At Taxes for Expats we have been preparing U.S. tax returns for U.S. Citizens and permanent residents living in UAE for over 7 years. We have been checked by the State Department and are listed on the list of approved Tax Preparers by the US Consulate in Dubai. Our clients live and work in two emirates - Abu Dhabi and Dubai.
As a U.S. Citizen or green card holder you are legally required to file a U.S. tax return each year regardless of whether you already pay taxes in your residence country. The expatriate Foreign Earned Income Exclusion ($92,900 for 2011 and $95,100 for 2012) can only be claimed if you file your tax return on a timely basis. It is not automatic if you fail to file and can even be lost. Since there is no income tax in Dubai that you could offset against your U.S. taxes, the primary vehicle for US expats to utilize is the Foreign Income Exclusion.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the calendar year as is standard in France for U.S. tax purposes). You must, however, pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these form or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
We have helped hundreds of expats around the world catch up with their past U.S. taxes because they have failed to file U.S. tax returns for many years. This is, in fact, our specialty and we offer a 10% discount to clients to wish to file multiple tax returns at once and get in full compliance with the IRS.
Unfortunately, unlike most countries in the world, you must also file your taxes on worldwide income so long as you are a U.S. citizen or green card holder. You always have the option to give up your U.S. citizenship - by following proper IRS and State Department procedures you can surrender your U.S. Citizenship and therefore cut off your obligation to file U.S. taxes in the future. You must surrender the Citizenship for non-tax avoidance reasons and then can usually only return to the U.S. for no more than 30 days per year for the subsequent ten years. This is another service that we have provided many clients in the past.
Work with a recognized expert to help you prepare your American tax return. We can also provide tax planning and advice with other expatriate tax and legal concerns; we look forward to working with you.
Below we include information on the UAE Tax System for American expatriates.
Income tax in the UAE
The UAE does not have any federal income tax on wages or salaries. Each emirate can impose income taxes but none do, and it would be very unlikely for that to change in the near future although there has been talk of introducing income tax in the past. Look to Saudi Arabia as a guide, where the idea has been mooted more often or more seriously, but usually dismissed. If it ever does happen there, the UAE could follow suit.
The International Monetary Foundation (IMF) has occasionally suggested income tax would be advisable for the Gulf Co-operation Council (GCC) countries. The beginning of the walk down the slippery road to filling in W-2s and P45s was begun by Bahrain in June 2007 when they announced the introduction of a 1% income tax to fund an unemployment scheme. Many wondered about the anomaly of expatriates paying income tax for a benefit they were not eligible for, however the Bahrain Ministry of Labour said that under certain circumstances (of their choosing), expatriates could receive unemployment benefit. There were protests against the scheme and some Islamic scholars said that such a tax was "haram", or un-Islamic.
Watch this space.
- Emirates Business 24-7 (a UAE newspaper) reported at the end of December 2008 that GCC countries had agreed in principle to bring in both corporate and individual income tax by 2012, and possibly sooner.
- Reuters had a report with the alarming headline "UAE toying with taxes as a new source of income", or "UAE preparing to impose taxes" as reprinted in some sources, on 08 September 2010, but it turned out to be a summary of recent measures by the UAE, especially Dubai, to collect money owed by, or increase fees collected from, residents for parking fees, car registration, road tolls, Emirates ID cards, etc.
- Which are taxes of a sort but not significant amounts relative to most people's income in the UAE, and a somewhat underwhelming read given the bold headline.
- The effect was even more diluted with some rather obvious comments such as "The imposition of road tolls and other fees goes hand-in-hand with the provision of infrastructure and services and these measures could have a predominantly revenue-raising angle," according to Giyas Gokkent, head of research at National Bank of Abu Dhabi (NBAD). Er, well, yes of course the imposition of fees is designed to raise revenue and pay for services and infrastructure. Governments don't just raise or impose fees because they're bored and feel like annoying residents. Well, not in the UAE or in most other countries.
- The report ends with the comment "If a business had set up in a free trade zone and had qualified for a tax holiday and then those tax holidays were withdrawn, potentially this could have an impact on the sovereign (political) risk profile of the UAE," from a tax specialist at PricewaterhouseCoopers in Dubai - Dean Rolfe. A bit of a red herring sounding comment, but it adds drama to the report. It's a bit like saying that if it snows in Dubai then it will be cold. True on the face of it but irrelevant since snowfall in Dubai is extremely unlikely. If Dubai reneging on the promised tax holidays in the free zones really was a serious concern, one wouldn't have expected international companies such as PricewaterhouseCoopers to have based themselves in Dubai in the first place.
- Reuters also pointed out (correctly) that there was a budget deficit of AED 6 billion in Dubai for 2010, or 2% of GDP. There are many other countries and states with a far more worrying deficit as a proportion of GDP. Whilst there are legitimate and serious concerns about the level of debt in Dubai, one should remember that Dubai is part of a wealthy federation of emirates, and as such, is far less likely to be at risk of bankruptcy than Greece, Ireland, USA, UK, and so on.
Sales tax in the UAE
Sales tax already exists, or some form of it does, in the UAE. For example:
- Alcohol in Dubai attracts 30% sales tax (or none if you buy it illegally - one reason why many do)
- Hotel services and entertainment attract a 5% municipality tax ie rooms, food, other services.
- Restaurants often add a service charge of 5-15% so you will usually see "++" written on menus indicating plus municipality tax plus service charge. And in case you're wondering, that service charge rarely ends up in the pockets of the service personnel. Just another one of Dubai's many ironies.
- Cigarettes attract some tax, so yes, in answer to that perennial question, they are slightly cheaper at airport duty free. And the limit was reduced to 200 cigarettes (1 carton) from 2000 (10 cartons) several years ago. Not that anyone seems to take any notice.
VAT / GST in the UAE and GCC
Value Added Tax (VAT), as it's known in the UK, or Goods and Services Tax (GST), as it's known in Canada and New Zealand, is more likely to be implemented than income tax.
- In May 2008, several reports said that the UAE was considering the introduction of VAT of 2-5% (various figures seen), possibly by January 2009 in just the UAE, or as late as 2012 across all GCC countries.
- In August 2008, there were reports that VAT would not be introduced in the UAE before 2010. Both reports based on comments from various UAE government officials.
- 06 April 2010 update: Gulf News reported that VAT in the GCC might be delayed until mid-2013, and quoted Ehtisham Ahmad, Adviser in the UAE Prime Minister's Office, as saying "The problem of trying to get an integrated VAT by 2012 when the free trade agreements kick in, is going to be very tight," so it looks like there's still some time to do tax-free (mostly) shopping in the UAE.
Corporation Tax
- Foreign banks are subject to a 20% corporation tax on profits earned in the emirates of Abu Dhabi, Dubai, and Sharjah (according to government.ae, the UAE government website). Local banks do not have any UAE tax bills.
- Oil companies are subject to a 55% tax rate in Dubai and 50% in other emirates, in addition to royalties.
Royalties
Some companies have an agreement, or requirement, to pay royalties to the government. For example Etisalat, the bigger and older of the UAE telecom companies, pays royalties. And says that since there is now a competitor (Du Telecom), who is not paying royalties, it is time to renegotiate the royalty fee.
Customs Duty
General import duty is 10% on luxury goods, and 4% on everything else. That includes goods shipped out of a UAE free zone to somewhere else in the country (which is why your car gets checked when leaving Jebel Ali Free Zone). The amount of duty imposed can vary, and might be as little as 1%.
Alcohol and cigarettes are in a separate category with higher rates of customs duty. About 30% or 33% for alcohol - if you go to an alcohol shop in Ajman or Umm Al Quawain, you can choose between showing your alcohol license and paying the 30% tax, or not showing it and getting the booze cheaper (and illegally).
Expats paying taxes in their home country or country of origin
Generally, people pay taxes in the country they live and/or work in, whether it be income tax, and/or a tax on consumption (eg VAT in the UK, MwSt in Germany, GST in Canada and New Zealand, etc.) Tax is also paid on income derived from within a country whether or not you live there eg rental property, investments.
People living in one country and working in another should only pay tax in one country - double taxation agreements are so you don't get stung in both countries.
There are three terms to familiarise yourself with.
- Country of domicile - usually the country you or your father was born in, and usually the country of your passport.
- Country of residence - where you normally live
- Country of tax residence - the country which you pay taxes in, for most people it's the same as the country of residence.
Tax residence
Different countries have different criteria for determining if you are tax resident. Those criteria are rarely set in stone, it is the intent rather than the actions that the country's Inland Revenue Department look at to decide if you are resident for tax purposes. For example
- You were born in the UK, you live in the UK, you work in the UK. Obviously you will probably be tax resident in the UK.
- You were born in Dubai but have British parents and a British passport, you have lived all your life in Dubai, you work in Dubai. Your country of domicile will be the UK, in the eyes of the UK tax authorities, your country of residence will probably be the UAE (whether or not you have a residence visa), and your country of tax residence will probably be the UAE although that's a moot point since you don't pay income tax.
- You were born in the UK, lived there, worked there but your employer sent you to Dubai for a 6 month job contract, and then you returned to the UK. Your domicile is the UK, you will probably be tax resident in the UK, you may be "resident" in Dubai for 6 months.
- You quit your UK job and took a 2 year contract in Dubai but left after 1 year and returned to the UK. You will probably be "tax resident" in the UK for the time you were in Dubai.
What does being "resident for tax purposes" mean?
Being declared tax resident for a country usually means you are supposed to pay tax according to that country's tax laws on any and all income. That includes wages, salaries, benefits (school fees, company car, accommodation provided, etc), income from investments (bank deposits, stocks and shares, rental income), no matter where it is sourced from.
Double taxation agreements mean that if you are taxed in one country, you don't pay tax again on the same income in another country. For example you live in Holland but work in Germany and your employer deducts tax before paying your salary. You are probably "tax resident" in Holland but shouldn't pay tax there on your salary, you might pay tax on your investments held in Holland though. The UAE has double tax agreements with many countries but they have little relevance to most expats working in Dubai.
Expats who move to a tax-free country like the UAE usually have no problems with the tax authorities in their home country if they clearly have taken up residence in the UAE for a medium to long-term period (at least 2 years). If you own a property in your home country, consider selling it or at least renting it out long term - having accommodation available for your use is a red flag to tax authorities. However, in some countries, renting out your home is insufficient to escape the tax man (Canada is possibly an example of this). Other things that can throw up red flags (remember these are not hard and fast criteria, and individually may not be a problem, it's the overall impression that the tax department looks at).
- Property owned and purpose for which it is used.
- Accomodation available (holiday home vs primary residence vs room in parent's house)
- Bank accounts
- Investments
- Close family staying in home country (meaning spouse and/or young children)
- Car left in family member garage or in own garage for personal use
- Leave of absence from company rather than resignation
Find the website of the tax authority or inland revenue department of your home country and study it. Usually there will be a section or department for non-residents and their tax obligations. Telephone them to ask questions. They are not always the enemy and can be very helpful.