Understanding the Concept Of Tax-Free Dubai
Table of Contents
The Tale Of The Tax
Toiling five days a week, from 9 am till 5 pm, only half of your income paid out to the government in the form of taxes, is the reality for many workers worldwide. Whether through direct taxes, like income tax or corporate tax, or through more indirect taxes, like sales tax, some portion of all income earned goes to the government. In return, the government is obligated to provide certain services that would not be present under a purely capitalistic economy; this includes public goods such as roads and bridges and services like public education and healthcare. Taxes collected are used to fund the government’s expenditure on goods and services that benefit society. While viewing taxes in this context justifies their implementation, it doesn’t take away from the disappointment of seeing the deduction on each paycheck or every receipt you get.
Dubai-A No-Tax Oasis?
Contrary to the fiscal policies adopted virtually everywhere globally, Dubai stands out as a notable exception. The United Arab Emirate (UAE) is famous for a few things; its high-rise buildings, oil, shopping, and the policy of no income taxes. The country is touted as a haven for ex-pats as earnings are not taxed. But how true is this? How does the UAE government fund its many ventures? Surely, the government must be making money. After all, the Middle-eastern country approved a balanced budget of AED 61.35 billion for the year 2020. This means that the government’s expenses were balanced out completely by the revenues earned, with a zero fiscal deficit.
UAE’s Fiscal Policy- A Closer Look
On the expenses side, the most significant expense by far is funding government affairs. 32.61% of the entire government budget is allocated to ensure that the government is smoothly and includes such expenses as employee rumination. The next major expenses consist of social development (31.13%), infrastructure (14%), and other federal expense (12.02%).
All of these expenses are funded through tax revenues, social contributions, grants, and other sources of revenue. However, the most significant contributor remains tax collection which was 36.1% of the revenues in 2019. Taxes are the main government source of funding their expenses. So, does this mean that the tax-free status of Dubai is just a myth? Not quite.
Busting The Myths:
Dubai’s tax-free title is well-deserved. This is because income taxes, as they are traditionally viewed, are non-existent in the country. Any individual working in UAE, citizen or not, is indeed exempt from paying any income tax. Foreigners living and working in Dubai do retain 100% of their income earned. This may sound counter-intuitive since taxes are the government’s largest revenue source.
I want to know more about US taxes abroad
No income taxes but heavy taxes on corporations:
Personal income tax is 0, but there are other kinds of taxes that the UAE government levies. The most important is corporate taxes, specifically those levied on foreign oil and gas companies and foreign banks. These corporate taxes can amount to billions of US dollars in any fiscal year since profits earned are high in both industries. There are also no capital gains taxes, which is again quite beneficial for local and foreign companies.
Easy repatriation of profits:
Another attractive policy for ex-pats and foreign companies specifically is the exemption of any taxes on repatriation of remittances or profits. Foreigners residing in Dubai can send money back to their home country without any further deductions. Corporate profits also get taxed once before being repatriated.
VAT regime:
In 2018, the country also adopted a blanket Value Added Tax (VAT) regime. According to the VAT policy, a flat 5% tax on all purchases was implemented. However, exceptions to the VAT exist. Foreign tourists who buy goods in the UAE and do not consume those goods during their visit are entitled to refunds. So, exports like these are free of any VAT.
Finally, other taxes exist, such as property transfer taxes, municipal taxes, and excise tax. Substances deemed harmful like nicotine and alcohol are heavily taxed as well.
Reasons Behind The Tax Regime:
UAE’s tax regime is unique but not unusual, especially for the region, and becomes clear when we delve into the reasons behind the personal income tax policy. Other gulf countries, most notably Qatar, follow a similar no-income-tax policy. The reason is simple; it is to encourage foreign workers since these countries lack expertise, like engineers, physicians, architects, and manual labourers, like construction workers.
By implementing a zero income tax policy and no deductions on remittances, the UAE government is incentivizing workers worldwide to settle in and work in the country. And the scheme has worked well. Of the 9.99 million total population of UAE, 88.52% consists of ex-pats mainly from India, Pakistan, the Philippines, Egypt, and other countries. Emirati nationals make up just 11.48% of the total population. The lack of income taxes, the ability to remit earnings freely, and overall better living standards are what attracts most individuals from all over the world to UAE.
In addition to this, the country has become a hub for shopping, particularly for foreigners. This is also the reason why purchases made by foreigners are exempt from VAT. Dubai’s peculiar tax regime makes sense in the context of the country’s economic conditions.
The Cost Of Zero Taxes:
There is a flip side to the issue of taxes as well. It is nearly impossible for non-Emirati to become citizens, for instance. Permanent residents do not enjoy the same facilities and benefits as citizens, and becoming a citizen is nearly impossible, though rules for certain professionals have been eased. It was also impossible for non-citizens to buy property in Dubai a few decades back, though this rule has since been revised to allow foreign investment. There are drawbacks to living in a country like UAE, though the benefits outweigh those. This is apparent by the number of ex-pats in the country since many aims to work in Dubai to save enough money to live a comfortable life in their home countries.
