Complete Guide to Withholding Tax in UAE

One term that often causes confusion is ‘withholding tax’. While many countries impose withholding tax on outbound payments such as dividends, interest, or royalties, the situation is notably different in the United Arab Emirates (UAE). So, does withholding tax apply in the UAE? Whether levied in the UAE or not, it can influence your agreements, contracts, and increase compliance risks, particularly given the evolving corporate tax system in UAE.

If you are a foreign investor or entrepreneur planning to expand or launch your business in the UAE, understanding the country’s approach to withholding tax is crucial. In this article, we will help you understand the nitty gritty of withholding tax in UAE, giving you a clear overview of the UAE's taxation landscape. The article also includes details of the benefits of no withholding tax in UAE, the role of double taxation treaties, and best practices businesses should follow to stay prepared.

Taxation in UAE

The UAE has been known for its business-friendly and low-tax environment. However, in recent years, the country has introduced several tax reforms to align with international standards and diversify its revenue sources beyond the oil sector. Businesses in UAE must now navigate a more structured tax system that includes Corporate Tax in UAE, Value Added Tax in UAE, and, in specific cases, Withholding Tax.

• Corporate Tax in UAE: Effective from June 1, 2023, the UAE imposes a federal corporate tax on business profits. It is set at a rate of 9 per cent on taxable income exceeding AED 375,000.

• VAT in UAE: VAT, which was introduced in the UAE on January 1, 2018, is set at a standard rate of 5 per cent on most goods and services.

• Withholding Tax in UAE: Unlike many jurisdictions, the UAE does not currently impose a general withholding tax on outbound payments such as dividends, interest, or royalties.

What is Withholding Tax in UAE?

UAE Withholding tax (WHT) is a tax that is deducted at the source of income. This means a certain percentage of payment is withheld (deducted) by the payer and paid directly to the government, instead of the full amount being paid to the recipient. Instead of the recipient paying tax later, the payer deducts it upfront and sends it to the tax authorities. This tax is imposed to ensure regular flow of revenue to the government.

The government implements WHT in UAE to:

• Collect tax on income earned within their country

• Prevent tax avoidance by foreign recipients

• Simplify the tax process by placing the responsibility on the payer

Withholding Tax in UAE commonly applies to:

• Interest

• Salary and wages

• rent

• Dividends

• Royalties

• Service fees (mainly to non-resident entities)

Does the UAE Impose Withholding Tax?

As of now, the UAE does not impose withholding tax on domestic or foreign payments. This makes the UAE an attractive destination for businesses, especially foreign investors and entrepreneurs. The absence of withholding tax in UAE encourages foreign investments, while minimising double taxation risks.

With effect from June 1, 2023, the UAE charges 0 per cent withholding tax on most payments to non-residents. This rule was introduced as part of the country’s Corporate Tax Law issued under Federal Decree-Law No. 47. This means the UAE does not charge withholding tax on things like dividends, interest, and royalties paid to foreign businesses. This policy helps attract more foreign investment and makes it easier for companies worldwide to do business with the UAE.

Consulting a tax expert is advisable to navigate withholding tax in UAE for cross-border payments. Reach out to Gryffin Capitalist for resolving all your tax issues.

Benefits of Zero Withholding Tax in UAE

Rates of WHT in UAE can impact how profits are repatriated by foreign investors. The UAE’s decision to set a zero per cent withholding tax rate on most payments to non-residents is a major advantage for businesses and investors. This tax friendly policy removes financial barriers, positioning UAE as one of the most attractive places for international trade and investment. Here are some of the key benefits of these zero withholding tax rates:

• Attractive destination for foreign investors

• Easier profit repatriation to home countries

• Higher net profits for businesses

• Reduces tax-related legal risks

• Enhances UAE’s global competitiveness

• No need for tax treaty claims or filings

• Enhances UAE’s appeal as a global financial and trade hub

What is a Double Taxation Treaty in UAE?

A Double Taxation Treaty (DTT) is a bilateral agreement between two countries designed to ensure that income is not taxed twice. It ensures that income is not taxed both in the country where it is earned and in the country of residence. Also known as a Double Taxation Avoidance Agreement (DTAA), this treaty encourages cross-border trade and investment.

The UAE has signed numerous DTTs with other countries to eliminate or reduce taxes on cross-border income. These treaties are especially useful for UAE-based companies receiving dividends, royalties, or interest from foreign sources, allowing them to benefit from reduced rates of withholding tax abroad.

Country-wise Overview of Withholding Tax Rates under UAE DTTs

The UAE has signed Double Taxation Avoidance Agreements with numerous countries to prevent double taxation and reduce WHT rates on cross-border income such as dividends, interest, and royalties. These treaties play a crucial role in shaping the framework for Withholding Tax in UAE, promoting international trade and investment by providing tax relief and clarifying tax obligations between countries.

Below is a summary of some of the applicable withholding tax rates under selected Double Taxation Agreements:

**Note:

1. Rates often vary depending on specific treaty provisions or the nature of the recipient.

2. “0 / 5 / 10” means the treaty specifies a range or multiple possible rates depending on conditions.

Withholding Tax Best Practices in the UAE

While the UAE does not currently impose a general withholding tax on most outbound payments, businesses should not assume this will remain unchanged indefinitely. The Corporate Tax Law, which was introduced in 2023, includes provisions for the future implementation of withholding tax in UAE on certain payments to non-residents.

To avoid compliance risks, businesses in UAE should follow key best practices when it comes to potential withholding tax obligations. We at Gryffin Capitalist work closely with you to evaluate your cross-border transactions and ensure their operations remain tax-efficient and fully compliant. Our team stays up to date with every regulatory change, so you don't have to. Some of the key best practices are:

●     Identify potential payments that could be subject to withholding tax in UAE, if future changes are enacted.

●     Businesses should stay updated with official guidance from the UAE Federal Tax Authority (FTA).

●     Ensure all payments to foreign entities are well-documented with valid invoices and contracts.

●     Maintaining proper documentation, such as Tax Residency Certificate, is essential to claim DTT benefits.

●     With tax rules continuing to evolve, working with experienced tax advisors, like Gryffin Capitalist, ensures your company stays compliant.

Navigate Withholding Tax in UAE with Gryffin Capitalist

Navigating the nuances of Withholding Tax in UAE can be complex for new and established businesses alike. Gryffin Capitalist offers expert guidance to ensure your business stays compliant with the latest tax regulations while maximising financial efficiency.

What we do for you:

➢    In-depth consultations on UAE’s withholding tax laws

➢    Evaluation of cross-border payments and tax implications

➢    Assistance with tax documentation and filing

➢    Ongoing updates on regulatory changes

Whether you are just entering the UAE market or scaling operations, our team ensures you remain compliant and informed. Get expert guidance today!