not to include any sums included in the credit aggregate or certain sums paid to the ruler of the respective emirate as the ruler's share in profits from oil under an agreement between the taxpayer and the ruler.
The following amounts may not be deducted from the taxable income of a taxable person dealing in oil: expenses deemed to be contributions to capital by agreement with the ruler of the relevant emirate, sums included in the credit aggregate, and certain sums paid to the ruler of the respective emirate as the ruler's share in profits from oil under an agreement between the taxpayer and the ruler. No non-deductible business expenses are specifically enumerated with respect to taxable persons not dealing in oil.
An annual deduction in respect of the depreciation, obsolescence, exhaustion or amortisation of physical and intangible assets calculated as a reasonable percentage of the original cost of such assets, and any additions thereto, are allowed. For certain specified assets, a straight-line depreciation in percentages stipulated in the Abu Dhabi ITD is presumed reasonable, subject to proof to the contrary.
The total of deductions for depreciation and losses in any tax year in respect of any asset may not, when added to the total of deductions previously allowed in respect of that asset, exceed the actual cost to the taxable person of such asset.
The Income Tax Decrees do not specifically address accounting issues relating to stock and inventory as a discrete category of asset. Therefore, valuation of stock and inventory may be accomplished by the method of commercial accounting regularly used by the taxpayer in maintaining its own records, provided that it fairly reflects the taxpayer's taxable income. The Income Tax Decrees do not specifically refer to the depreciation of stock and inventory.
Since the Income Tax Decrees do not specifically address the treatment of reserves, such treatment is to be governed by the method of commercial accounting regularly followed by the taxpayer in keeping its own records, provided that such method fairly reflects the taxpayer's taxable income.
The Income Tax Decrees do not provide that dividends paid affect the taxpayer's taxable income; nor do they require a dividend-paying taxpayer to withhold a portion of the dividend as a withholding of the recipient's income tax.
Dividends received and income from capital gains are treated no differently from other types of income.Losses
Net operating losses not allowed to be deducted from a taxpayer's income in a tax year may be carried forward indefinitely.Rates
|Taxable amount (dirhams)||Zero to 1 million||1,000,001 to 2 million||2,000,001 to 3 million||3,000,001 to 4 million||4,000,001 to 5 million||5,000,001 and over|
|Rate||–||10 per cent||20 per cent||30 per cent||40 per cent||50 per cent|
The rate of tax payable on income of oil-producing taxpayers in the emirates are as follows:
- Ajman and Fujairah: 50 per cent;
- Abu Dhabi and Dubai: 55 per cent; and
- Sharjah: 65 per cent.
Ras Al Khaimah has no separate provision governing petroleum-producing taxpayers.Administration
All foreign companies, public and private shareholding companies, LLCs and share partnership companies are required to have their annual financial statements audited by accountants registered in the UAE, and to submit such audited statements to the Ministry of Economy. Branch offices of foreign companies are required to prepare their annual accounts on an independent basis for operations in the UAE, and to maintain the necessary books and documents of account within the UAE. Pursuant to the recently enacted new Companies Law, every LLC or joint-stock company is now required to keep its accounting books in its head office for a period of at least five years from the end of the financial year of the company.
Within three months of the end of each tax year (1 January to 31 December), taxable persons are required to file a provisional income tax return. Taxable persons with taxable income below the threshold of 1 million dirhams are exempted unless specifically directed to file. The returns are filed with the respective director of tax appointed pursuant to the Income Tax Decrees.
Income tax is to be paid in quarterly instalments based upon the provisional declaration. Within nine months of the end of the tax year, taxable persons are required to file a final income tax declaration. Discrepancies between the provisional and final declarations are to be reconciled by adjustment of the final quarterly tax instalment and, if necessary, a partial tax refund.
Failure to file the declaration or to pay income tax without reasonable cause incurs liability for a fine of 1 per cent of the amount payable for each 30-day period or portion thereof during which the failure continues. Extensions of time for filing may be granted upon proof of a justifiable reason.
The director of tax has power to inspect relevant books and records. Penalties for falsification of records or making false statements include imprisonment or a fine, or both. A taxable person affected by such falsification, if legally responsible, is also liable to a fine.
Disputes as to the application of the tax laws are subject to the jurisdiction of the UAE courts or, by agreement, to arbitration.ii Other relevant taxes
Establishment of a branch office or an LLC in the UAE will entail payment of various fees in the course of the licensing and registration process. Although these fees are not taxes as such, the amounts involved can be significant and should be taken into consideration as a potential cost of doing business in the UAE.
Establishment of a branch office in the UAE will also mean payment of sponsorship fees to the national agent of such branch.
Customs duties are generally low. Under the GCC agreement to impose uniform rates for customs duties, the UAE imposes a uniform 5 per cent customs duty on the import of goods from outside the GCC. Limited exemptions apply to military and security purchases and some foodstuffs.
Federal Decree Law No. 7 of 2017 introduced an excise tax in the UAE on certain products and became effective as of 1 October 2017. A reasonably high rate of tax on a limited number of goods is imposed by way of an excise tax. This includes a 50 per cent excise on carbonated drinks and a 100 per cent excise on energy drinks and tobacco products.