The Taxes American Citizens Must Pay in Dubai and the UAE

The United Arab Emirates is an amazing country where 90% of the 10 million people living there are expatriates. This number includes tens of thousands of Americans who do not need a work visa to move and work there. However, even when far from home, they always have to remember to pay their taxes. We will explain the procedure and tell you whether US citizens living in Dubai or any other emirate should beware of double taxation. Spoiler alert – they don’t need to!

• Emirates is a Tax Haven
• What Documents to File to the IRS
• Document Filing Periods
• How to Cut Your Taxes
• Taxes Payable by Companies in the UAE
• Which Companies Will Be Exempt?

Emirates is a Tax Heaven 

The first thing a taxpayer should know about the UAE is that it is one of the few states in the world where private persons do not pay an income tax. With a relatively low population and other taxes (5% VAT, a 10% tax on commercial property rent income, hotels and entertainment, 5% on residential real estate rent income) there is no need for an income tax.

However, this does not mean that US citizens who have relocated to Dubai or any of the other eight emirates are exempt from taxes. All US citizens, dual citizenship or green card holders, regardless of where they live in the world, are required to file an annual income tax return to the US Internal Revenue Service.

Only Americans whose annual income is lower than the standard deduction from taxable income don’t have to pay tax. This is rarely the case for US citizens working in the UAE. This amount is indexed annually by inflation and depends on the taxpayer’s status. In the case of the self-employed and private entrepreneurs, the lower limit for taxable profits is just USD 400.

What Documents to File to the IRS

So this means that double taxation is technically impossible. An American living and working in the UAE does not have to report their income to the country of residence. But they do have to fill out and file Form 1040 to the Internal Revenue Service. You can do this on your own, using Free File on the service’s website.

Form 1040 is the main document, but probably not the only one that the tax inspector would expect to receive.

If the total value of foreign financial assets exceeds USD 200,000 by the end of the financial year (or if exceeded USD 300,000 on one occasion in the year), as well as the tax return, you need to file Form 8938, as required by the Foreign Account Tax Compliance Act (FATCA).

Such assets include:

• foreign bank accounts,
• shares,
• bonds,
• financial instruments,
• contracts with citizens of other countries,
• stakes in foreign companies. 

In addition, the US Embassy in Abu Dhabi would like to remind US citizens residing in the United Arab Emirates that they must pay taxes for inherited properties (Form 1041) and the gift tax (Form 709) if the total amount in the financial period exceeds USD 16,000.

If one or several accounts were opened during the tax year at foreign banks, where over USD 10,000 were deposited on them simultaneously, you must notify the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). In this case, you must fill out Form 114 (FBAR – Foreign Bank and Financial Accounts Report). This should be done online separately from your return. You do not need to pay anything, but you must not conceal the money.

Form 114 is one of the simplest forms in the USA. Taxpayers only need to enter their personal data, contact information and information on all their foreign accounts: bank addresses, account numbers, and the balances in USD. The latter is worth particular attention: before submitting the form, you need to convert the money from any other currency (for instance, AED) into US dollars according to  the most recent exchange rate published by the US Treasury. Only then can you submit the completed form.

Document Filing Periods

If you are located in the USA, the tax return and other forms should be submitted by 15 April. However, in the case of US citizens living abroad, the deadline is automatically deferred to 15 June 15 - they can also postpone the filing of documents for four more months, until 15 October. To do so, they must complete Form 4868. It is advisable not to miss the deadlines: anyone failing to submit all the paperwork and pay all the taxes (in 2022, the payment deadline was 18 April) will have to pay fines and penalties. Moreover, the calculations of such fines and penalties are based on the deadline of 15 April and not 15 June. 

• 5% of the unpaid amount per month (Form 1040),
• USD 10,000 (Form 8938),
• the failure to disclose  information on foreign bank accounts may be punishable with penal sanctions (Forma 114).

NB! If you unintentionally withheld information on some of your income or failed to submit your return to the IRS on time, since 2012 taxpayers can use the streamlined filing compliance procedure to remedy things.

How to Cut Your Taxes

At the moment, the USA does not have any tax agreement with the UAE. However, the governments of the two countries share information on the bank accounts of the owners. That is why it is crucial that you notify the tax service. So if you have decided to stay in the Emirates and do not visit America, you can deduct a proportion of your income generated by your employment abroad from the taxable amount. The size of the deduction (FEIE) – this is important – does not apply to other income sources and is indexed annually by inflation:

You are only eligible for this “discount” if:

• you have legally spent 330 days abroad over the last 12 months, or
• your residency status has been approved in a country outside the USA and you do not need to leave its borders for a long time.

In the event of compliance with these conditions Americans living abroad can deduct part of their income spent on paying for accommodation. The maximum deductible amount for real estate in 2022 is USD 57,174 in Dubai and US 49,687 in Abu Dhabi. From this amount, you need to subtract 16% from FEIE for the ongoing year. The remaining amount can be written off as tax-exempt. To be eligible for the tax deductions, you need to complete and submit Form 2555.

Expatriates residing in the UAE cannot claim an offset of taxes paid in a different country because the Emirates do not impose personal income taxes.

NB! Even if you do not have to pay any taxes after all the deductions, you still have to submit a tax return.

Taxes Payable by Companies in the UAE

It may be hard to believe, but income tax is not payable in the Emirates either by individuals or legal entities. However, life in the UAE is becoming less heavenly for businesses. According to a law passed in January 2022, effective from 1 June 2023, some companies will have to pay 9% of their income to the state.

Which Companies Will Be Exempt?

Federal corporate tax will not apply to companies registered in free economic zones unless they do business with companies on the mainland. In addition, the tax is not payable by entrepreneurs whose income does not exceed AED 375,000 which is the equivalent of about USD 102,000. The following categories of business will also be exempt from the standard rate:

• medical services and medications,
• recently built residential properties,
• investments into precious metals,
• educational services and study goods,
• international carriage and the actual supplies,
• maritime, ground or air transportation,
• the export of goods or services outside the Cooperation Council for the Arab States of the Gulf.

In addition, the new tax will not affect natural resources companies as they already pay taxes at the rate determined by each emirate individually. Apart from natural resources companies, the activity of foreign banks is taxable in the UAE. 

Is this corporate tax a concern for individuals? No. Nothing will change for them. As in the past there is no need to pay either personal income tax or capital gains tax in the UAE. Unless your profit is linked to doing business.

Another option for US citizens is the opportunity to take a tax credit for your kids, entitling them to deduct up to USD 3,000 from annual taxes. At the time of the application, the children should be under the age of 16, should be US citizens and have a social security number. To do so, Form 8812 must be completed.

In a Nutshell

The United Arab Emirates remains one of the most attractive countries in the world from a tax perspective even with the newly introduced taxes – corporate income tax since 2023 and 5% VAT since 2018. The key when you live in Dubai or any other emirate is to stay alert and keep in mind the tax obligations that you assume from your status as a US citizen.

Cover photo: vwalakte (Freepik)