US Expat Tax Guide – Dubai, the UAE and the Gulf Region

We have published blog articles on Dubai before - https://htj.tax/?s=dubai+emirates

In this article, we provide a high-level overview of some tax issues in the United Arab Emirates (“UAE”) and looks at key practical issues including, for example, the main strategic maneuvers open to expats living and working in the UAE in respect of potential US tax exposure.

Dubai is one of the seven emirates comprising the United Arab Emirates and is the country’s largest city. Originally a small fishing and trading settlement, Dubai saw a rapid transformation of its economy following the discovery and export of oil in the mid-1960s, and later diversified to become a first-class tourism destination and a world-leading financial services center.

The UAE is largely governed by Sharia law – thus criminal and civil issues are dealt with along these lines. Generally speaking, foreigners cannot own more than 49% of a business in Dubai, a rule which requires cooperation and co-investment from a local partner.

How do taxes work in UAE?

On 1 January 2018, the Federal Government passed Federal Law No. 8 of 2017 on Value Added Tax (VAT Law). Under the VAT Law, the Ministry of Finance and the Federal Tax Authority are responsible for enforcing taxes in the UAE. The UAE Government implemented value added tax (VAT) in the country from 1 January 2018 at a standard rate of 5%. However, the UAE Federal Government does not levy any corporate income or other personal taxes on its residents.

Do expats in UAE pay taxes?

Under the respective laws, every chargeable person conducting business or trade in the respective emirate is legally subjected to a progressive tax income bracket, not exceeding 55% of taxable income. Every emirate has drafted the law on the levying of income tax, but in reality, its practice is limited only to oil companies and banks. An exception to this is oil and gas producing companies, which are liable to pay corporate taxes at rates specified in the relevant concession agreement. Tax rates are agreed on a case-by-case basis. Oil and gas companies are also required to pay royalties on production. Additionally, branches of foreign banks are taxed at a rate of 20% on their annual fees income, which is calculated in reference to their audited financial statements.

In practice, ‘chargeable person’ is usually defined as corporate entities that engage in the oil business and not Expats.

How much tax do US citizens pay in Dubai? Is foreign income taxable in UAE?

 There is currently no personal income tax in the United Arab Emirates. As such, there are no individual tax registration or reporting obligations. There is no federal or Emirate-level personal income tax in the United Arab Emirates.[1]

The tax regime for individuals in the emirate is, without question, benign. There is no tax on income, capital gains, gifts, wealth or inheritance. Aside from municipality taxes on hotel or restaurant bills, taxation on alcohol and a form of council tax, the most significant tax bill  which private individuals are likely to incur is a property transfer tax on any local real estate transactions.

There are no tax laws covering individuals in the UAE, and as a result, there is no domestic concept of personal tax residence. Nevertheless, the relevant local authority issues tax residence certificates to individuals who satisfy the requirements (including a physical presence of more than 183 days within any 12-month period) and a pertinent double tax treaty, if appropriate.

The UAE has been known as a low-tax jurisdiction in the Middle East. Despite the UAE’s enactment of the VAT Law, and UAE continues to be among the least complex jurisdictions in the world for accounting and compliance. The low-tax regime has been one of the main incentives for foreign investors to establish themselves in the country. The government continues to ensure that the burden placed on residents and corporate entities in the UAE is minimized by carefully implementing VAT in limited sectors and goods and/or services. In addition, dedicated federal and local tax departments have been established to ensure compliance and aid in the effective implementation of VAT.

As there is currently no personal income tax in the United Arab Emirates, claiming relief for foreign taxes paid is not applicable.

Does UAE have a tax treaty with the US?

UAE national or resident individuals and UAE resident companies have access to an extensive and growing Double Tax Treaty (DTT) network[2].

The UAE has concluded around 128 double taxation treaties of which around 90 are already in force. These DTTs may not be immediately relevant for obtaining relief from UAE taxation (as the United Arab Emirates does not levy withholding tax (WHT) or other forms of non-resident taxation); however, they may allow for relief from taxation in DTT partner countries[3], the United States is not one of them.

It follows that expat taxes will be the only or sole taxes imposed on expats with a nexus to the US, despite the varying types of corporate entity used for business in Dubai, it is irrelevant for these purposes as the tax position must be the same due to the permissive tax regime in Dubai / UAE.

In light of the United States’ Foreign Account Tax Compliance Act (FATCA) rules, the UAE has indicated its intention to put in place a Model 1 IGA (InterGovernmental Agreement), which means that local financial institutions in Dubai will report directly to the local tax authority rather than having to report directly to the Internal Revenue Service (IRS). The intention to sign the IGA also means that, for now, Dubai residents are protected from the automatic FATCA withholding taxes by US paying agents which would otherwise apply.

How can you avoid double taxation? Do American expats pay US taxes?

We think that overall – US expats must be alive to the fact that ongoing US tax liability is ever-present and there is limited recourse to claim correspondent foreign tax relief as a result of one’s residence in Dubai / UAE.

Double taxation, in our view may not arise, as the local UAE situation shows that taxes are not levied.

US citizens and resident aliens living abroad must file a US tax return and, with several important exceptions, must use the same forms and must compute tax by referring to the same tax rules as their stateside counterparts.

The main exception is special rules that allow taxpayers to exclude all or part of their foreign earned income if they meet statutory foreign residence or physical presence abroad tests.

While these provisions may allow significant tax benefits, it is important to remember that income earned abroad is frequently subject to foreign income taxes. In turn, credits or deductions for these foreign taxes may provide an additional measure of US tax relief.

While residing in foreign countries, US citizens and aliens considered US residents must continue to follow the standard rules for filing US income tax returns. Tax returns for individuals are due on the fifteenth day of the fourth month following the close of the tax year (15 April for calendar-year taxpayers); however, taxpayers who are US citizens or residents and whose tax home and abode are outside the United States and Puerto Rico on the regular due date have an automatic extension of two months (to 15 June for calendar-year taxpayers) for filing.

What happens if you don't pay US taxes while living in United Arab Emirates?

Being taxable means that you are on the IRS’ radar, not paying your taxes where they are due and owing opens you to a wide range of potential penalties. If you’re living abroad and fail to file your US or state taxes, you can receive a penalty for not filing taxes, even if you do not owe taxes. The failure to file penalty could be thousands of dollars, being disqualified from benefits that will reduce your tax obligation, or worse.

The most common (in our view) penalty that is applied is that of fines and hefty interest charges.

The IRS also has the power to notify the State Department who will then have the authority to revoke your US passport or deny your request for a passport.

To prevent any problems, please contact us to discuss the streamlined procedures - https://htj.tax/2015/02/streamlined-foreign-offshore-procedures/

The combination of civil and criminal coercive power of the IRS is legendary and can be deployed in interesting ways.

Mikhail Charles

HTJ Tax

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Interesting External Links

https://www.irs.gov/

Totalization Agreements | Internal Revenue Service https://www.ssa.gov/international/agreements_overview.html

Foreign Earned Income Exclusion | Internal Revenue Service

https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion

bbc.com

Is the UAE still a high-paid expat haven?

https://www.bbc.com/worklife/article/20181218-is-the-uae-still-a-high-paid-expat-haven

uscis.gov

https://www.uscis.gov/

Green Card

https://ae.usembassy.gov/

https://www.mofaic.gov.ae/

 

[1] < https://taxsummaries.pwc.com/united-arab-emirates/individual/significant-developments > Accessed 10 September 2021

[2] < https://taxsummaries.pwc.com/united-arab-emirates/individual/foreign-tax-relief-and-tax-treaties > Accessed 10 September 2021

[3] < https://www.mof.gov.ae/en/StrategicPartnerships/DoubleTaxtionAgreements/Pages/DoubleTaxtion.aspx > Accessed 10 September 2021

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