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The UAE may be a relative tax haven, but if you’re an American investor putting money there, you’re still required to report your earnings and possibly pay taxes on them. In this post, we’ll break down what American investors should know about US taxes on UAE investments.
Read more: Is The UAE No Longer Tax-Free?
In order to prevent tax evasion, the US has signed agreements with countries worldwide to enforce what’s known as FATCA, or the Foreign Account Tax Compliance Act. The UAE signed on in 2015.
Under FATCA, the UAE’s financial institutions (e.g. banks, investment funds, or crowdfunding platforms that are incorporated or registered in the UAE) are required to collect certain types of information about US investors, and then report it each year to the UAE ministry of finance, which in turn shares it with the IRS.
FATCA is essentially a US-specific version of CRS, the Common Reporting Standard, which is a global exchange of financial account information set up between OECD countries as well as many others.
he US does not participate in CRS, as it uses FATCA instead in order to get similar information about American accounts abroad to the IRS.
Individual American investors (including dual citizens and green card holders) fall within this reporting requirement. This also includes jointly held accounts – even if just one of the account holders is an American taxpayer, the account is reportable.
In addition to that, UAE financial institutions (FIs) also have to report what are known as Passive NFFEs (Non-Financial Foreign Entities) if an American taxpayer holds 25 percent or more of the ownership.
Passive NFFES are things like private investment firms or trusts that make a majority of their income through passive earnings like dividends or interest payments.
UAE FIs are required to have American account holders fill out what are known as self-certification forms when they open an account.
The form collects basic information like their permanent residency address, tax taxpayer identification number, and a declaration of the countries where the account holder is a tax resident.
By signing the form, the account holder acknowledges that the FI will report their financial information to local tax authorities (and ultimately, the IRS).
As part of the annual reporting process, the FI submits to the IRS various types of financial data from American account holders. This includes:
● Year-end balances at the end of the reporting year
● Interest income, like interest earned on deposits or bonds
● Dividend income
● Proceeds made from sales of financial assets like stocks and bonds
Generally speaking, Americans are taxed on worldwide income earned through foreign investments.
Interest income, whether earnings from savings accounts, bonds, or interest paid out by crowdfunding platforms, is typically taxed at an individual’s ordinary income tax rate. Dividends may get taxed at a lower rate, if it qualifies. You will likely have to report this income to the IRS on Form 1040.
In any case, how much you specifically owe should be worked out by you and/or your tax accountant.
When it comes to FATCA compliance, American taxpayers typically have to file Form 8938 along with their regular tax return. On this form you’ll report on your foreign financial assets, like a UAE-based bank account, investment funds (including shares in UAE-based crowdfunding platforms) and stocks and bonds.
However, you only need to file if you exceed the following thresholds:
a) If you’re single or married but filing separately and your assets are over $50,000 on the last day of the tax year, or over $75,000 at any time of the year
b) If you’re married and filing jointly and your assets are over $100,000 on the last day of the tax year or over $150,000 at any time of the year.
a) If you’re single or married but filing separately and your assets are over $200,000 on the last day of the tax year or over $300,000 at any time of the year
b) If you’re married and filing jointly and your assets are ove $400,000 on the last day of the tax year or over $600,000 at any time of the year.
You can read more information about Form 8938 here.
Beyond FATCA, American investors often need to file another form called FBAR, or a Foreign Bank Account Report. This is filed with the Financial Crimes Enforcement Network (FinCEN) through their website. Americans have to file this if the total value of their foreign financial accounts exceeds $10,000 at any time of the year.
Unfortunately, the US doesn’t have a tax treaty with the UAE. That means there aren’t tax credits or exemptions available to offset U.S. taxes on income earned in the UAE.
In terms of personal income, like wages and salary, Americans can write off up to $126,500 for the tax year 2024 as part of the Foreign Earned Income Exclusion (FEIE) as long as they have been abroad for 330 days or are bona fide residents of a foreign country for a full tax year.
But keep in mind that does not apply to earnings made from investments, whether dividends or interest earned on crowdfunding platforms.
UAE FIs are required to register on the UAE’s CRS/FATCA system, which they can do here. The UAE Ministry of Finance also has a dedicated website that includes an AI chatbot to answer questions and video tutorials that will walk FIs through the registration system.
The FATCA reporting deadline is typically June 30 each year, unless the local regulatory authority announces an extension.
American taxpayers that don’t report their foreign income to the IRS can face a penalty of 5 percent of the unpaid tax for every month the return is late, with a maximum of 25 percent of the unpaid tax.
Failure to pay what is owed by the due date (that is, once it’s filed) is 0.5 percent per month and up to 25 percent of the unpaid tax.
For UAE FIs, non-compliance can lead to a 30 percent withholding tax on income that’s owed to them by US sources — things like interest and dividends paid out by US entities. In the worst case scenario they can even lose access to US financial markets.
Disclamer:
This post is for educational purposes only, and the Firm does not directly or indirectly provide these services.
