How tax-free UAE earns money? This sector plays major role in Dubai’s economy

The United Arab Emirates, especially Dubai, is considered a tax haven for many. Due to their low tax rates and sometimes no tax attracts individuals from all backgrounds. People can create a comfortable lifestyle here as they are allowed to save from their income. However, understanding the economics of the tax system in UAE is important to make decisions regarding living here and making a career.  

A question naturally comes to mind. If Dubai and other emirates are tax free, then how do they generate revenue? The answer lies in its unique tax system.  

Tax structure in Dubai 

Dubai and the UAE's economic policy prioritizes growth and investment, with a tax framework that plays a crucial role in achieving this goal. The city's tax system is characterized by minimal to no taxes on profits and income, making it an attractive destination for investors and fostering a thriving startup ecosystem. 

Corporate tax in Dubai 

Dubai's tax environment is characterized by a lack of income tax and historically, no corporate income tax. In principle, all income and transactions received directly in Dubai are tax-exempt, including passive and active investments, dividends, and capital gains. However, as of June 2023, a 9% corporate income tax was introduced, applicable to mainland-based companies operating solely in Dubai, with an exemption limit of 90,000 Euro (Rs 8,100,619.70) to safeguard small businesses, startups, and freelancers. Companies with international operations are not expected to be affected, and residency is a prerequisite for corporate income tax liability. 

VAT in UAE 

Prior to 2018, Dubai had no value-added tax (VAT). However, starting January 1, 2018, a 5% consumption tax was introduced across all emirates, including Dubai. This VAT applies to most goods and services, with a few exceptions. While some free zones, like the Dubai Airport Free Zone, are exempt, businesses must collect VAT if their annual income exceeds AED 375,000. Exceptions apply, and tourists, trade fairs, and conferences are eligible for VAT refunds. 

Role of tourism in Dubai's economy 

Tourism is a vital pillar of Dubai's economy, generating substantial revenue. In 2019, international tourists injected approximately $34 billion into the local economy. The sector continues to thrive, with tourist numbers surging by 187% between 2021 and 2022. The EXPO 2020 event further bolstered visitor numbers, solidifying Dubai's position as the world's fourth most visited city.