Tax Strategies for Expats in the UAE

The UAE offers a unique tax landscape that is highly attractive. With its zero personal income tax and numerous tax incentives for businesses, expats have opportunities to optimise their financial and tax positions. As of the issuance of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, corporate tax was introduced, effective for tax periods commencing on or after 1 June 2023.

One of the fundamental aspects for expats is understanding tax residency. An expatriate can be considered a resident for tax purposes if they have a permanent home in the UAE, spend more than 183 days in the country during a tax year, or have their principal place of business and economic interests in the UAE. Establishing tax residency can help expatriates avoid double taxation, especially if their home country has a double taxation agreement (DTA) with the UAE.

The UAE has an extensive network of DTAs with over 100 countries. These agreements are designed to prevent double taxation of income earned in one country by a resident of another. Expats should review their home country’s DTA with the UAE to understand how their income will be treated and ensure they are not taxed twice on the same income.

While personal income is not taxed in the UAE, the introduction of corporate tax affects expats owning businesses or deriving income from business activities in the UAE. The corporate tax law applies to a natural person earning more than AED1 million annually. The tax rate is set at 9% for taxable income exceeding AED375,000. For individuals with business interests, it is crucial to understand whether their activities qualify as a business or business activity under the UAE Corporate Tax Law. Activities that are exempt include wages, personal investment income, and real estate investment income when conducted personally and not through a licensed business.

It is important to benefit from structuring the investments strategically. Personal investment income, such as dividends, interest, and capital gains, is generally not subject to UAE corporate tax if it does not constitute a business activity. Real estate investments, if conducted without a license, also enjoy tax-exempt status. However, investments through a corporate structure might be subject to corporate tax. Understanding the distinction between personal and business investments is crucial for effective tax planning.

If a natural person had to run the business or investment through a corporate structure, then corporate tax law offers small business relief. The relief allows eligible businesses with revenues not exceeding AED3 million to be treated as having no taxable income. This can significantly reduce the tax burden on small-scale entrepreneurial activities. It is essential to monitor business revenues and ensure compliance with the eligibility criteria to benefit from this relief.

Another important provision of the law that individuals need to be aware of is the available deductions and exemptions to minimise their taxable income. The UAE tax law allows deductions for business expenses incurred wholly and exclusively for business purposes. However, personal expenses and withdrawals by sole proprietors are not deductible. Additionally, interest deductions are permitted only for expenses incurred for business purposes, emphasising the importance of maintaining clear financial records.

Estate planning is another critical aspect for expats in the UAE. While there is no inheritance tax, the application of Sharia law to the distribution of assets can be a concern for non-Muslim expats. Establishing a will registered with the DIFC Wills Service Centre or the Abu Dhabi Judicial Department can help ensure that their assets are distributed according to their wishes rather than the default Sharia principles.

The UAE continues to hold its position as a leading destination for expatriates, characterised by its zero personal income tax and numerous incentives for entrepreneurs and innovators. However, to fully benefit from these opportunities, expatriates must adopt a strategic approach to their tax planning. This includes leveraging DTAs, structuring investments wisely, taking advantage of small business relief, and ensuring compliance with tax regulations. By understanding the UAE’s tax laws, expatriates can optimise their financial outcomes and enjoy the benefits of living in one of the world’s most tax-friendly environments.