The UAE Tax & FBAR Complications for US Citizens & Residents

UAE Tax & FBAR Complications 

It is not uncommon for high-level employees who are US Citizens or Permanent Residents of the United States to relocate overseas for work on temporary assignments. Sometimes, these temporary assignments can last one or several years. When it comes to taxation in foreign countries, many countries abroad have different tax rules — which leads to complex tax equalization calculations for US persons. In fact, there are some countries that do not tax their residents on income generated in the country. In the United Arab Emirates (UAE), there is no personal income tax on income earned. So if a person earned $500,000 in the United States and would incur about a $200,000 tax liability on that income — they could avoid having to pay any tax in the UAE on that same income. Unfortunately, for US Citizens and Permanent Residents, it is not that simple, due to the fact that the United States follows a Citizenship-Based Taxation Model (which also includes most residents). Explore the basics of certain tax complications that may impact citizens and residents of the United States who reside in the UAE.

Worldwide Income (U.S.)

The United States is one of only a few countries that follows a worldwide income tax model. That means, that US taxation is based on your US person status — and not where you reside. Therefore, if you are a US Citizen or Resident (Permanent Resident or meet the Substantial Presence Test) of the United States, you are subject to US tax on your worldwide income, even if you reside overseas and even if all of the income is sourced from foreign countries. While some taxpayers will be able to apply foreign tax credits they paid overseas to reduce their US income tax liability on the same income, it becomes a bigger problem in countries that do not tax personal income since there is no tax credits to apply.

FEIE (Foreign Earned Income Exclusion)

FEIE refers to the Foreign Earned Income Exclusion. For US Taxpayers who earn income outside the United States for wages and other employment or self-employment, they can usually exclude about $110,000 of their income from US tax liability, in addition to a portion of the housing exclusion they may accrue. Therefore, for a US person who resides and works in the UAE and earns about $100,000-$150,000 – they may be able to avoid all of the US tax liability, presuming they qualify. It is important to note that to qualify for FEIE, it does require the Taxpayer to both file taxes and claim the exclusion. In other words, they cannot simply just not file taxes because they are below the exclusion amount.

No Foreign Tax Credit on Earned Income

Since there is no personal income tax in the UAE, there would be no foreign tax credits available to reduce or eliminate US tax liability on the worldwide income portion generated in the UAE. For comparison purposes, if the same Taxpayer was working in France or Italy and paying a 30% to 40% tax rate then they would apply these foreign tax credits to the US tax return and avoid (or minimize) tax liability on that income.

FBAR & FATCA and Other International Reporting

The United States requires US citizens and residents to report their global assets to the Internal Revenue Service and FinCEN for any year in which the value of their foreign accounts, assets, and investments exceed the threshold requirements for filing. In recent years, offshore tax compliance has become a key enforcement priority. There are many different international information reporting forms that US taxpayers may have to file including the FBAR and FATCA. They are different thresholds and different due dates for the filing of these forms so taxpayers who may have a reporting requirement will want to determine what their reporting requirements are.

Penalties (Tax and Reporting)

The United States government strictly enforces international tax compliance. The failure to file the proper tax returns and reporting forms may result in significant fines and penalties. In addition, the US government may also revoke or deny a passport for taxpayers with seriously delinquent tax debts. It is important to note though, that the Internal Revenue Service does offer various offshore tax amnesty programs designed to assist taxpayers with getting into compliance. Depending on which program the taxpayer qualifies for, they may be able to avoid penalties and reduce their overall tax liability. Taxpayers considering one of these programs should speak with a Board-Certified Tax Law Specialist before making any proactive representation to the US government.

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