In the United Arab Emirates (UAE) exists since mid-2023 a new tax, namely the corporation tax. Since then, Dubai has paid a lump sum of 9% corporate tax on corporate profits. Both legal and natural persons who conducted business in the UAE are affected by the new corporate tax. This shall apply from the first financial year onwards that: May 2024 begins. After the end of the financial year, nine months remain to prepare the balance sheet required for the tax return. Until then, a registration with the Federal Tax Authority of the UAE is also required. What, on the other hand, remains valid is a tax exemption of income from other sources (for example, wages and salaries, rental income from renting real estate, capital gains). In addition, free trade zones in the UAE will continue to have autonomous tax regimes, so that no corporate tax will be incurred there for the time being.

1st Corporate Tax in Dubai – Introduction

From our point of view in Germany, the UAE with its tax law always seemed like a tax haven, because no matter from which sources income was fed, it was still protected from taxes. But recently, amazing things have happened in the financially strong desert state. In fact, it was decided at the beginning of 2022 to introduce a corporate tax, which of course now also applies in Dubai. What this means for entrepreneurs in Dubai and elsewhere in the UAE and possibly abroad and what obligations are associated with the new corporate tax, we clarify in this article.

2. introduction of corporate tax in Dubai (UAE)

The UAE has always been largely tax-free on all income. But since June 2023 there is now a corporate tax, thus also in Dubai. This is an astonishing U-turn to the fiscal policy of the Gulf state so far. After all, the UAE has long been celebrated as a sophisticated tax haven. The absence of taxes made them a magnet for entrepreneurs and investors from all over the world. But times are changing. Meanwhile, the UAE has also taken measures to comply with international standards in the collection of taxes. This includes taxing corporate profits.

The legal basis for the introduction of corporate tax in the UAE is Federal Law No. 47/2022. All regulations on the new corporate tax are readable in the linked document in English.

3. design of corporate tax in Dubai

3.1. First-time collection of corporate tax

The new corporation tax in the UAE applies from the marketing year starting on 01.06.2023 or thereafter. The profit of this first and every further marketing year is then subject to corporate tax, as we know it from Germany. However, the rules there are much simpler.

3.2. Who is subject to corporate tax in Dubai?

Taxable persons are both natural and legal persons who conduct business or develop business activities in the territory of the UAE. This also includes if you, without being resident in the UAE, are active in business from abroad in the UAE. Thus, freelancers in Dubai are also subject to corporate tax.

Excluded from corporate tax are companies that mine or extract natural resources because they are already taxed in another way. The same applies to non-profit companies as well as a number of other exceptions. Special regulations also affect the free trade zones, which continue to retain their independence. Further exceptions may arise through the application of double taxation agreements. Since there is currently no such agreement with Germany, further explanations are unnecessary.

3.3. Determination of the amount of corporate tax in Dubai

The regular corporate tax rate in Dubai and elsewhere in the UAE is 9% on net annual profit. However, there is an allowance of AED 375,000 (equivalent to about EUR 95,000). For natural persons, a sales threshold of AED 1 million per calendar year still applies. Only when this limit is exceeded will income be subject to corporate tax. In addition, there is also income that is protected from corporate tax. Thus, rental income from real estate rentals, wages and salaries as well as capital income still does not incur corporation tax (and also income tax).

3.4. Further regulations on corporate tax in Dubai

Other regulations concern the process of tax collection. For all entrepreneurs, a registration with the tax authority of the UAE is required. Furthermore, they must submit an annual tax return. This even applies to companies that are established in a free trade zone. However, they charge their corporate income tax at a tax rate of 0%, so that their profits remain tax-free.

Various accounting standards are permitted to determine the taxable net profit, including under the IFRS procedure. There are also a number of exceptions for natural persons. Unlike corporations, for example, there is no capping when applying interest expenses.

Apart from corporate tax: other taxes in Dubai

On this occasion we can take a short digression into the current tax law of the UAE. For example, a property transfer tax has existed in the UAE for a long time. In fact, this was the first tax that the UAE collected. However, each emirate itself determines at what tax rate the transfer of fundamental rights takes place. In Dubai, for example, the real estate transfer tax is 4%.

In 2018, the current sales tax was added. It is a uniform 5% and covers both domestic supplies and services. It is interesting that the sales tax in the UAE was introduced together with the other members of the Gulf Cooperation Council at the same time and under the same conditions.

In addition to the sales tax, there is now (since 2019) another excise duty. It concerns the sale of certain soft drinks subject to a tax of 50 %. The goods thus taxed include all beverages which have either been fortified with carbon dioxide (except mineral water), contain sugar or sweeteners (soft drinks) or their ingredients (for example taurine, caffeine, ginseng, guaraná) have a stimulating effect (energy drinks). This also affects substances used for the production of such beverages. This can therefore be seen as equivalent to the sugar tax in the UK and elsewhere.

Furthermore, all tobacco products are subject to an excise duty of 100% since 2017. E-cigarettes and liquids used for consumption are also affected by this tax. In any case, this is the first steering tax of the UAE. The objective of this excise duty is to reduce the attractiveness of these unhealthy consumer goods.

These excise duties are primarily paid by manufacturers or importers of these goods. All intermediaries and end users thus pay the tax via the sales price increased by the excise duty. In contrast to the multi-phase sales tax, as it also levies Germany, this excise duty comes with a one-time tax payment and therefore less bureaucracy.

5. The New Corporate Tax in Dubai – Conclusion

Considering that the UAE has a policy aimed at being internationally connected, the introduction of corporate tax is hardly surprising. Finally, this move is in line with the international efforts of the leading industrial nations to ensure a global taxation of corporate profits in order to put a stop to the uncontrolled international tax competition that has hitherto taken place. So it is logical that companies will soon also pay corporate tax in Dubai.

First of all, this is the situation that entrepreneurs in Dubai and the neighbouring emirates have to adapt to. But it is also worth a detailed look into the tax law. In addition to the relatively low tax rate of only 9% on net annual profit, there is also a generous allowance and a number of derogations. In the best case, there is therefore no corporate tax in Dubai. But even if corporate tax is incurred in Dubai, you still pay far less tax there than the approximately 50% that you often have to pay as an entrepreneur in Germany.