Withholding Tax in UAE

Q: 1. What is withholding tax?

UAE withholding tax is a type of income tax collected by the government from employees and individuals who receive various payments, such as salaries, wages, commissions, dividends, interest, or royalties. It is typically withheld from salaries at the payment source before reaching the recipient. The amount withheld depends on the individual’s earnings, tax requirements, and available exemptions.

Q: 5. What income types incur withholding tax in the UAE?

UAE withholding tax applies to payments made to non-residents for services rendered or work performed within the country. This includes royalty and professional technical service fees, such as management, consulting, legal advice, and engineering services. Additionally, any dividends paid to non-residents are also subject to withholding tax. The tax rate applied to non-residents varies yearly, typically between 5% and 20%.

Understanding Withholding Tax In UAE

Withholding tax plays a significant role in the global financial landscape, affecting businesses and individuals. In this article, we will delve into Withholding Tax in UAE, explore its implications for businesses in the United Arab Emirates (UAE), and clarify frequently asked questions related to this topic.

What is Withholding Tax in UAE?

At its core, withholding tax is an amount of money an employer or business entity deducts from employee payments as income taxes. This deduction is typically made at the source, hence the term “withholding.” The specific regulations and tax rates associated with withholding tax vary from one country to another. Generally, these taxes are withheld at a global rate ranging between 15% and 25%.

Implications of Withholding Tax Rules To UAE Businesses

Recently, on the 9th of December, 2022, the Ministry of Finance (MoF) and the Federal Tax Authority (FTA) in the UAE made important updates to Federal Decree-Law No. 47. These updates specifically pertain to corporate tax (CT) and withholding tax guidelines in the country. The changes will take effect from June 1, 2023, and apply to all financial years after that.

Income Sources Eligible For 0% Withholding Tax

Under the updated legislation, certain income sources are eligible for a 0% Withholding Tax in UAE. These income types include:

Foreign companies’ income is sourced in the UAE and doesn’t attribute to its Permanent Establishment (PE) based there.
Mainland-sourced income benefits from the Free Zone’s 0% corporate tax regime but not coming through an onshore branch.
Dividends or other profit distributions given by a Free Zone Person are subject to Zero taxation on mainland shareholders. For instance, if a DMCC company distributes dividends to someone residing in the JAFZA free zone, they will be eligible for a zero percent (0%) withholding tax.

Advantages of Withholding Tax

Withholding Tax in UAE brings several advantages to the financial systems of most countries, and these benefits extend to businesses and the government. Some of the key advantages include:

Accurate and Efficient Tax Collection: By implementing withholding tax rules, governments can collect taxes accurately and promptly, ensuring financial stability.
Compliance and Avoidance of Penalties: Withholding tax rules ensure businesses comply with local tax laws and avoid costly fines and penalties.
Accountability for Foreign Individuals: Foreign individuals operating within the UAE are held accountable for their income and associated taxes.
Prevention of Double Taxation: Withholding tax prevents the risk of double taxation and enables the government to collect taxes from non-resident individuals efficiently.
Combating Tax Evasion: Withholding taxes help combat tax evasion while generating additional government revenue.
Flexible Tax Payments: Withholding taxes are often used instead of income taxes, giving businesses more flexibility in their tax payments.

Employee Incentives: Withholding taxes can be used as an employee incentive, allowing companies to deduct taxes from salaries and offer additional benefits like bonuses or vacation time.

What is resident withholding tax?

The United Arab Emirates is renowned for supporting businesses and entrepreneurial endeavors. With a robust economy and numerous resources, the International Tax United Arab Emirates Highlights provides an ideal environment for businesses to thrive and grow.

For current and aspiring business owners, staying informed about changes to corporate tax laws, including Withholding Tax in UAE rules, is crucial to ensure compliance with the latest regulations. Understanding withholding tax and its implications is essential for businesses operating in the UAE. By staying informed about tax regulations and compliance requirements, businesses can ensure their smooth operations and focus on growth and success in the dynamic economic landscape of the UAE.

Withholding Tax: Frequently Asked Questions

1. What is withholding tax?

UAE withholding tax is a type of income tax collected by the government from employees and individuals who receive various payments, such as salaries, wages, commissions, dividends, interest, or royalties. It is typically withheld from salaries at the payment source before reaching the recipient. The amount withheld depends on the individual’s earnings, tax requirements, and available exemptions.

2. Is there a withholding tax in the UAE?

Businesses in the UAE do not incur withholding taxes, as their corporate income and profits are subject to a 0% rate. However, seeking advice from a corporate tax consultant or accountant is essential to understand specific exemptions that may apply to your business.

3. What are the compliance requirements for withholding tax in the UAE?

According to current advice from the FTA, non-residents that receive UAE-sourced income can be eligible for a 0% withholding tax rate. Therefore, no taxes would need to be withheld. Furthermore, UAE businesses or foreign recipients will not be obligated to file related paperwork or reports. It is advisable to consult specialists in accounting and taxation for personalized guidance.

4. How is withholding tax calculated?

Non-residents without a permanent presence in the UAE, receiving no UAE-derived revenue related to their establishment, may be exempt from withholding tax. Tax withholding is usually standard for cross-border payments, including dividends, royalty payments, and interests. UAE resident individuals are exempt from withholding tax for all transactions between them.

5. What income types incur withholding tax in the UAE?

UAE withholding tax applies to payments made to non-residents for services rendered or work performed within the country. This includes royalty and professional technical service fees, such as management, consulting, legal advice, and engineering services. Additionally, any dividends paid to non-residents are also subject to withholding tax. The tax rate applied to non-residents varies yearly, typically between 5% and 20%.

6. What taxes are paid in the UAE?

The UAE has no personal income tax, with most taxes paid by businesses. Indirect taxes, such as withholding tax and Value Added Tax (VAT), currently set at 5% on goods and services for businesses, may apply. Additionally, there are excise taxes on tobacco products and carbonated beverages at a rate of 100%. Other taxes are associated with specific activities, such as property and asset transfer taxes, taxes on oil and gas companies, customs duties, and the withholding tax system mentioned earlier.

Before conducting business in the UAE, consulting with corporate tax consultants or accountants is essential to ensure that all relevant fees and taxes are properly considered.