Dubai After the Tax Reform – UAE Tax Residency and Corporate Taxation in 2023

The United Arab Emirates is no longer a tax-free destination. This is sure to come as a surprise to many Staatenlos readers. However, in this article we are going to analyse all the changes and tell you how you can use them to your advantage.

As of now, residency in Dubai (in this article we will frequently use Dubai to refer to the United Arab Emirates as a whole) can trigger taxes in the country, although it really does not have to. Most people are unaware of the implications of tax reform in the UAE, both positive and negative.

At first, the announcement of the introduction of a 9% corporate income tax hardly caught anyone’s attention. When the details were still unknown, people assumed that the tax would only affect mainland companies, not companies in free zones.

It is important to understand that the seven Emirates have not done this reform for lack of money, but rather because of international pressure. Re-blacklisting their jurisdiction would be fatal for many of their citizens and companies. Moreover, in many cases, double taxation agreements only apply to Emirati citizens, and not to foreign residents. Our hope is that this will change with the modifications that have now been made.

Unfortunately, two developments have occurred that many did not foresee: firstly, the scope of corporate taxation is much wider than originally thought. Secondly, and this is particularly curious, a large number of Dubai residents will suddenly become tax residents, often without even being aware of it. This means that they will be subject to extended corporate taxation, even if they only spend 1 or 2 weeks a year there.

Dubai’s modernisation and liberalisation have come at a price: constantly changing laws and regulations that increasingly take away the charm of the Emirates. It remains to be seen whether this will not lead to an exodus in the near future… after all, a tax burden of 9% – small as it may seem to many – is something you can get in quite a few EU countries at much lower costs, in case you really want to establish a base residence.

The new rules for tax residency in the UAE

Until now, the UAE did not have a clear definition of tax residency in its laws. There was also no legal basis for tax residency certificates and, as a general rule, they were only issued upon application with proof of a domicile and 183 days of residence.

From now on, however, this will also begin to undergo substantial changes. It remains unknown whether the much narrower definition of tax residency will be an advantage or a disadvantage. UAE residents can now apply for a tax certificate online with clear conditions. This tax certificate will allow them to prove their residency there with relative ease. This is a very positive development for migrants from many tax-burdened countries, who can now easily prove a new tax residency to the authorities in their home country.

Even for those who do not need such a certificate to emigrate, having it can avoid them problems on return, especially after a short period of time.

Under the new laws, tax residency in the UAE is now triggered by meeting any of the following criteria:

• A permanently available dwelling in the UAE, whether rented or owned.
• 90 days of residence if there is a local residence or business permit.
• 183 days of stay for any person.

Compared to the situation until now, these are substantial changes that will suddenly make many individuals taxable persons. Even renting a flat without spending hardly any time in it can be potentially problematic. But, on the other hand, it can also have immense advantages… it all depends on how these changes in the law are finally implemented.

It is quite possible that the Emirates just wants to make it easier to obtain tax residency certificates rather than potentially taxing all residents. Anyone who meets the above criteria can apply for such a certificate online without difficulty. By doing so, of course, one instantly admits one’s personal tax liability. I wonder how people who do not need such a residence certificate and therefore do not apply for it will be treated. Will the Emirates tax them? Can the Emirates even manage all the information needed to control its new tax obligors?

In the end, there will be little chance of escape. The Emirates is a modern police state, and residents can easily be traced through their Emirati identity card. Any tenant or owner of a long-term residence is easily traceable through the Ejari system – since, without Ejari, you have no electricity, water, gas supply and so on. If the mere availability of a flat already entails a tax residence, it will be quite easy to ask these groups of people to submit an income tax return.

Those who do not have an Emirati identity card and prefer not to have one can rent short-term flats in the Emirates. This is considerably more expensive and is taxed separately too, but saves bureaucratic hassle.

In any case, even these flats potentially fall under the definition of tax residence. Only those living permanently in local hotels can claim tax residency for a maximum of 3 months as a resident and 6 months as a non-resident. However, it is important to note that a local economic activity gives rise to the imputation of a tax residence.

Those who only enter the country once every 180 days can easily avoid being considered tax resident. However, this increasingly raises the question of whether or not this makes any sense, since the most interesting bank accounts both locally and globally can only be opened with an address in the UAE, for which a UAE residency is mandatory. For most people, getting a purely private account in the UAE will not be worth the cost and effort of getting an Emirates ID. Otherwise, the visa (which is now only valid for 2 years) is of little use.

In any case, the regulatory spiral can be expected to grow more and more: the current practice of sponsoring oneself through an inactive company is likely to be restricted soon. Minimum income or actual wages paid will then be required to obtain and maintain an Emirati ID card. When this happens, we will be virtually back to personal tax liability due to local business activity.

Double taxation agreements and tax residency in the UAE

Logically, if we end up as tax residents, we become able to rely on double taxation agreements. However, it is essential to make sure that these agreements are actually applied in our cases. Many UAE double taxation agreements contain a clause excluding foreign nationals from their application.

This is the case in Spain, for example, and was the case in Germany before the agreement was definitively suspended. Switzerland and Austria, on the other hand, have fully valid taxation agreements.

In cases where a double taxation agreement exists between the UAE and our country of residence, having a flat at our disposal in the Emirates or spending 90 days in Dubai, Abu Dhabi, etc. will by no means lead to becoming a tax resident in the UAE.

If the agreements remain unchanged, generally only a stay of 183 days or more in the country could make you a tax resident in the other country. So if you are resident in Switzerland or Austria and have invested in flats in Dubai, for example, you can use them for occasional stays without any problem: the double taxation agreement protects you.

This changes once you spend 183 days or more in the UAE with the resulting tax holiday from those countries of origin.

It remains unknown to what extent Dubai will strictly enforce tax residency, especially through the availability of flats. Will a tax residency certificate from a DTA country protect you, or will it be enough, as in many countries, to prove that the main residence is in another country? Will the UAE immediately charge every tenant and flat owner?

With virtually no tax administration in the past, the UAE is unlikely to adopt an overly tough stance overnight. More likely, they themselves will realise that much of their recent success is due to the local tax exemption. With an already high cost of living, the new taxation will make the desert state significantly less attractive to many entrepreneurs. There are plenty of other countries where you can live tax-free.

If you do not wish to have a tax residence in the Emirates, we advise you to transfer your flats to people you trust during the course of the year or notify them immediately. You can keep the Emirates ID, but the question remains as to what it will be used for. If you want to continue living as a Perpetual Tourist, it is probably better to let the Emirates ID expire and look for a more attractive base.

UAE tax reform may be much more relaxed than we currently imagine, but given the laws that have been passed so far, caution is more than warranted. In any case, the actual implementation of these laws is a matter of time and resources. In 2023, we expect that only the most egregious cases will be prosecuted. The tax registration of existing large companies in Dubai and Abu Dhabi is likely to consume most of the state’s resources by 2023.

The law in question will come into force in June and will not be retroactive, so there are still a few weeks left to prepare yourself against the undesirable legal consequences we are discussing right now. We will limit ourselves to what is important and not go into all the details. We could write a lot about income determination and deductibility, but this kind of information would only be relevant and interesting for large companies. Our aim is to give an overview of the most important consequences of this new law.

Legal consequences of taxation in case of tax residency in the UAE

Is Dubai still tax-free? In the last few weeks, we have not stopped receiving questions like this one. In fact, there has never been an income tax in the UAE and, officially, there are no plans to introduce one at present.

In our opinion, it is quite likely that the (corporate) tax discussed here will be extended to cover also the income of employees (personal income tax) in the next 3 years.

Once a tax administration is in place, as we have seen so many times before, there is no end to the greed of the state. The introduction of new taxes will only be a matter of time: the introduction of a 5% value added tax (VAT) in the GCC states for the first time in 2018 was already warning us.

The introduction of a 9% corporate tax misleads most of those affected, because it is not about taxing a corporate entity like a mainland company: corporate tax also affects personal income, as long as it is from a commercial activity.

Every self-employed person in the UAE is taxed on his or her income under the same rules as a company. In fact, the majority of free zone business owners will be far from being exempt from this tax, as they may think – more on this later on this article.

First, the good news about the new corporate tax: an exemption of AED 375,000 is planned to compensate small businesses and the self-employed. This is equivalent to about USD 100,000, and is a sum on which one can live comfortably in Dubai. Moreover, this sum is likely to more than double in practice.

The second piece of good news is that workers’ salaries and capital gains will remain tax-free; and, of course, a tax-free salary can reduce profits.

Unfortunately, it will not be possible to deduct all profit through a salary, although the exact guidelines remain unknown. In any case, we can assume with some certainty that up to sums of around USD 350,000 you will not have to pay tax in Dubai. Salaries of USD 20,000 per month are not unusual in the country. However, over time it is to be expected that salary and dividends paid out will have to be in reasonable proportion to each other.

Dividends continue to be exempt from tax in the UAE, as are all other types of capital gains. This also applies to companies receiving dividends from subsidiaries.

For pure traders and investors of all types who are not engaged in commercial activities, this can have quite significant advantages. In many cases, you will be able to avoid or reduce withholding taxes through the numerous double taxation agreement that the UAE has signed, as obtaining tax residency has become much simpler.

The change in UAE taxation will not only affect those who have a mainland or free zone company, but also those who have companies abroad, such as an LLC in the USA – at least if the effective address is in Dubai.

According to the internationally applicable rules, the effective address rule will also apply in the UAE, as it does in Western countries, which brings us to the big question: to what extent does this rule actually apply?

Many states consciously or unconsciously look the other way: do you need a real substrate, is a trustee enough, or do you not even have to take any measures at all? All we can do is wait for the next few months to find out.

We recommend, if you are resident in the UAE and there are public commercial registers in the country where you have your company, that, at the very least, you cease to be listed as a director of such companies through the use of trustees. Thus, there would be no doubt – at least prima facie – that the business is not being run from the UAE.

On the other hand, there are also indirect corporate tax consequences to consider. Even if you manage to avoid having to pay the tax, you will still have to make an extra effort to keep your accounts and file tax returns for your local company.

All free zones that previously did not require bookkeeping, without exception, would now oblige you to prepare and submit accounting. Even completely inactive companies have to file a tax return.

Thus, as mentioned above, companies with no real activity are likely to be exposed and the granting of residence visas to their shareholders will be stopped. At the very least, there will be a considerable additional cost for the preparation of such accounting and tax returns. The Emirati lobby of accountants and auditors is jumping for joy at these changes.

In principle, every commercially active individual will also have to file a commercial tax return. Casual self-employment may be exempt from taxation up to €100,000, but it does not exempt from bureaucratic obligations. Thus, Perpetual Travelling with short stays in Dubai hotels will again become very attractive after these changes.

As already mentioned, it is only a small step from corporate tax to income tax, but it is not only the possibility of applying new taxes at any time that is envisaged, but also the increase of existing taxes and the reduction of tax allowances. For large companies with a turnover of more than EUR 750 million, the UAE will apply the internationally agreed minimum tax of 15%. Again, it will only be a matter of time before this extends to smaller companies and even individuals. If you are planning to stay in Dubai for the long term, you should consider this.

Free zones and the new corporate income tax

Initially, it was assumed that the 9% corporate tax would only apply to regulated mainland companies, but it is now known that free zones will also potentially be affected. What is worse, the very organisations that grant permits and open companies in free zones do not seem to know whether their clients will be taxed or not. It is time to clarify this issue.

In any case, all free zones are subject to the obligation to keep accounts and make tax declarations. This cannot be avoided under any circumstances. It will be interesting to see how a possible tax exemption for free zones is defined. Existing tax advantages will probably cease to be maintained.

Companies in free trade zones that have been tax-free until now would have to pay tax at 9% after deducting costs and salaries, and after taking into account the exempt amount of about 100,000 USD. This will particularly affect free trade zones that meet these characteristics:

• they are mere shell companies, i.e. they do not have a business base in Dubai (a flex office would not be sufficient to escape this);
• their usefulness lies in invoicing their own companies (same beneficial owner);
• they do not comply with OECD transfer pricing rules; or
• they do not qualify as “qualified free zones” for other reasons.

The authorities have not yet provided a definition of what a “qualified free zone” would be. What is certain, however, is that only certain licences will benefit from unlimited tax exemption and only if the employees actually work in the Emirates.

Unfortunately, most readers of this blog will probably not be among them.

All owners of shell companies should keep an eye on the evolution of what counts as qualifying income, especially if they expect to exceed by far the exemption amount, which is likely to be AED 375,000.

However, since many will not reach this figure after deducting operating costs and salaries, they can disengage for the time being. In the long term, however, the question will be whether to keep the structure in Dubai or switch to a simpler international solution.

US LLC with Dubai residency… or not?

Setting up a US LLC is usually our most common recommendation – in addition to UAE residency – as it is the simplest international solution. A common model for both Perpetual Tourists and UAE residents is to sponsor themselves for a visa through a dormant free zone company while running their business through an LLC.

Compared to the cost of a resident visa free zone, the additional costs are minimal: for as little as €1800 for the first 12 months, you can set up a fully operational US LLC through Staatenlos.

The advantages, even over FTZs if they were to remain tax and accounting free, are not merely limited to cost savings: one of the growing challenges for FTZs is opening corporate bank accounts: without a real address, options are scarce. Usually, it is only possible to open an account through expensive intermediaries with “motivation bonuses” for bankers.

This is because the most common online banks, such as Wise.com, work for US LLCs, but not for UAE companies.

The same is true for popular payment service providers such as Stripe (currently only for mainland Chinese companies), Paypal and others. With an LLC, you increase the options to choose from, and opening them is considerably simplified.

The recognition of invoices issued by US LLCs is also superior to that of free zone companies. All US states have a public commercial register from which at least the name of the company can be deduced. Dubai’s free zone companies, on the other hand, are for the most part completely anonymous – as there is no public commercial register – leading people to suspect, and rightly so, that they might be dealing a company that is not real.

As a high-tax country and a world power, the US LLC has a much better reputation than Dubai, the hitherto reviled tax haven.

Even with the introduction of a corporate tax, this will hardly change. The high US tax burden benefits LLCs that are disregarded entities, although properly used they are still completely exempt from taxation and accounting. It is possible that, in many cases, free zone companies will continue to pay no tax on lower incomes, but there will undoubtedly be an additional burden of time and cost in terms of accounting and tax reporting.

Those who prefer to give up their Dubai establishment given the changes taking place can easily start selling through a US LLC. Please contact us if you prefer to avoid the bureaucracy of the Emirates.

The LLC tax exemption does not require a tax-free domicile, so you can also take advantage of it as a Perpetual Tourist. In this case, the motto would be “emigrate without immigrating”. Those who enter a state system accept many disadvantages without gaining much in return, and more and more people are considering the possibility of living for 3 or 4 months in 3 or 4 different places per year.

Bank compliance can be a problem, but it is sufficient to know how to comply with all the requirements of financial institutions and companies without triggering an actual tax residency.

In certain cases, however, it may well make sense to use an LLC to benefit from Dubai tax residency now that it is easier to obtain it. Those who fear that their home country may keep treating them as tax resident if they do not acquire another residence can protect themselves by acquiring UAE tax residency.

Dubai’s tax residency solution is attractive because these changes have made it much easier to become a tax resident there. Most other countries require 183 days minimum stay for tax residency – too long for Perpetual Tourists.

So… is Dubai LLC not taxed if you are a tax resident there?

Answering this question is not yet easy either, as it is far from clear how rigorously the UAE will apply the place of effective management and how it will treat the LLC for tax purposes. It is quite likely that the UAE, like many other states, will follow the definition of LLC as a corporation.

Generally, we would encounter a hybrid mismatch as in many other jurisdictions: you benefit from the tax transparency of a partnership in the US, but, in the country where the owners reside, the company is not considered to be fiscally transparent.

Thus, the LLC would not pay corporate (or trade) tax in the UAE as long as the effective address is not in the UAE; and profits (dividends) received from the LLC would be tax exempt even under the new laws.

Therefore, those who activate a tax residence in Dubai – whether intentionally or not – will only need to ensure that the UAE cannot impute a local permanent establishment to them. This is most likely to be achieved by appointing another manager in the appropriate country where the existence of a permanent establishment is not problematic from a fiscal point of view.

On the other hand, it is also possible to carry on business outside the UAE for most of the year, even if you acquire tax residency because you have rented or bought a property in the UAE. However, you will need to be able to prove that the services were not provided in the UAE.

Even if the foreign corporate substance of an LLC is not recognised or if it is treated as a partnership, the same rules apply as for local companies, which are more unfavourable in many respects.

These rules are: no corporate tax would be payable on profits up to USD 100,000. In fact, the amounts will be much higher due to tax-free deductible salaries. However, LLC accounting would become unavoidable.

For all these reasons, the LLC remains in most cases a fantastic complement to the UAE tax residency. Activating a local tax residence is also nowhere near as problematic as it might seem at first glance. In fact, there are considerable advantages in cases where you need to prove your residency abroad in your home country.

On the other hand, if you do not need to prove foreign residency, one might wonder whether it would be better to renounce the UAE residency permit and remain a Perpetual Tourist.

After all, there are much less complicated residencies for Perpetual Travellers, such as Paraguay or Panama, if case you need to have one.

The UAE’s new corporate tax: conclusion and recommendations

As always, the introduction of new taxes is a double-edged sword. While 9% is too much for us, we have to admit that this low tax burden can save you from other inconveniences. It is very likely that the Emirates will soon be removed from the blacklists it is still on, and the new double taxation agreements (now that double taxation could occur) could bring interesting benefits.

It is important to understand the new definition of tax residency and the introduction of the 9% corporate and self-employed tax rate in Dubai.

In principle, the new rules are beneficial to all those who live off their investment income. Owners of shares are the main beneficiaries, as they can now (partly) avoid withholding taxes that would otherwise be levied. Capital gains will not be taxed in the near future. After all, they are unlikely to want to chase away the country’s wealthiest expatriates and residents.

The new rules are also beneficial for many emigrants from countries where you are asked for a tax certificate in order to stop being tax resident in the country you are leaving.

On the other hand, the new rules are detrimental if you earn much more than USD 200,000-300,000 as an entrepreneur. In such cases, taxation at 9% is indeed reasonable, but it is still a considerable expense. You would have to check whether a tax residency in Dubai really makes sense or whether it is better for you to opt for another country or not to have any tax residency at all.

Anyone who wants to live in the Emirates will have to pay the corresponding price, even if it only involves creating some business substrate in a foreign company (perhaps a US LLC) so as not to fall under the local business corporation tax. Above these amounts, however, it is not enough to have the means to qualify: appointing a trustee manager for your LLC would certainly be much cheaper than paying taxes above these profit margins, and you would avoid the tedious local bureaucracy!

For those who have been sold the Dubai free zones for their real use, perhaps they should consider switching to a US LLC or other tax-free jurisdictions, with or without tax residency. It is likely that the authorities will not consider the previous use of the free zone as ‘qualified’ – although, with profits under six figures, you are likely to remain tax-free anyway. For this and many other reasons – such as cost, access to bank accounts or recognition – you should consider relocating your business. Currently, Dubai’s free zones lag behind their foreign tax-free competition at almost every level.

If you have your company in a free trade zone only to sponsor your visa (which is basically what we have recommended until now) you should consider whether you really get any benefit from keeping your Emirati residency permit. Apart from being able to have a second driving licence and perhaps a private account in the country, most people will not get much benefit from this permit.

In any case, if you have Dubai residency, you will need to get moving if you want to avoid possible penalties. You will need to register for tax purposes before the end of the year, and you should start looking for an accountant for your companies as soon as possible. We can recommend contacts in the UAE if you need them, although we would prefer to help you continue to enjoy your tax and accounting free life.

The new law will come into force on 1 June 2023. However, some points remain open. The responsible ministries have yet to define exactly what will remain tax-free “qualified free zones”. The tax-free amount is likely to be AED 375,000, but this has not yet been definitively confirmed. In addition to permanent establishment, the definition of nexus for UAE clients could also trigger a tax issue for foreign companies. If you are affected by all of this, you will need to constantly keep abreast of developments in these regulations.

At Staatenlos, we are experts in complying with international regulations while avoiding paying taxes. Keeping you abreast of laws and legal systems around the world is what we do best.

The world still offers many options for tax-free living, and you just need to know about them. Let us help you through our consultancy service or any of the many other options available on our website… because your life is yours!