For many years, the United Arab Emirates represented to international entrepreneurs what El Dorado once promised to Spanish conquistadors – a land where taxes simply didn’t exist, where profits flowed in broad streams straight into investors’ pockets. That idyll, however, came to an end in 2022, when the Emirates decided to join the ranks of nations collecting corporate income tax. For Polish entrepreneurs already operating there, or those merely planning expansion into the Middle East, this change necessitates a fundamental reassessment of tax strategy.
The Skarbiec Law Firm specializes in international tax law and cross-border business operations.
Corporate income tax in the United Arab Emirates
The end of the zero-tax era
On June 1, 2023, the Emirates implemented a corporate income tax – federal corporate tax (CT) – which, though still relatively mild compared to European standards, definitively ended the era of complete tax freedom. Income up to 375,000 dirhams (equivalent to approximately 395,000 złoty, or roughly $100,000) remains tax-free. Everything above that threshold faces taxation at a rate of nine per cent. It’s still an attractive proposition, though it represents an entirely different world from the shell ofshore companies – mere file folders – through which hundreds of millions once flowed via paper transactions. On the other hand, nine per cent remains too low to prevent such a company from constituting a controlled foreign corporation from the perspective of a Polish tax resident who would own it.
The Emirati authorities, however, demonstrated a certain pragmatism. Recognizing that suddenly burdening all businesses with taxes might reverse investment flows, they maintained a special regime for entities operating in free zones. These economic enclaves – scattered across the federation’s territory, from the Dubai International Financial Centre through Jebel Ali Free Zone to numerous smaller zones specializing in specific industries – can still enjoy a zero rate, provided they meet certain conditions.
The requirements aren’t trivial. An entrepreneur seeking the status of a qualified free-zone person must:
Demonstrate real economic substance on-site
Ensure that non-qualified income doesn't exceed specified limits
Equally important, all transactions with related parties must be conducted at arm’s length, in accordance with transfer-pricing principles. This means an end to aggressive optimization schemes in which profits were artificially shifted to Emirati companies through inflated prices for intangible services or licensing fees.
The catalog of qualified activities is simultaneously broad and surprisingly precise. It encompasses classic production and trading functions, but also more refined activities such as fund management, headquarters services for capital groups, or reinsurance operations. Transactions with natural persons and selected financial sectors subject to separate regulations, however, have been excluded.
The Poland-UAE double taxation treaty
A shield against double burden
It’s precisely in such situations that the double taxation treaty between Poland and the UAE – signed back in 1993 and subsequently modernized by a 2013 protocol – comes to the fore. Though the document originated in the Emirates’ pre-tax era, its significance has paradoxically increased since the introduction of CT.
The treaty is based on the classic OECD model, granting different categories of income the right to taxation either exclusively in the state of residence or in both states with limitation of withholding tax rates. The logic of this division is straightforward:
passive income – dividends, interest, or royalties – is subject to limited taxation in the source state
while income from business activity is taxed where the activity is actually conducted, provided it exceeds the permanent-establishment threshold.
The treaty’s architecture primarily protects against classic economic double taxation, when the same income in the hands of the same taxpayer would be burdened with tax in two jurisdictions. Poland has committed to applying the proportional credit method, which means that tax paid in the Emirates is deducted from Polish tax, but no more than would be due in Poland on that income. This is a solution favorable to the taxpayer, though in practice, given the low Emirati rate, it rarely leads to complete elimination of Polish tax.
Practical guidelines for those considering Emirati structures
For a Polish entrepreneur considering engagement in the Emirates, thoughtful planning and realistic assessment of costs and benefits are crucial. Here are practical recommendations:
First principle: never establish a company in the Emirates solely for tax purposes. If the only justification is “paying less tax,” the structure is doomed to problems. There must be solid business justification – access to markets, ease of doing business, access to financing, presence of clients or suppliers.
Second principle: plan substance from the beginning. If you’re establishing a company in Dubai, immediately plan for real office space, hire local personnel, organize business processes. The more substance, the lower the risk of challenge by Polish tax authorities. An empty shell company is asking for trouble.
Third principle: document everything. Business justifications for decisions, economic analyses, board meeting minutes, transfer-pricing documentation, proof of services rendered – all this will be needed in case of tax audit. The better the documents, the stronger your position in a dispute with the tax authorities.
Fourth principle: use professional advisors familiar with both jurisdictions. You need someone who understands both Polish tax law and Emirati realities, and knows how the double taxation treaty works. Savings on tax advisory services at the beginning can cost many times more in the future.
Fifth principle: be prepared for a long-term perspective. An international structure isn’t a quick tax trick; it’s a long-term business strategy. It requires patience, investment, consistency. Benefits will appear after years, not months.
Sixth principle: monitor changes in regulations. International tax law evolves at lightning speed. What was legal and effective two years ago may be challenged today. Regular reviews of the structure with advisors, tracking tax interpretations, adapting to new regulations – these are necessities, not options.
Between optimization and common sense
The United Arab Emirates has entered a new era – from tax haven, it has transformed into a normal business jurisdiction with moderate taxation levels. For Polish entrepreneurs, this means the end of easy schemes, but not the end of possibilities. The Emirates remains an attractive location for real business activity, particularly when the goal is expansion into Middle Eastern, African, or South Asian markets.
The Poland-UAE treaty effectively protects against double taxation. Its mechanisms work as they should – they ensure predictability and fair division of taxation rights between states. They’re not a magic wand eliminating taxes, but a tool organizing tax relations between jurisdictions.
The key to success is understanding that the era of shell structures has departed irreversibly. Contemporary international tax law – strengthened by OECD initiatives, automatic exchange of information, and increasingly close cooperation among tax administrations – demands substance, economic justification, and transparency. An Emirati structure makes sense only when it’s part of a considered business strategy, not a desperate attempt to flee Polish tax authorities.
For those ready to invest in real presence in the Emirates – to hire people, rent office space, conduct actual business activity – the reward of nine-per-cent CT (or even zero in free zones) can be significant. For those seeking a quick tax trick – only disappointment, tax audits, and potential sanctions await.
Ultimately, the best tax planning is the kind that lets you sleep at night. A structure you defend only through creative interpretation of regulations, which requires hiding facts from tax authorities, which rests on legal fictions – that’s not optimization, that’s a ticking time bomb. Better to pay honest tax on real activity than to save a few percentage points at the cost of years of stress and uncertainty.
The Emirates can be an excellent place to conduct business. Provided you actually conduct business there.
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Have questions about taxation of business activity in the Emirates?
Every international structure requires individual analysis. The Skarbiec Law Firm has advised Polish entrepreneurs for years on:
- Interpretation of double taxation treaties
- Tax planning
- Economic substance requirements
- Disputes with tax authorities regarding international transactions and tax residence