Dubai is considered one of the most desirable tax havens in the world. Both residents and business people benefit from the low tax rates that apply not only in Dubai but also in the other six emirates of the UAE. But how does the country manage to generate such wealth and offer its citizens a high standard of living despite its low tax revenues?
The Tax Structure in Dubai
Economic policy in Dubai and the UAE is focused on growth and investment. Part of this focus is the tax structure. No or low taxes on profits and income are at the heart of the tax system in Dubai. This attracts investors and encourages business startups in the city.
Overview of the tax system in Dubai
The seven Arab emirates have only existed in their current form since 1971. Dubai is one of the best known, along with Abu Dhabi. Each emirate has its own tax laws, but they all share one thing: a fundamental, culturally-based reluctance to levy taxes on its citizens, i.e. natural persons. But local companies are also not charged taxes, or only to a small extent. There is a reason for this, because these tax advantages have turned the seven beggar emirates into flourishing, rich, attractive locations. The reasons for this development lie in a clever strategy of interplay between trade, investment and tourism.
Absence of income tax and corporate income tax
Dubai does not levy any taxes on income of individuals. In fact, in principle, all income and transactions received directly in Dubai are tax exempt. This means that passive and active investments, dividends and capital gains are also exempt from tax. This does not mean that there are no tax regulations, only that the rates are set at 0 percent.
However, a corporate income tax of 9 percent was introduced as of June 2023. Initially, this seemed to apply only to the mainland and only to companies that are based and operate purely in Dubai. An exemption limit of 90,000 euros applies. To protect small businesses, startups and freelancers. Companies with international operations should not be affected. One must be considered a resident to be subject to corporate income tax.
That means 9 percent corporate tax paid by:
- any individual doing business in the UAE
- any legal entity recognized and registered in the UAE
- Any legal entity that is registered outside but can be shown to be managed in the UAE.
Furthermore, non-resident persons may also become liable to pay tax. Do you have a permanent establishment, a so-called PE, in Dubai? If so, you may also be subject to corporate tax. We have written a detailed article on the subject. Here you can find out whether you are affected or not: 99% of Freezone Companies formed by DLS Dubai remain 0% Corporate Tax – Why?
Importance of value added tax (sales tax) in Dubai.
Until 2018, there was basically no value added tax (or sales tax) in Dubai. As of January 1, 2018, all emirates, just including Dubai, introduced a consumption tax of 5 percent. The sales tax is levied in both the mainland and the free zones. It applies to all goods and services that take place in the country, with few exceptions. Some zones are defined as "outside the UAE" and have no sales tax. These include the Dubai Airport Free Zone or the Dubai Textile City.
The requirement to collect VAT applies to companies when income from imports and supplies exceeds AED 375,000. However, there are exceptions to this rule as well. Tourists are refunded the income tax paid. Likewise, there is a VAT refund for trade fairs and conferences.
The role of tourism in financing Dubai
One of the most important pillars for the flourishing economy is tourism in Dubai. Every year, millions of visitors are drawn to the dazzling metropolis. Huge skyscrapers, light and water shows, magnificent beach promenades, luxurious hotels with a variety of leisure facilities and grandiose shopping paradises attract tourists.
Importance of the tourism sector for Dubai's economy
Tourism is one of the most important sources of income for Dubai. Dubai took in around $34 billion from international tourists in 2019. In this regard, the number of tourists continues to rise inexorably every year. From 2021 to 2022, Dubai saw a 187 percent increase in tourists. EXPO 2020 boosted guest numbers even further. Dubai thus remains the fourth most visited city in the world.
Revenue sources from the tourism sector
Tourism revenue sources already accounted for more than 20 percent of total revenues in 2003, surpassing oil revenues for the first time. This is also necessary because, according to the latest findings, oil in Dubai will run out in about 20 years. Tourism, as a diverse source of revenue, can absorb this. In addition to the pure income from overnight stays, tourism has an impact on many other industries. Visitors pay entrance fees to museums and attractions, go out to eat, drink, and party, shop, and travel by cab or pay tolls in their own cars or rental cars on many roads.
Impact of tourism on Dubai's fiscal situation
Tourists don't just pay the price of staying and having fun in Dubai. They also incur numerous taxes for the emirate. In addition to the VAT introduced in 2018 for services and goods used in the country, there are two types of tourism taxes:
- Hotel Tax (also known as Bed Tax) and
- Departure tax.
The bed tax depends on the class of hotel. It usually ranges from 1.40 euros to 4 euros.
Since 2016, there is a special exit tax for tourists. It is paid at the airport and amounts to 35 dirhams. The money is to be used for the expansion of the airport and Dubai's infrastructure.
Investment and business activity in Dubai
The financial sector is also one of the lucrative sources of income for the Emirate of Dubai. Due to the tax advantages and business-friendly structures, Dubai is an attractive country for investment and business activities.
Attractive investment opportunities in Dubai
The Emirate of Dubai offers investors many opportunities. Particularly noteworthy are investments in growth industries. Particularly favorable and sustainable growing investment opportunities are:
- Shares and bonds
- Savings accounts
- Real estate
- Investment funds
- Fintech companies
- E-commerce
- Exchange Traded Funds (ETF's)
- Real Estate Investment Trusts (REIT's)
- Pension Programs
Importance of companies and business start-ups in Dubai
As a tax haven, Dubai offers the best conditions for companies. There is neither a business tax nor a wealth tax here. In addition, companies benefit from the excellent infrastructure, modern communication systems and clear financial stability. The geographic location and ease of recruiting employees also contribute to the attractiveness of starting a business in Dubai. In addition, the government actively supports company founders with advice and services. The barriers to opening a company are low. Learn more about setting up a company in Dubai.
The Role of Trade and Commercial Ports in Dubai's Financing
Another factor in the rapid economic growth and tremendous stability of Dubai's economy is the state's geographic location. Countless goods are handled both by sea and air.
Importance of trade for Dubai's economy
Dubai and its ports are the gateway to the world. Its largest trading partner is China, followed by India, the United States, Saudi Arabia and Switzerland. Dubai is a central logistics hub. Around 14 percent of the gross domestic product is generated here. In addition to the ultra-modern infrastructure, the legal conditions are also responsible for Dubai's boom as a trading center.
Revenue sources from international trade
As the volumes of goods increase, so does the revenue for Dubai from trade. In principle, a customs duty of 5 percent of the value of the goods is taken. Exceptions are goods such as cigarettes at 100 percent and alcohol at 50 percent. There are also customs processing fees.
Tax advantages for trading in Dubai
Despite the customs duties and customs processing fees, Dubai is popular as a trading and transshipment hub. The country is considered one of the largest re-export points for Europe. The perfect location, exceptionally good infrastructure and favorable trade agreements with other countries make the Dubai trade hub one of the most desirable for the whole world.
Real estate sector and luxury goods in Dubai
Dubai also bears the name "The Golden City". The gold sparkles on the buildings and as jewelry on the people. But Dubai is also a golden city in a figurative sense. It is about the special display of luxury, exquisite cars, noble trade goods and promising real estate. With them, the owners, but also the Emirate of Dubai earn money.
Importance of the real estate sector for Dubai's finances
Real estate is Dubai's capital. This can be seen above all in the form of hotels and accommodation for tourists. But attractions, museums or venues for pleasure are also important real estate in Dubai. And last but not least, international companies, banks and private individuals want imposing buildings to live and work in.
Income from real estate investments and sales
Dubai does not have income from taxes on the return of the real estate that is built here by private individuals and companies. But all these buildings have to be financed. For this purpose, more and more loans become necessary from year to year. These are available from Dubai's banks. Thus, real estate construction and purchase promotes the banking market in Dubai. The banks on the Mainland in turn pay taxes to Dubai as one of the few exceptions.
In addition, real estate is a sought-after investment. Thus, the government sells real estate to interested parties and makes money from it.
Something else is interesting for Dubai with regard to real estate: If you want to profit from the many advantages of the emirate, you have to be tax resident in Dubai. This can be done either by founding a company or by investing in Dubai assets. These are to a large extent real estate.
In addition, a fee of 4 percent of the market value is due for each transaction. In most cases, this is paid by the buyer of the property.
Tax aspects of buying luxury goods in Dubai
Dubai offers luxury at its finest. However, you will have to pay taxes on some luxury goods. Until recently, this included the increased tax of 30 percent on alcohol. However, Dubai has suspended this for an indefinite period. This is intended to strengthen tourism as the first mainstay for the next few years. With the exception of cigarettes, all goods, including luxury goods, are subject to the same percentage for both VAT and customs.
Special Economic Zones and Free Zones in Dubai
Up to now, all tax regulations and levies such as value added tax and corporate income tax only apply in the mainland. Therefore, the free trade zones in Dubai are of great importance for foreign interested parties for the establishment of a company and the investments.
Concept of Special Economic Zones in Dubai
Free trade zones, or special economic zones, are spatially delimited areas. They are located on the territory of Dubai. But they differ from the mainland by special legal conditions. In Dubai's special economic zones, there are no customs duties on imports and exports. Furthermore, depending on the free trade zone, there are further benefits and simplifications for companies that want to establish themselves here.
Importance of free trade zones for Dubai's financing
Given the zero percent tax, duty waiver, and simplified procedures, one wonders how Dubai can continue to generate revenue through the free zones. For one thing, the process of setting up a company in a free trade zone costs money. You can expect to pay 7,000 to 10,000 euros here, depending on the zone. On top of that:
- the visa costs
- Costs for renting business premises
- costs for the use of infrastructure
- possible licenses
- Tax advantages for companies in special economic zones
Despite all the differences, the Free Zones offer the following common advantages:
- purchase of property possible for foreigners
- no taxes on income, profits and capital
- no excise taxes (value added tax)
- no corporate income tax (Why? Learn more.)
- very simple visa regulations
- excellent infrastructure
- quick and easy establishment process for companies
The free zones attract foreign entrepreneurs and businessmen of all kinds to Dubai. As a result, the emirate continues to build on its position as an innovative and strong commercial and financial center. More on the topic of Freezones.
Conclusion
Dubai offers tax exemption on income, profits and capital. Thus, the emirate attracts companies and freelancers from all over the world. Dubai also offers innovation, communication and perfect infrastructure. So far, the emirate has financed this from the profits of the oil industry. However, oil reserves are expected to run out in the foreseeable future. However, this does not mean that Dubai will return to its former status as a fishing village. New strategies are to keep the golden city shimmering. These include a focus on established and new industries such as tourism, finance, fintech, e-commerce and crypto markets.
But it also includes the soft introduction of taxes. In 2018, it was the 5 percent value-added tax. In 2023, corporate income tax of 9 percent was added. But these tax rates are still very low by comparison. But is there a threat of further expansion of the tax system? Experts assume that these two taxes will remain. Nor will the rates increase. There will be no capital gains taxes or income taxes in Dubai. This was promised by Sheikh Maktum bin Raschid Al for the next 50 years. Moreover, taxes on income contradict the cultural tradition of the country.
