When you start a business, one of the earliest decisions you have to make is how to pay yourself. This isn’t as easy a decision as it may seem when you’re just starting out. The UAE has a lot of laws regarding (non-payroll) taxes and compensation, and you must follow them to the letter. At the same time, you still have to cover your personal expenses while you run your business. So how should you pay yourself? There are several possibilities.
Wages and Taxes for Locals and Expats
In many countries, the simplest way to make money from your own business is to simply list yourself as an employee and draw a check. This keeps your business and personal income nicely separated for payroll and accounting purposes, and ensures you’re in compliance with tax laws. The UAE doesn’t charge income or corporate taxes (generally), so these aren’t a consideration for most local entrepreneurs.
If you’re a local, the discussion might end there. Whatever money you pay yourself in wages is tax-exempt, unless you work in finance or the oil and gas sector, each of which has special rules. But if you’re one of the millions of expats who’s flocked to the business-friendly climate of the Emirates, you might want to think twice before cutting yourself a check.
UAE income is free of foreign tax for expats. But what about the tax liability in your home country? Most countries actually have a relaxed attitude toward taxing income overseas. But if you’re from the United States or United Kingdom, these countries regard their citizens as taxable no matter where they happen to live. You have to file special forms each year with the IRS in the United States or HM Revenue and Customs in the United Kingdom to exclude all or a portion of your income from being taxed. It’s a good idea to talk to a tax expert to find out about any foreign tax exclusions or benefits since any cash you pay yourself in wages may be considered taxable by your home nation.
What Issuing Paychecks Means in the UAE
If you decide to issue yourself a paycheck in the UAE, there are a few things to keep in mind:
- WPS: The Wages Protection System is a sort of government clearinghouse for wages in the UAE. For at least the first six months of operation, all paychecks must go through this electronic salary transfer system. The WPS was created to protect workers, and payments are made through pre-approved and authorized financial institutions. Income taxes are not deducted of course, but locals have a fraction of their pay deducted for statutory pension contributions. As of 2018, this is 5%. Expats are exempt from this requirement since they don’t receive pension benefits.
- Extra paperwork: Every paycheck issued in the UAE must be registered and tracked. That includes your paycheck too, and penalties for noncompliance can be stiff.
- Local banks: Paychecks must be deposited in UAE-based banks, which enjoy a local monopoly and charge high fees.
Consider Paying Yourself Market Rates
As your company grows, its budget should grow along with it. This gives you a certain amount of flexibility for how to structure your paycheck. If you’ve been doing more than one job, such as chief executive and chief financial officer, try paying yourself a fair market rate for at least one of these positions. While it may seem odd to pay yourself what you’d pay an employee, especially if you have a flow-through company structure that lets you draw straight from the profits, it’s good discipline for later. Say you’re doing these jobs, but you’re only getting one check. Eventually, the work of a financial officer will grow to be too much for you to do part time, and you’ll have to hire help. Obviously, that person will expect to be paid market rates. If you’ve already been budgeting your own pay at that level, the transition is much easier than having to find an executive paycheck in the budget on short notice.
Deciding how to pay yourself can be complicated and confusing. The UAE may have a favorable tax code, but that’s far from the only consideration when deciding whether to draw a paycheck from your own small business.