VAT on Salaries in the UAE
Because of its favorable tax set-up and economic incentives, the United Arab Emirates (UAE) has emerged as a global business hub. In January 2018, the UAE implemented Value Added Tax (VAT) at a standard rate of 5%, which was one of the most substantial changes to the UAE taxation system. Although VAT is payable on most goods and services, there is often a question that people ask is VAT payable on salary?
In general, VAT does not apply to salaries in the UAE. In any case, you have to know not just who needs to pay VAT, and who is exempt from it, but if there is a payroll tax in the UAE. This article elaborates on these insights.
Is VAT Payable in the UAE?
VAT is an indirect tax levied on the consumption of goods and services. It has relevance at every level of the supply chain, and other registered companies thus charge VAT to consumers and pay it to the Federal Tax Authority (FTA). From 1st October 2023, this is applicable at the same time as VAT Registration Requirements. The following conditions are required for VAT registration in the UAE;
for businesses: Their taxable turnover in a year is more than AED 375,000 compulsory registration. Their annual taxable turnover is between AED 187,500 to AED 375,000 for voluntary registration. Once registered, companies will need to pay VAT at 5% on taxable goods and services.
Are Salaries Subject to VAT in the UAE?
Salaries are not subject to VAT, as they are a form of compensation that does not relate directly to a taxable service being provided. This indicates that people do not have to pay VAT on their wages.
So nevertheless, VAT may be applicable for some employee-related transactions. If an individual works as a freelancer or consultant and earns above the VAT threshold, they must register for VAT and charge it on their invoices.
Employee Leasing and Employment Agencies: Where a business provides employee outsourcing services, the service is VAT-exempt. However, the amount paid to outsourced employees is free for VAT.
Employee Benefits and Perks: Employee benefits other than those that are required by law.
Example of VAT in Employment Services
Now, imagine a company hiring a contract external consultant. First, if the consultant is VAT registered, they have to charge 5% VAT on their invoice. (Unlike a Marketplace vendor, a full-time employee that works directly for the company will never see their salary with VAT deductions.
Who is Exempted from VAT in UAE?
VAT is justifiable because it applies only to most goods and services, while certain sectors and transactions are exempt from VAT or zero-rated subject to 0% VAT. Some sectors and transactions are VAT exempt, so no VAT is ever charged, and businesses cannot recover VAT on related outgoings.
Financial Services: Interest for loans, life insurance, and other financial transactions are exempt.
Residential Real Estate: Sales and leases of residential and domestic real estate (not before first supply) are exempt. Public Transport: Buses, taxis and metro services are exempt from VAT.
Zero-Rated VAT Sectors
Zero-rated transactions are taxed at a 0% VAT rate, allowing businesses to recover input VAT on any associated costs. Key sectors include,
Healthcare: Zero-rated is necessary for medical services and medicines.
Education: Schools and universities that provide accredited education also do not incur any tax.
Export of Goods and Services: Products exported outside of the UAE are 0% VAT.
Are Salaries VAT-Exempt?
UAE tax laws do not classify salaries as taxable supplies; thus, salaries are not subjected to VAT. VAT is not a cost to employees earning wages, nor is VAT paid by the employers; salaries do not attract VAT. However, if an employee undertakes taxable business activities like consulting, they may need to register for VAT and follow tax regulations.
What is the Payroll Tax in the UAE?
One of the biggest advantages of working in the UAE is that there is no payroll tax or personal income tax. Employees do not have tax deducted from their salaries, which makes the UAE an attractive destination for expatriates and professionals.
Employer Contributions and Payroll Costs
Although there is no income tax, employers must cover certain payroll-related obligations.
Social Security Contributions for UAE Employees
Therefore, all UAE employees are required to pay 5% of their salary to the General Pension and Social Security Authority (GPSSA). Cost to Employers: 12.5% – 15% of UAE employee’s salary Expats is not required to pay into the UAE social security system.
End of Entity Gratuity
Workers in the UAE can receive an end-of-service gratuity if they’ve been working for at least one year. It is computed based on tenure and final remuneration.
Work Permit and Visa Fees
Expat employees will also have to pay for residence visas, work permits, and health insurance.
Potential New Corporate Tax Changes (Starting 2023)
Although employees are not liable for payroll tax, businesses in the UAE are required to pay corporation tax. Effective from 1 June 2023, UAE implemented a 9% corporate tax on earnings over AED 375,000 of net profits. Certain tax and duty advantages remain for free zone businesses subject to their adherence to economic substance rules . While corporate tax doesn’t impact salaries directly, companies could restructure compensation to align with tax strategies.
Other factors include tax-friendly policies that enable the UAE to attract global talent and businesses, with policies conducive to businesses. Here’s a rundown of the important points such as:
VAT and Salaries: Salaries are exempt from VAT, and the employees do not pay VAT on their salary. Freelancers, consultants, or outsourcing companies may need to charge VAT, though.
VAT Exempt Sectors: Some of the most significant VAT-exempt sectors are financial services, residential real property, and public transport. Essential services like education and healthcare are zero-rated (at 0%).
Payroll Tax: No payroll tax and no personal income tax. But, social security contributions, gratuity payments, and visa-related costs are pooled by the employer.
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For businesses, compliance with VAT and corporate tax laws is essential. VAT is not imposed on salaries but on other aspects of employment, like outsourced services and some benefits. As the tax landscape in the UAE changes, you must stay updated on relevant VAT laws, corporate tax policies, and costs is essential for both employers and employees.
