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What global businesses need to know about payroll in The United Arab Emirates
The United Arab Emirates has undergone one of the biggest economic transformations of any country in the world in recent decades. The skylines of Abu Dhabi and Dubai are unrecognizable compared even to the turn of the millennium, as the nation on the Arabian peninsula makes an increasingly major mark on the world stage.
Much of its growth has been down to energy revenue, and the country remains reliant on oil and natural gas for much of its wealth. However, the UAE is working hard to diversify into other industries, with tourism, construction, and services all thriving, in no small part down to foreign investment. While the UAE’s population is only around 9.5 million, many of these are well-educated expats, and it’s one of only a few countries on the planet where it’s easy to access a truly global workforce.
As you’ll see in this guide, the UAE is gradually becoming more ‘Westernized’ from payroll and employment standpoints. However, this still has to be balanced with respecting Islamic cultural norms and meeting some of its unique specifics.
Getting Started
Starting a business in the UAE is relatively easy and this is mainly due to the government’s offering of incentives for doing so. Firstly, however, you should check that your organization qualifies for one of the six types of business licenses available: industrial, commercial, professional, tourism, agricultural, and occupational.
From here, the company structure needs to be decided. This could range from a sole proprietorship, civil company, or limited liability company, through to a foreign company branch or free zone company. A free zone offers many tax, financial, and operational incentives, and is therefore especially popular with foreign investors.
Next, you’ll need to gain approval for your chosen business venture, and its name; this is carried out by the Department of Economic Development. The name is especially important as UAE law states it cannot violate public morals and must be relevant to the business activity.
Following approval, you’ll be able to license and register your company for the chosen activities. The remaining steps involve opening a bank account and processing the necessary visas. There may be a few other steps involved, depending on the unique nature of your business but, overall, incorporation can be completed in as little as a couple of weeks if your company is a free zone entity, or up to three months outside a free zone.
Every company is legally required to have a formal entity established in order to process a UAE payroll, but all applicable payroll registrations are completed during the process of establishing the entity.
To compensate employees who are registered under the Wages Protection System (WPS), it is mandatory for UAE businesses to make payments from an in-country bank account.
Employment Considerations
Whether you’re a UAE national or foreign worker, you are subject to the UAE’s Labour Law, with some exemptions for certain categories. One of the many unusual characteristics of UAE business is that there are no trade unions or collective bargaining agreements, but there are offices established that provide employees with legal support should they need it.
In free zones, employees are generally not governed by the labor law. As such, free zones have their own labor law and specific template contracts, which relevant parties are obliged to use. As would be expected, each free zone has its own requirements for information. Employees are considered under contract with the authority of each free zone, and probation periods are capped at a maximum of six months.
The normal working week is a maximum of 48 hours a week, and eight hours per day. Working time is reduced by two hours a day during Ramadan, which takes place slightly earlier each year (for 2024 it begins in early March, and in 2025 around the end of February). Many businesses open at 8 am, close between 1 pm and 4 pm to avoid the hottest parts of the day, then reopen until around 7 pm.
In a major change implemented in 2022, the traditional Muslim day of prayer on Fridays is no longer the designated rest day. As a result, most companies have therefore moved to a Monday-to-Friday working week, in line with Western economies. However, employers are still expected to accommodate the need for Muslim employees to attend prayers on Fridays.
Overtime pay is a 25% premium on top of normal salary, increasing to a 50% premium for any hours worked between 9 pm and 4 am.
Women generally may not be required to work at night (10 pm to 7 am) unless they hold managerial positions or certain medical, technical, or service-industry jobs. Under labor law, an employee must not work more than five consecutive hours without a break of no less than one hour.
Notice periods are two weeks within the first five months of employment, a month for service between five months and five years, and 90 days for service above five years. Probation periods are capped at a maximum of six months.
Compensating Employees
Technically, there is no minimum wage in the UAE, however UAE Labour Law does stipulate that the basic needs of any employee must be met. Employers must register with the Ministry of Human Resources and Emiratisation (MoHRE) and then subscribe to the UAE’s electronic salary transfer system, known as the Wages Protection System (WPS). All employee wages must be paid through this system. Late or unpaid salaries can result in heavy fines.
Bonus schemes are common in the UAE, but there are no specific guidelines or laws related to what can be awarded, meaning that these remuneration decisions are at the discretion of the employer.
Severance pay entitlement is 21 days’ salary for each of the first five years of service, and 30 days’ salary for every year above that; any incomplete years are paid according to these scales on a pro-rata basis.
Tax and Withholding Considerations
The UAE has no requirement for any employees to pay any income tax. Social security contributions are 12.5% employer (15% in Abu Dhabi) and 5% employee.
Corporate Tax was introduced in the UAE on June 1 2023, and has been set at a rate of 9% on all taxable income above 375,000 dirhams per year (approximately £80,000; $102,000; €92,000). There are a number of exceptions and zero-rated incentives that you should check your eligibility for – even if the zero-rating applies to your organization, you will still have to register with the relevant authorities.
The Ministry of Finance introduced VAT at the standard rate of 5% on January 1 2018. Compared to many other countries, this is still a very low rate of VAT and will be unlikely to deter either workers or businesses from the UAE.
Paid Leave and Sick Leave
Labour Law currently mandates seven paid public holidays; whether holidays that fall on weekends are allowed to be served as days off in lieu is decided by local authorities on a year-by-year basis. Paid leave is two days per month for employees who have completed at least six months of service but not one year. Once an employee has completed a year of service, they are then entitled to 30 days per annum. Employees are only allowed to carry over unused leave into the following year at the discretion of their employer, who should have a carryover policy in place to facilitate this.
In terms of sick leave, employees are entitled to 90 sick days per year (continuous or intermittent), provided they have completed three months of continuous service following the probation period. They should also provide a medical certificate confirming the illness within the first 48 hours of absence. Sick pay entitlement is 100% of salary for the first 15 days, and 50% for the following 30. Any sick leave beyond 45 days in a single year is unpaid.
Maternity leave entitlement is 60 days, with the first 45 paid at full salary rate and the last 15 at half the normal rate; mothers can take the leave before and/or after the birth, as required. There is no specific paternity leave, but there is an entitlement of five days’ paid parental leave that can be taken by either parent within the first six months of a birth.
In Summary
It’s clear that the UAE is gradually moving its business practices closer to those of the West, with measures like introducing Corporate Tax, and moving the working week to Monday-to-Friday. However, the country still retains many cultural sensitivities that are important to Islamic culture, and for any business to be successful in the UAE, it’s imperative that these are respected. This is where the partnership of a global payroll provider can be invaluable, helping you steer through the complexity, and supporting you in taking full advantage of the incentives of the free zones.
This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.