How to Save Millions and Stay Law-Compliant: 7 Ways to Reduce Taxes in Dubai

10:07 pm  |  11.03.2024

Are you running a business in the UAE but postponing accounting? You shouldn’t. Incorrect accounting can result in fines, account blocking, business suspension, and even a ban on operations in the UAE. However, with proper accounting practices, significant savings can be achieved. Professional bookkeeping can decrease company costs and boost revenue. And no, we’re not referring to illegal practices that could lead to penalties in the UAE.

Corporate Tax Optimization

Corporation tax, also known as income tax, has become a topic of discussion and concern among businesses, especially since its introduction in the summer of 2023. This tax is set at 9%. It applies to all companies whose annual revenue exceeds 375 thousand dirhams (approximately 102,000 US dollars). Corporation tax is calculated by subtracting expenses from income.

Registration in Free Economic Zones (FEZ)

Registering a company in a free economic zone is one of the most significant methods of tax optimization. Free zones are unique territories with exceptional tax and customs preferences. That is why, at the stage of opening a company, we recommend contacting specialists so that they can choose the optimal solution for your case.

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In general, if you study the very essence of free zones, they were developed by the government to attract foreign investment and capital. There are about 45 such zones in the Emirates, many of which specialize in certain sectors of the economy, including IT, logistics, and finance. This is where tax optimization opportunities lie.

Not only the possibility of doing business but also the possibility of optimizing taxation depends on how correctly you choose a free economic zone. Some of these zones offer complete tax exemption, including VAT and corporation tax.

So, even though a corporate tax has appeared in the Emirates, the legislation provides for the possibility of exemption from income tax.

It is important to remember that a company’s activities in a free zone are limited to work within this zone and international operations. However, interaction with companies outside the free zone in the UAE is prohibited. Although the law is not generally retroactive, violations of the rules in the UAE may result in back taxes being assessed. This emphasizes the importance of maintaining correct accounting records.

Obtaining Tax Resident Status

Having not received tax resident status in the UAE, entrepreneurs are faced with the need to pay taxes simultaneously in two countries: the United Arab Emirates, where their direct commercial activities are carried out. This leads to a situation where, instead of the expected exemption from the tax burden, the entrepreneur finds himself subject to double taxation. Therefore, the process of registering as a UAE tax resident is a very important and effective tool for reducing tax expenses.

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Business Structure Optimization

30% Reduction in Corporate Tax Optimizing business structures, such as creating holding companies, allows for the distribution of tax obligations between the head office and branches, reducing the overall tax burden. Additionally, conducting transfer transactions within a group of companies further decreases tax expenses.

Compliance with Economic Substance Requirements in the UAE

If we are talking about the legislation of the UAE, then tax obligations are borne only by the head office of the holding, while its branches and subsidiaries are exempt from paying corporate tax. This model not only helps reduce the tax burden on the entire holding but also provides additional protection for the rights and interests of beneficiaries.

In the context of internal optimization of the holding, it is also worth noting the practice of transfer operations within one group of companies. Redistributing revenues between divisions, especially to those located in jurisdictions with lower tax rates, can further reduce the overall tax burden.

Of course, such an approach can go beyond simple tax optimization, turning into an effective business management strategy at the international level. To do this, you should consult a qualified international accountant.

VAT and B2B Collaboration

In the UAE, only those companies whose profits exceed 375 thousand dirhams must register as payers. But as practice has shown, in some situations, the status of a VAT payer can be beneficial. However, a lot depends on the type of business partners you have.

If your counterparties are also VAT payers, then your mutual transactions are considered B2B, and in this case, value-added tax (VAT) is not charged on sales transactions.

However, if your counterparties are not VAT payers, then the transactions will take on a B2C format, and in such cases, you will be charged VAT.

Also, any company must consider where the supplier is located. In the case of B2B transactions, VAT is charged according to the location of the buyer (that is, the one who orders the service), and in the case of B2C transactions, according to the location of the seller.

Next, the accountant comes into play. It analyzes aspects of your business and your business relationships with partners to find ways to minimize your tax liability, for example through the use of tax deductions or the use of VAT reverse charge mechanisms.

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Investment for Benefits and 50% Cost Reduction 

Investing in certain industries may also result in additional tax preferences. Take, for example, the renewable energy sector or the research and development sector. Investing in these areas may result in your local government offering you attractive tax breaks. This could be a reduction in taxes through benefits and subsidies or even a complete exemption from paying them for a certain period.

The most attractive areas for investment for tax optimization are agriculture, manufacturing, healthcare, education, scientific research and development. The government actively supports the development of these areas, offering investors in these areas truly unique working conditions.

Thus, by directing your available funds to these areas, you provide yourself with the opportunity to optimize your tax obligations. This is not only a smart investment of resources, but also an effective way to reduce the tax burden on your business.

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