Does UAE Have Taxes? Understanding the Tax Implications for Your Business

Albert Einstein once said that the hardest thing in the world to understand is taxation. For UAE residences, this may have been hard to relate to, but not for long.

We wrote an article some time back about Will Taxes in the UAE be Implemented and here’s the second part of it.

From January 1, 2018, the UAE will impose a five percent VAT while exempting 150 food items, healthcare and education. This would be the first time the region has introduced direct taxation. The Gulf Cooperation Council (GCC) resolution covering the tax will come into effect in 2018 but countries will have until January 1 2019 to implement VAT.

In the first year, the UAE is expected to generate AED12 billion from tax revenue in an attempt to diversify revenues following a dip in oil prices. Considering that the UAE economy is forecast to grow to $440 billion in 2019, the VAT contribution would be approximately $6.5 billion, according to expert estimates.

How Much Tax In UAE

While the UAE is well-known for its lack of personal income tax, there are other tax considerations for businesses operating in the Emirates. Let’s delve into the three main indirect taxes that may apply to your company:

Value Added Tax (VAT)

VAT is a consumption tax applied at each stage of the supply chain, ultimately borne by the end consumer. VAT registration is mandatory, a registered business adds VAT to the price of taxable goods and services they sell. They then claim back the VAT they paid on their own business expenses. 

However, Under the Value Added Tax (VAT) regime, a taxable person is defined as any individual or business conducting economic activities, including the supply of goods or services, within the UAE. You also need to file a VAT return. The VAT return filing process involves reporting relevant financial information, such as sales figures, purchase invoices, and VAT amounts charged or paid, as well as making necessary adjustments and claiming eligible input tax credits.

• Current VAT Rate in UAE: The standard VAT rate in the UAE is 5%, introduced in January 2018.
• VAT Applicability: Most goods and services supplied in the UAE are subject to VAT. However, some essential items and services are zero-rated (meaning VAT is applied at 0%) or exempt (not subject to VAT at all).

Corporate Tax

UAE Corporate tax applies to businesses and other entities registered in the UAE mainland, excluding those operating in Free Zones.  To be considered a qualifying free zone person, an entity must be incorporated and maintain its presence and operations solely within a designated free zone in the UAE, and derive qualifying income from transactions outside of the UAE with separate legal entities. 

However, only businesses with a taxable income exceeding AED 1 million (approximately USD 272,250) in a financial year are subject to corporate tax. Corporate tax registration is mandatory for all companies meeting the prescribed criteria, including those operating in mainland UAE and free zones, with a few exceptions for specific sectors and activities. For corporate tax purposes, companies operating in the UAE will need to file an annual corporate tax return.

• Current Corporate Tax Rate: The current corporate tax rate in the UAE is a flat 9%, implemented in June 2023.
• Taxable Income: Taxable income for corporate tax purposes is generally calculated as the net profit of the business, after deducting allowable expenses from its gross revenue. Allowable expenses may include business costs, employee salaries, and depreciation on assets.

Understanding the intricacies of the corporate tax law can empower businesses to calculate tax liabilities accurately, comply with regulations efficiently, optimize UAE tax strategy

Excise Tax

Excise tax is an indirect tax levied on specific goods deemed harmful to health or the environment, often referred to as a “sin tax.”  The purpose is to discourage consumption and generate additional government revenue.

• Products with Excise Tax: Some examples of products subject to excise tax in the UAE include:
  • Tobacco and tobacco products (100% tax rate)
  • Carbonated drinks and sweetened drinks (50% tax rate)
  • Electronic smoking devices and related liquids (100% tax rate)
  • Energy drinks (100% tax rate)

The applicable excise tax rate varies depending on the product category. Businesses involved in the import, production, or storage of excisable goods must register for excise tax with the FTA.

How Will Vat Affect Businesses?

Will VAT disincentive businesses considering investment in the region? Not really, we reckon. Corporate income tax (CIT) is more likely to discourage investment as it may present a challenge to the tax-free branding that has served the UAE so well.

For sure, business owners will require time to get acquainted with the new system and revamp their financial systems. Moreover, entrepreneurs must now look at the suppliers for the goods and services they use to run their business, and determine the impact of VAT.

How Will Vat Affect The Common Man?

Basic food items exempt from VAT are likely to include fresh fruits, coffee and tea, wheat and cereal flours, sugar, infant milk foods, uncooked pasta, etc. Most food items – processed and cooked – and foods falling into the luxury goods category such as confectionery, chocolates, etc. will be subject to the standard 5 percent VAT.

VAT on real estate is another area that consumers need to watch out for. The sale of new properties and the subsequent resale by an individual may be subject to different VAT rules. Additionally the rental of commercial property may be treated differently to the rental of residential property.

The UAE Still Says No To Income Tax – For Now?

Going by UAE Finance Ministry revelations, the UAE government is not considering implementing a personal income tax on individuals and hasn’t undertaken any study on personal income tax so far. Reports also seem to suggest that the current priority of the Ministry is putting in place the infrastructure required for the implementation of VAT .

Watch this space for more updates.