How UAE’s high-net-worth individuals can avoid tax and financial pitfalls

The UAE is set to attract a record 6,700 millionaires in 2024, according to the Henley Private Wealth Migration Report, making it the top destination for wealthy individuals.

While the country’s tax-free environment and robust financial infrastructure are significant draws, relocating involves navigating complex financial and legal landscapes.

Below are five critical tax and financial pitfalls that high-net-worth individuals need to be aware of when moving to the UAE.

1. Misinterpreting the tax-free environment

The UAE’s tax-free environment, with no personal income tax, capital gains tax or inheritance tax, requires navigation, according to where one has come from, and may leave for next.

Many expatriates might overlook the fact that their home country could still tax their global income.

In the extreme, US citizens are taxed on worldwide income, which means an American expat earning income in the UAE might still be liable for US federal income taxes.

To avoid unexpected tax liabilities, it’s essential to conduct a thorough review of your home country’s tax laws regarding international income.

Utilise foreign-earned income exclusions, tax credits or tax treaties that may reduce your liability and maintain detailed records of your residency status and income sources to support your tax filings.

Without an understanding of their residency and domicile legislation, citizens of other countries may have similar challenges.

2. Inadequate wealth management and investment planning

The UAE offers numerous investment opportunities, particularly in real estate and financial markets.

However, without a thorough understanding of local market nuances, these opportunities can turn into pitfalls.

The UAE’s real estate market, for instance, can be highly lucrative, but also volatile, and is also governed by a legal framework that may be unfamiliar to foreign investors.

Research the legal aspects of property ownership and engage with reputable local advisers to navigate regulatory requirements.

A mix of equities, bonds and other financial instruments across multiple jurisdictions can balance your exposure.

3. Overlooking local succession and estate planning laws

Estate planning in the UAE requires careful consideration due to the application of Sharia in matters of inheritance.

Assuming that your home country’s inheritance laws apply in the UAE can lead to unintended consequences for asset distribution.

Drafting a legally recognised will in the UAE is essential to ensure your assets are distributed according to your wishes.

Include clear instructions for the management and distribution of your estate, considering both local and international assets.

Establishing trusts or other legal entities where appropriate can provide additional control over your estate planning and protect your beneficiaries.

4. Non-compliance with global tax obligations

Even while enjoying the tax-free environment of the UAE, HNWIs must remain vigilant about their global tax obligations.

Ignoring the tax reporting requirements of your home country can result in severe penalties and legal issues.

Regularly updating yourself on your home country’s tax reporting requirements and deadlines is crucial.

Using software tools or professional services to track and report foreign income and assets accurately can help ensure compliance.

Taking advantage of any tax deferral options or credits available for taxes paid to foreign governments and establishing a systematic process for record-keeping will further ensure you meet all reporting obligations.

5. Understanding double tax treaties

Double tax treaties (DTTs) proliferate, with the UAE perhaps surprisingly having developed a network more than most other countries, despite the absence of personal taxes.

With the purpose of promoting its development goals, the UAE has concluded DTTs with 137 separate sovereign states.

For individuals, they are intended to help eliminate double taxation, and also avoid tax evasion.

Because these are bilaterally concluded and no two countries have similar tax systems, their actual application will vary.

For those arriving or leaving, or those with wealth or earnings overseas, their existence should not be taken for granted, as using a tax residency certificate will normally require annual renewal, alongside statutory reporting in the other country.

This can mean that consolidating international wealth in an appropriate wrapper or structure can simplify or legitimately overcome their use.

David Denton is technical consultant at Quilter Cheviot