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VAT and Corporate Tax in Dubai, UAE

VAT and Corporate Tax in Dubai, UAE - Makebiz

The United Arab Emirates is traditionally considered one of the most attractive places to do business. The key point to consider when doing business in this country is the taxation system, including VAT and corporate tax. Let’s take a closer look at it for both individuals and entrepreneurs.

VAT: the main aspects

Since January 2018, the Emirates has introduced a value-added tax at a rate of 5%. This was a significant step for the government, which seeks to diversify its sources of income and reduce dependence on the oil industry. However, despite its introduction, the tax burden in Dubai remains one of the lowest in the world.

It is charged for all goods and services consumed within the country. The calculation formula looks like this:

The amount of VAT payable = The amount of outgoing VAT — The amount of incoming VAT.

This means that businesses can deduct the tax paid on their purchases from the VAT they collect from customers. 

One of the main advantages for small and medium-sized enterprises is the exemption from the tax burden for organizations with an annual turnover of less than 375,000 dirhams. 

The UAE tax system provides for certain categories of transactions that are exempt from paying value-added tax. These types of activities include, in particular, transactions with residential real estate, undeveloped land, local passenger transport services, as well as a number of financial services that are regulated by separate legislation.

In addition to full tax exemption, the country also applies a zero-rate VAT mechanism for certain types of goods and services. This means that the tax is formally applied, but its rate is 0%, which allows companies to retain the right to refund the input VAT. When planning business activities, it is important to take into account such regulatory features.

The zero rate, for example, applies to exports of goods and services outside the GCC, international transportation, as well as a number of related transportation services. Furthermore, such transactions may include transactions with precious metals of investment quality. In the real estate sector, this rate is applied for the first sale of residential properties within three years after completion of their construction. In some cases, the zero rate may also apply to education and health services.

Firms operating in the country must take into account the thresholds at which they are required to register as VAT payers. If the amount of taxable supplies or expenses is DIRHAMS 187.5 thousand or is expected to reach this level within the next 30 days, the company has the right to register voluntarily. 

Mandatory registration occurs when the amount of 375 thousand dirhams is exceeded for taxable supplies for 12 months. Then the entrepreneurs have 30 days to fulfill the condition. In case of failure to provide documents, the FTA has the right to register on its own, which will entail penalties in the amount of 10 thousand dirhams.

Taxation of individuals

One of the most significant aspects is the absence of income tax for individuals. This means that residents and expats don’t have to worry about tax deductions from wages or other income. Moreover, the Emirates has no taxes on donations, capital withdrawal and profits, which makes the country particularly attractive for investment and business.

For tourists shopping in Dubai, there is a possibility of VAT refund. By purchasing goods with its payment at a rate of 5%, it is possible to arrange a refund at the airport upon departure from the country. This reduces the overall cost of shopping and makes shopping in Dubai even more profitable.

Corporate tax: the main provisions

In 2023, the UAE introduced a corporate tax. It applies to companies with annual profits of over 375 thousand dirhams. It is important to note that the 9% rate applies only to the portion of profits exceeding this threshold. This means that enterprises with profits below the specified amount are not required to pay tax, which creates favorable conditions for small and medium-sized enterprises.

In addition, organizations with an annual turnover of less than 3 million dirhams expect a zero rate if they meet certain conditions. This is especially important for startups and entrepreneurs seeking to minimize costs.

Investors are also attracted by the availability of free economic zones, where enterprises can benefit from special tax benefits. There are various regimes in the frisons that allow organizations not to pay corporate tax for a certain period of time, as well as exempt them from tax on the repatriation of profits and dividends.

The benefits apply to various business lines. In particular, they may apply to companies engaged in the production and processing of goods or raw materials, investment activities and stock ownership, as well as capital management. Separate preferences apply to organizations related to the maritime industry, such as ship owners and operators. Preferential treatment can also be applied in the field of reinsurance, logistics, as well as in the financing and leasing of aircraft.

In order to take advantage of the benefits, it is necessary to comply with certain conditions of economic presence. These include:

1. Sufficient financial resources to cover transportation and administrative expenses.

2. Qualified employees who are regularly paid salaries in accordance with the legislation.

3. Office space as a confirmation of physical presence in the country.

It is important to note that many expenses related to running a business can be fully accounted for as tax deductions. These typically include employee salaries, marketing and advertising costs, administrative and operating expenses, and office space rental costs.

All this allows entrepreneurs to significantly reduce the tax base, which in turn contributes to an increase in profits and the possibility of reinvesting funds in development and scaling.

Thus, the UAE tax system offers many advantages for individuals, as well as for small and medium-sized enterprises. Tax exemption for companies with low turnover, the possibility of refunding incoming VAT and zero rates for certain goods and services make the Emirates an attractive place to do business. Compliance with the conditions of economic presence and proper cost management significantly increase financial stability and contribute to successful development in the international arena. Taking these aspects into account, entrepreneurs can effectively plan their activities and optimize tax expenses, which ultimately contributes to the growth of companies.

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