April 20, 2023 –
Foreign investors considering establishing business in the UAE and the US must be aware of the tax implications and regulations in both countries. In this blog post, we will discuss tax planning strategies that can help foreign investors minimize their tax liabilities while remaining compliant with local tax laws.
UAE: Tax-free environment, no personal income tax, VAT considerations
The United Arab Emirates (UAE) is known for its tax-friendly environment, which makes it an attractive destination for foreign investors. There is no personal income tax, allowing foreign investors to retain more of their earnings. However, the UAE introduced Value Added Tax (VAT) at a rate of 5% in 2018. VAT applies to most goods and services, with some exceptions, such as basic food items, education, and healthcare services. Foreign investors must consider the implications of VAT on their businesses and ensure they are compliant with VAT registration and reporting requirements. The UAE is reportedly considering the implementation of a corporate tax in the future, which would have implications for businesses operating in free zones as well, though the details are yet to be finalized[1].
US: Corporate tax rates, state taxes, and tax treaties
In the United States, the federal corporate tax rate is 21%. However, state taxes can vary, and foreign investors must consider the combined tax burden when investing in the US. Some states, like Nevada and South Dakota, have no corporate income tax, while others, such as California and New York, have higher corporate tax rates[2]. Additionally, the US has tax treaties with many countries to avoid double taxation and promote economic cooperation[3]. Foreign investors should review the applicable tax treaties to understand their tax obligations and potential benefits.
Understanding tax residency and tax obligations in both countries
Tax residency is an essential factor in determining tax obligations for foreign investors. In the UAE, tax residency is typically based on the duration of physical presence in the country, with a minimum of 183 days required to establish tax residency[4]. In the US, tax residency is determined by the Substantial Presence Test, which considers the number of days spent in the country over three years, with a minimum of 31 days in the current year and a total of 183 days over the three-year period[5]. Foreign investors must understand their tax residency status to determine their tax obligations in each country and avoid potential penalties for non-compliance.
Utilizing Double Taxation Avoidance Agreements (DTAAs) for tax relief
Both the UAE and the US have entered into Double Taxation Avoidance Agreements (DTAAs) with various countries to prevent investors from being taxed twice on the same income. For instance, a foreign investor based in Germany who earns dividend income from a UAE-based company may be eligible for tax relief under the Germany-UAE DTAA. Similarly, an investor from the United Kingdom with rental income from a property in the US could benefit from the provisions of the UK-US DTAA. These agreements typically cover provisions for reducing or eliminating double taxation on certain types of income, such as dividends, interest, and royalties, as well as information exchange and cooperation between tax authorities of the contracting countries.
Engaging tax professionals for proper planning and compliance
Navigating tax planning and compliance can be complex, particularly for foreign investors dealing with unfamiliar tax systems. Engaging tax professionals with expertise in UAE and US tax laws can help investors develop effective tax strategies and minimize their tax liabilities. A knowledgeable advisor can play a crucial role in identifying situations where Double Taxation Avoidance Agreements (DTAAs) may apply to specific circumstances. They can analyse the investor’s sources of income, residency status, and relevant DTAAs to determine potential tax relief opportunities while ensuring compliance with the requirements of the relevant DTAA, such as providing necessary documentation and reporting to the appropriate tax authorities. By working with experienced tax and legal professionals, foreign investors can maximize their tax savings, optimize their business structure, transfer pricing frameworks, and cross-border dealings to minimize tax leakage, and effectively navigate the complexities of cross-border taxation and legal issues.
Conclusion
By understanding tax laws and planning strategies in both the UAE and the US, foreign investors can maximize their investment returns while ensuring compliance with all tax obligations. Vizier Ventures can help you analyse your goals, business strategy, and company plans to understand how to optimize for tax efficiency and navigate the complexities of both tax systems. With our expertise, you can confidently make informed decisions that align with your business objectives and minimize your tax liabilities.
By Darius Jannat at Vizier Ventures
- https://www.tax.gov.ae/en/ ↑
- https://www.irs.gov/ ↑
- https://www.irs.gov/businesses/international-businesses/united-states-income-tax-treaties-a-to-z ↑
- https://u.ae/en/information-and-services/finance-and-investment/taxation ↑
- https://www.irs.gov/individuals/international-taxpayers/substantial-presence-test ↑
