For many ex-pats, Dubai seems like a financial paradise. The salaries are excellent, and there’s no income tax. Dubai is labeled a tax-free country, but common sense tells you that a country needs taxes to survive and govern. So how does the country make money? Is Dubai really a tax-free country?
Dubai is not a completely tax-free country. While individuals and most businesses benefit from paying no income tax, the government imposes tariffs and taxes on multiple other sectors. These include the massive local oil business, entertainment industry, some imported items, and even utilities.
While some countries rely heavily upon income taxes for their revenue, the ruler of Dubai, Sheikh Mohammed bin Rashid Al Maktoum, is adamant that it is not an option in his country. So how does the government finance the running of Dubai? Let’s look at some of the taxes and tariffs that fund the country.
Is Dubai Tax Free?
Although it is true that most people living in Dubai do not pay income tax, you still need to satisfy the government that the country is your fiscal home. Fiscal residency refers to the country where you pay your taxes. To fulfill the requirements for this, you need to:
- Obtain residential status.
- Be employed, set up your own business, or invest in property.
- Maintain a current account that shows your salary deposits and living expenses deducted.
- Exhibit proof of a local phone number, postal address, and physical address.
Once you prove adequate substance to the tax authorities and financial institutions, you can apply for your UAE Personal Tax Certificate. This document qualifies you as a UAE resident who does not have to pay income tax.
The “tax-free” Dubai does its share of tax-collecting, but perhaps not in the typical ways. Some sectors are tax-free, but here are some methods that the country uses to gather its revenue.
Income Tax In Dubai
You might be surprised to know that the primary source of Dubai’s tax is income tax. That doesn’t contradict the “no income tax” status previously mentioned. Although most citizens don’t pay income tax, it doesn’t exempt the large listed businesses from paying their dues.
Individual Tax In Dubai
GCC nationals employed in Dubai have to pay a 17.5% social security tax. UAE nationals pay 5%, which the government automatically deducts from their salary, while employers pay the balance. Employees registered to companies in free trade zones also have to contribute to social security. Non-GCC residents are not subject to these social security taxes.
There is also no inheritance tax in Dubai. In cases where the person did not leave a will, the government will deal with the inheritance according to Shari’a law.
Corporate Tax In Dubai
Dubai taxes its oil businesses at a whopping 55% of its income, a substantial amount considering the country runs almost entirely on oil. Foreign banks that operate in Dubai also face a 20% tax on their income. This may seem low, but the government derives a sizeable income from this sector due to the multitude of transactions.
All other businesses established in Dubai do not have to pay corporate taxes. Companies also don’t have to pay taxes for remitting income outwards. Dubai places no limitations on the amount of money people can repatriate.
The state also recently declared that a 9% corporate tax will come into effect in June 2023.
Businesses must register for the country’s excise tax if they are involved in:
- Importing such goods into the UAE.
- Producing excise goods consumed in the UAE.
- Stockpiling these goods in the UAE.
- Overseeing a warehouse stocking these goods.
Paying VAT in Dubai
Dubai, along with the UAE states, implemented VAT in 2018. This tax is only set at 5%, though. VAT applies only to businesses in the UAE that provide services and goods to UAE and Gulf Cooperation Council (GCC) customers.
Dubai’s Import Duties
Most of Dubai’s imports are exempt from tax, but those that go against the values of Islamic laws are taxed heavily. Known as excise tax, examples of these are alcohol, tobacco, and arms and ammunition. The country imposes a 50% tax on alcohol imports and a 30% tax at the point of sale. Dubai also taxes items such as cigarettes at a higher level than other countries.
Their tax structure is congruent with the Islamic philosophy. Rather than punishing people for disobeying Islamic laws, they make using substances forbidden by their rules expensive.
Dubai’s Entertainment Taxes
Every restaurant in Dubai charges an extra 10% on the bill, called a service charge. Most people understand that term to mean a tip that gets paid to the staff. But this “service charge” is paid to the government rather than the employees.
Institutions that provide board and lodging like hotels also have to pay a similar service charge. The government doesn’t see it as taxing the people of Dubai because the tourists are paying the bills, not the locals. This is the “municipal charges” you see reflected on your bill or receipt.
The government also imposes taxes on all other avenues of leisure spending, such as amusement parks and theaters.
Various Property Related Taxes In Dubai
Dubai does not apply capital gains taxes unless it is related to the sale of a company that has to pay income or banking taxes.
The country applies a transfer charge of 4% when a property is sold. The buyer usually pays the property transfer taxes. Dubai’s residential tenants also pay 5% of their annual rental costs to rental taxes.
Dubai’s Utility Taxes
Dubai’s substantial government has several branches that impose taxes when people use their services. When they generate utility bills, the government levies a council tax for things like electricity.
Recently the government has also implemented heavy tolls on frequently-used roads. These tolls tally up to a significant amount that helps the government cover its considerable expenses. All parking areas also belong to the government. The government loads parking charges so heavily that it motivates people to use public transport instead of private vehicles.
Dubai Generates Taxes From Ex-pats
Ex-pats need a national ID that permits them to live, work, and earn an income in the UAE. Dubai charges them 100 dirhams to renew their national IDs. Although this is not exorbitant, a large ex-pat population allows the country to collect a significant amount from this tax.
Although individuals and most companies don’t pay income tax in Dubai, it doesn’t make the country “tax-free.” The state takes its cut from many other areas in society. But the lack of income tax is certainly a drawcard for thousands of ex-pats, businesses, and investors. The attractive lifestyle also makes it a popular destination.
It is also virtually impossible for any country to govern successfully without levying taxes on its subjects, one way or another. Governments will always tax citizens in some way to earn the necessary revenue, and Dubai is no exception. It reiterates the truth of the old adage: “Nothing is certain besides death and taxes.”