Tax status in Dubai when setting up a company: all the important information in one place
Are you setting up a company in Dubai but have your permanent residence in Hungary? Do you have business in both countries, so you're unsure where to pay tax? These are just a few of the situations where it can be difficult to get your head around tax liability. In this article, we clarify the most common misconceptions and provide clear, concise information on which country you should be taxed in in different situations.
You may find this article particularly useful if you are looking for a tax-efficient alternative to company formation in Dubai or are considering self-employment.
Tax liability: individuals vs business taxation in Dubai
In the Emirates, the tax for sole proprietorships and companies will be uniformly 9% from 1 January 2024. If your Dubai taxation to find out more, read our previous article.
You don't have to pay tax in Dubai as an individual. So, if you are an employee, your wages are not subject to deductions such as SZJA or TB, as in Hungary.
That doesn't mean life in Dubai is free. You have to pay for medical care, for example. Fortunately, most employers provide some kind of health insurance package, but it may not cover everything. If you're self-employed or own property, you'll need to take out insurance yourself.
As regards where you have to pay tax, i.e. where is the your tax status, you may already experience differences as a self-employed person and as a company. The tax residence in both cases is Double Taxation Avoidance Convention between the Government of Hungary and the Government of the United Arab Emirates is regulated by. The international convention describes where you are a resident taxpayer, i.e. the tax authority of the country to which you have to pay taxes.
Determining the tax liability of individuals
You will be taxed in the UAE if you are resident or domiciled in that country. You are taxed in Hungary if your residence, place of business or place of management is in this country. If your business is registered in Hungary, you are clearly taxable in Hungary on income earned through it.
But what if you were considered a resident of both states? These situations are governed by the Double Taxation Convention and the decision may be determined by the following factors, in order.
1. Permanent residence
You are considered a resident taxpayer in the country where you have your permanent residence. If you have a permanent residence in both countries, you are taxed only in the country with which you have closer personal and economic ties.
2. Personal and economic relations
The country where your personal family and economic ties are closer is also known in legal jargon as the centre of your 'vital interests'. What does this mean in practice?
By economic links, for example, the NAV may mean invoices issued to companies in different countries. For example, if you are resident in Dubai and work as a self-employed person for a Hungarian company, but you are not taxed in Hungary, the NAV may look more closely at the transaction. In such cases, you will have to prove that you have closer economic ties in Dubai. As this mainly arises for work done online, proving a Dubai IP address can usually short-circuit these cases.
In personal relationships, it's a bit more complex, and although it sounds funny, it's usually where your toothbrush is, or where you take your kids to school or nursery in the morning, that can be considered the centre of your vital interests. Even if you are not registered on that property.
3. Place of residence
If it is not possible to determine which country is the centre of your interests, or if you do not have a permanent residence in either country, your tax residence will be used to decide where you are taxed. Under the rules, an individual becomes a resident for tax purposes in the country after a stay of more than 183 days a year.
Important: You must provide proof of tax residence in Dubai. To do this, you can buy a so-called tax residence certificate after 183 days in Dubai, which can be used internationally.
If you have a habitual residence in both countries, or in neither, you will only be considered a resident for tax purposes in the country of which you are a national.
5. Other cases
If your situation cannot be determined on the basis of the nationality provision, for example if you are a dual national, the competent authorities of the two countries will settle the issue by mutual agreement.
Determining the tax liability of companies
As a company, you will be taxed in the UAE if you are registered, domiciled, resident or manage your business in this country.
So you will be taxed in Hungary on your company registered in Hungary and in Dubai on your company registered in Dubai. If your company is registered in both countries, or in neither, the competent authorities in the contracting countries will settle the matter by mutual agreement.
Setting up a company in Dubai: tax liability depending on length of stay
Under international conventions, you become a tax resident in one of the Emirates or Hungary where you spend more than 183 days. To prove this, after the 183 days you will need to request an official form, which must be accepted internationally by any tax authority with which Dubai has a double tax treaty.
Tax deductibility for stays of 90 days
If you spend 3 months or less in Dubai, you are not yet considered a Dubai tax resident under the 183-day rule. However, you can apply for a tax certificate for 90 days if you want to do business there for such a short period. However, this is only accepted locally.
As a Hungarian citizen, you can stay in the country for 90 days without needing a visa, as this is considered a tourist visit. Of course, you can still work online in the country, for example as a digital nomad with your Hungarian business. You cannot work locally unless you are established in the country. Once you are established, the double taxation convention applies from then on, as long as you retain your tax residence in Hungary.
Tax residence for more than half a year
If you are staying in Dubai for more than 6 months and your sole proprietorship or company is registered there, you will not have to pay any taxes in Hungary, including SZJA. The exception to this is income from real estate, whether it is real estate use or sale. Income from real estate is taxable in the country where the property is located.
To stay in Dubai for more than 90 days, you must be established in the country. To do this dubai visa you need to apply for, which is for example foreign entrepreneur bank account is also essential for opening up. We have a team of experts to help you every step of the way, from establishing your business in Dubai to obtaining a Dubai ID card and setting up a company in Dubai.
The Dubai tax liability also applies to money withdrawn from your Dubai company to your Dubai personal account (in legal form), i.e. you are subject to 0% tax as an individual.
You should be aware of the condition of validity of your Dubai visa, which means you cannot leave the country for more than six months. So you need to enter the UAE at least every six months, even for 1-2 days. This is generally not a problem, but you should take it into account if you digital nomad and you travel often. There is still the possibility of a special arrangement to travel once a year instead of twice a year, but this requires a special procedure.
Tax liability: controversial cases in practice that may require proof
Of course, the tax authorities can audit you at any time. So it's important that you have all the documents proving your tax eligibility and that you meet the conditions.
However, here are two common examples of how the Hungarian tax authorities may contact you and ask you to clarify the situation:
- Taxation of investments in Hungary: Let's say you are a Hungarian citizen settling in Dubai and you acquire a permanent address in the country. Thereafter, you will be taxed in Dubai on all investment income, whether it be foreign exchange gains or dividends. If the country where your investment is located has a double tax treaty with the Emirates. So Hungarian investments are also taxed in Dubai. In this case, the tax authorities can strictly check that you meet all the conditions for tax residence in Dubai.
- Taxation of income from a Hungarian company acting on behalf of a client: Let's say you have an address in Dubai and have registered your sole proprietorship here. You work for a Hungarian company, and when the work is done, the company makes a payment to you, on which no tax is paid in Hungary. In this case, the NAV may also look more closely at the transaction. If you can prove that you work abroad or are tax resident abroad, this should not cause any problems. This will be dealt with in more detail in a later article.
Tax Inefficiency for Digital Nomads in Dubai
It is worth knowing that Dubai is the Work Remotely from Dubai programme has been welcoming teleworkers and digital nomads since March 2021. In this article, we will focus only on digital nomads. To apply for a Dubai digital visa as an entrepreneur, you must:
- You will be doing business in Dubai for at least a year and you can prove it,
- You can guarantee a minimum monthly income of $3500,
- You must also attach bank statements for the last three months.
As long as you do not exceed 183 days of residence, however, you will continue to pay tax in Hungary unless you suspend or close your business there.
It's worth checking with an expert that you have met all the requirements to avoid surprises.
Comment: You can set up a sole proprietorship or a partnership in Dubai. The former is the freelancer permit and associated visa option. It's also worth knowing that as a sole trader, you don't even need a tax number up to AED 375,000 income. Sole traders are taxed in the same way as partnerships. Find out more about Dubai taxation from our article.
Setting up a company abroad with a secure legal background
If you still have questions about tax residence or setting up a company in Dubai, freelance taxation If you're thinking about and want to make sure you're compliant with the law, our expert team can help.
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