While one of the wealthiest and most influential of the seven emirates within the UAE, people often regard Dubai as a tax haven. The city provides an exemption from several taxes for individuals and businesses, most notably the personal income tax. This lack of income tax begs one to ask how Dubai can generate revenue for services and infrastructure expansion.
Dubai generates its money through its portfolio of state-owned enterprises, extensive tax regimes, and various fees and fines. The tax systems are put in place to encourage foreign direct investment while benefitting from tourism and goods that are non-compliant with Islamic beliefs.
Whether you’re an aspiring ex-pat or merely looking for your next tourist destination, knowing more about the country and city of interest will always benefit you. This summary will also give you an idea of extra costs you can incur (or save) when traveling to Dubai. Now then, let’s crank up that air conditioner and see how Dubai can afford to beat the heat.
The History Of Dubai’s Sophisticated Economy
Before exploring the various tax systems that the country has put in place to generate revenue, it is essential to understand how the city reached the position of power it enjoys today. After all, each great city has a story to tell.
Dubai was at first a tiny fishing village, primarily surviving on the booming pearl-diving industry. Due to these maritime activities, Dubai’s ports grew more and more sophisticated, and it became a trading hub in the area.
However, over time the industry started declining. When Dubai’s neighbors found massive oil resources in Abu Dhabi in the 1930s, much tension arose, eventually breaking out into hostilities. Britain finally intervened, but Dubai was still left to suffer economically.
When Shaik Rashid bin Saeed Al Maktoum came to power in 1958, he acquired large amounts of debt to finance enormous infrastructure projects. The Shaik used a lot of the money to establish private companies, which constructed more ports, utilities, communications, and Dubai’s first airport.
In 1966, Dubai found oil for the first time. The oil reserves were insufficient to power the entire economy, but Shaik Rashid used the oil profits to develop further and finance his infrastructure projects. These projects were immensely successful and helped Dubai become a world leader in the trade, finance, and tourism industries.
How Does Dubai Make Money?
Today most of the city’s revenue is derivative from its three primary industries: tourism, trade, and financial services. Although the city, and the UAE in general, does not impose any personal income tax on its residents, various other taxes generate more than enough money for the government.
One of Dubai’s primary sources of income stems from its comprehensive collection of state-owned enterprises. Many of these companies deliver essential services, such as electricity provision and transport. Massive holding companies, hotels, media groups, and even financial service providers diversify and boost the city’s already impressive portfolio of companies.
These large and successful enterprises include, but are not limited to, the following:
- Emirates Airlines
- Dubai Holding
- Dubai Internet City
- Dubai Lifestyle City
- Dubai Internet City
All nationals part of the Gulf Cooperation Council or GCC (incorporating Dubai residents) who work in the city are subject to a social security regime. These employees must contribute 5% of their salary to social security, while employers pay 12.5%. Social security obligations affect businesses registered in free trade zones (FTZs), but foreigners are exempt from this requirement.
In Dubai, the city levies corporate taxes against oil companies and foreign banks (excluding those registered in FTZs for 50 years). Oil companies can expect to pay up to 55% of their taxable income to the government, while foreign banks pay taxes at 20%. This tax regime seems excessive, but these companies enjoy success nonetheless, and only 1% of the city’s GDP comes from oil.
Interestingly enough, the UAE plans to introduce a new corporate tax regime on 1 June 2023. This system requires all companies to earn over AED 375,000 net profit (roughly $102,000). This amount is still a meager corporate tax rate compared to other countries.
Dubai is known for its various entertainment facilities ranging from different skyscraping hotels and malls to water parks and resorts. For multiple reasons, Dubai is an international tourist hotspot and therefore requires these facilities to keep entrants happy. Entertainment, however, comes at an extra cost due to a large amount of income the government generates from these activities.
All restaurants in Dubai charge a 10% tax on the subtotal of the bill. Hotels, resorts, and other entertainment facilities must charge various service and tourist fees. These charges can range from 6% to 10%, depending on the reasoning behind the entertainment tax.
Rental And Property Transfer Tax
Tenants renting residential housing must pay 5% of their annual rent as a rental tax. For tenants of commercial property, this tax amounts up to 10%. Buyers and sellers of properties must pay 4% of the final sales price as a property transfer tax. Although both parties carry the tax burden, the property buyer usually assumes the responsibility to pay the tax.
Value Added Tax
Dubai levies a 5% VAT on all goods and services. Some transactions are exempt from VAT, such as those on personal protective equipment, certain educational and healthcare services, exports outside of the GCC, and a couple more. Once again, this tax is one of the lowest in the world.
The Dubai government levies an excise tax on all goods considered harmful to human health or the environment. These goods include carbonated drinks (taxed at 50%), energy drinks containing stimulants such as caffeine or ginseng (taxed at 100%), and tobacco or tobacco-related products (taxed at 100%).
Dubai is a trading hub, boasting two of the largest ports in the world and by far the most successful one in the gulf; there is no way the government could avoid charging import duties on the goods entering the city. Furthermore, the city doesn’t have a large manufacturing industry. Relying on imports to get specific items is the most efficient option for Dubai.
Most goods, however, are exempt from import tax. For the most part, duties only affect products that do not comply with Islamic standards and beliefs. These imported goods include alcohol (taxed at 50% on imports and 30% on sales), tobacco (taxed at 100% for both imports and then again on sales), arms and ammunition, and other goods that are not compliant with Islamic requirements.
Other Sources Of Revenue
The Dubai government uses various revenue sources to fund its fiscal spending. They derive from all sorts of places and range from license and visa fees to speeding tickets and other fines. Though it is pretty similar to what most modern governments have in place, the rates of these sources in Dubai differ and are often considered rather expensive.
Dubai’s roads are full of traffic surveillance cameras (speed traps). Considering all the sports cars driving around on its streets, it’s no surprise that this serves as a source of immense revenue for the government. Once, a British tourist scored $47,000 in speeding fines within only 4 hours.
For those looking to acquire a driver’s license in Dubai, you will pay around $1,200 to $2,000 for your first attempt. Each additional try will cost you between $300 to $400. So, if the first try wasn’t already expensive enough, you will have the extra costs to motivate you.
Furthermore, seeing as most of Dubai’s population is comprised of ex-pats, the city gets a lot of its income from the issuance of working visas. These visas and permits can cost you roughly $7,000 for a license eligible for two years. There are still many other benefits from working in Dubai, explaining why ex-pats do not mind paying these fees.
Dubai also makes a significant portion of its income from residents’ utilities use. Most notable is likely the use of toll fees on their roads since most people use road transport in the city. Also, utilities such as electricity and water help fund the government’s provision and improvement of these services.
Dubai’s success story is no miracle, nor is it all based on discovering large oil reserves as many tend to believe. The city makes its money from large numbers of tourists and ex-pats entering for a short stay or actively participating in the economy. Few cities have as sophisticated a taxing system as Dubai, yet the omission of an income tax allows residents’ pockets to feel less burdened.