Taxes 101: Tax Obligations for UK Citizens Starting a Business in Dubai
Setting up a business in Dubai offers numerous benefits, positioning it as a central hub for global trade and business. With its foreign ownership policies, supportive business environment, high quality of life, and state-of-the-art infrastructure, Dubai has become an attractive destination for entrepreneurs, including UK citizens. This article explores the encouraging taxation system in Dubai. It’s also highlighting how it appeals to UK nationals and clarifies the tax obligations they need to consider. Read on to learn the tax implications for UK citizens starting a business in Dubai.
Understanding Dubai’s Tax System:
Although it is not classified as a tax haven, Dubai is renowned for its favourable tax environment. Today, UAE does impose certain taxes, but they are significantly less burdensome compared to the tax systems in the UK and the USA. Essential taxes in Dubai include:
- Corporate Income Tax:
Most businesses in Dubai benefit from the absence of corporate income tax. However, starting from January 2023, a corporate income tax rate of 9% applies to companies earning profits exceeding AED 375,000. Certain sectors, such as oil, gas, and petrochemical companies, are subject to a flat corporate tax rate of 50%. Foreign bank branches face a rate of 20%.
- Rental Tax:
Dubai levies a rental tax on real estate properties located within the Emirate. It’s a 5% flat rate made out annually.
- Tourist Tax:
The tourist tax is imposed on various services in Dubai such as hotels and leisure. Typically the rate is between 6% to 10%.
- Value-Added Tax (VAT):
Introduced in the UAE, along with the rest of the GCC in 2018, VAT is a flat 5% tax on goods and services. Businesses are required to register for VAT if their annual turnover exceeds AED 375,000.
- Individual Taxes:
Individuals in Dubai are subject to taxes such as a 5% municipality tax when renting a property. Also, it’s applicable a 10% tax on hotel and restaurant services. Furthermore, individuals must pay a 5% tax on alcohol purchases, they also need to possess a valid liquor license.
The Double-Taxation Agreement (DTA) between the UK and the UAE:
To mitigate the impact of double taxation for UK citizens working in the UAE, the UK and the UAE signed a double-taxation treaty. This agreement ensures that UK citizens who reside and work in the UAE are not obligated to pay tax on their UAE-earned income to the UK. Here’s a simplified overview:
UK citizens working in the UAE will be classified as non-UK residents. This is applicable just if they satisfy one of three automatic overseas tests:
- They were not UK residents in the previous three tax years and will spend less than 46 days in the UK during the current tax year.
- They were not UK residents in one or more of the previous three tax years and will spend less than 16 days in the UK during the current tax year.
- They are engaged in full-time work abroad and will spend less than 91 days in the UK, with a maximum of 31 days involving work.
What are the tax obligations for UK citizens starting a business in Dubai?
Let’s look at a real-life example. Imagine you are a UK resident planning to relocate to the UAE for a few years. Maybe start a business there. You own a home in the UK and are considering renting it out while you’re in the UAE. Naturally, you may be concerned about the tax obligations. You would want to know whether you will still be liable for taxes in the UK while earning income abroad.
In this scenario, your exposure to income tax and capital gains tax (CGT) in the UK will be determined by your residency status. Once you become a non-UK resident, you will only be subject to UK income tax on any income sourced within the UK and CGT on gains arising from residential property in the UK. The income you earn in the UAE will not fall under the scope of UK income tax.
To determine your residency status, the statutory residence test (SRT) comes into play (as seen previously). It takes into account the number of days you spend in the UK. Also, it will be considered the ties you maintain with the country. The more ties you have, the fewer days you can spend in the UK before being considered a UK resident for tax purposes. Ties can include factors such as family and accommodation.
If you move to the UAE and start working there full-time during the UK tax year, you may be eligible to claim split-year treatment on your UK tax return. This treatment allows you to divide the tax year into two parts. One when you were a UK resident and the other when you were a non-UK resident. This can further optimize your tax liabilities and provide relief from double taxation.
FAQs about tax obligations for UK citizens starting a business in the UAE:
Will I be subject to UK income tax on my earnings in the UAE?
No, as a UK citizen working in the UAE, you will generally not be liable for UK income tax on your earnings in the UAE. The double-taxation treaty between the UK and the UAE ensures that you only pay tax on income and capital gains from the UK itself, relieving you from double taxation.
Do I need to pay VAT on my business transactions in Dubai?
Yes, VAT is applicable in the UAE, including Dubai. UAE is mandating that businesses are registering for VAT if their annual turnover exceeds a certain threshold. VAT is charged at a flat rate of 5% on most goods and services. There are certain exemptions and special provisions based on specific sectors and transactions.
Can I claim split-year treatment on my UK tax return if I move to the UAE?
Yes, if you move to the UAE and start working there full-time partway through the UK tax year, you may be eligible to claim split-year treatment on your UK tax return. Split-year treatment allows you to divide the tax year into two parts, optimizing your tax liabilities and providing relief from double taxation.
Seek Professional Tax Assistance from Start Business Advisory:
Navigating the complexities of tax implications for UK citizens starting a business in Dubai can be daunting. Start Business Advisory, based in Dubai, specializes in providing legal advice and services for Dubai and UAE businesses, including those from the UK looking to establish a presence in Dubai. Our team of experts possesses extensive knowledge and experience in handling tax-related matters. We can assist you at every stage of the process, from selecting the right location to organizing the necessary documentation.
To gain a better understanding of your individual tax implications, we recommend scheduling a one-on-one consultation with our team. Our team will provide tailored guidance to ensure compliance and maximize tax benefits for your business.
Dubai’s enticing taxation system and favourable business environment make it an ideal location for UK citizens. Especially if they are looking to start a business abroad. Taxes such as corporate income tax, rental tax, and VAT do exist in Dubai, but they are significantly more favourable compared to the UK tax system. The Double-Taxation Agreement between the UK and the UAE further alleviates the burden of double taxation for UK citizens working in the UAE. By partnering with us you can leverage our expertise to optimize your business’s tax obligations.