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Investment for Expats in the United Arab Emirates

Submitted: December 2013

In the UAE, expats should just be concerned with beating inflation to preserve the value of their savings, but this is already a hard task. The good news is that UAE-resident savers need not worry about the taxman.

Inflation is actually a personal matter, as you must determine for yourself which inflation you want to beat. If you are a long-term immigrant, you are likely to be concerned with inflation in the UAE. If you eventually plan to return to your home country, you might prefer beating the inflation rate of that country.

Remember that you invest for a purpose, and that this purpose is specific to you. If the purpose of your savings and investments is 100% outside the UAE but you keep in any AED-denominated investments, you are effectively making a currency bet. It is worth noting that the Emirati Dirham is pegged to the US dollar, which means you have little FX exposure if you come from:

  • the United States
  • a dollarized economy, such as Panama or Ecuador, or
  • another country whose currency is pegged to the US dollar, such as Saudi Arabia.

Inflation in the UAE

Over the past few years, UAE inflation has been below 2%. However, the inflation rate was persistently above that level prior to the 2008 downturn. At the 2008 peak, it was at a record high of 13%.

As a result of the US dollar peg, the central bank of the UAE does not target any specific inflation rate. Consequently, one can reasonably further expect inflation volatility down the line. For more information on monetary policy, see Foreign Exchange for Expats in the UAE.

Interest rates

You should expect interest rates on UAE savings accounts to be broadly in line with those seen in the US, at least for now.

Easy-access savings accounts or term deposits generally have a very low yield, but the rates may vary strongly from one bank to another (from 0.5 to 1.3%). This is still well below inflation. In other words, the real value of your savings is doomed to erode if you rely solely on savings accounts.

Islamic finance

If you are keen on Sharia-compliant financial products, the UAE is a good place to find what you’re looking for. Most UAE financial institutions have Islamic finance products. As always, it is advisable to enquire about what’s really behind the financial product, namely:

  • the underlying risk, and
  • how ethical the investment really is

Overseas investments

It’s best for an expat to invest outside the UAE for now. A UAE bank would probably have many investment products on offer, but they are unlikely to derive their value from the UAE market. So if your investment income is in fact derived from overseas, you should consider actually investing in your home country or in the world’s biggest financial centres, such as the US, Canada, the Eurozone, the UK, Singapore, Hong Kong, Australia or Japan. As the Emirati Dinar is pegged to the US dollar, you are unlikely to have much currency risk on US investments, such as S&P500/NASDAQ shares, US bonds, offshore savings accounts, etc.

It might be tempting to consider that investing in the US is completely like investing in the UAE. It’s wrong. Apart from the regulatory differences, US investments still carry one major risk: you know that the exchange rate won’t change, but you’ve got no guarantee that US and UAE interest rates will match in the future. At the moment, the UAE central bank usually refrains from departing from the rates set by the US Federal Reserve, but this can change in the future, for example if the US dollar peg causes too much macroeconomic instability in the UAE.

If you wish to invest in overseas assets, there are a few points you need to check:

  • Financial transactions taxes
  • Any extra regulatory burden that may be imposed on international clients, such as anti-money laundering checks
  • Money transfer fees, e.g. for international wire transfers between the US and the UAE
  • Inheritance tax considerations
  • Asset liquidity
  • Broker’s fees (pricing structures may vary greatly from one jurisdiction to another)
  • Foreign withholding or income taxes
  • Yields available on foreign investments
  • Foreign currency exposure.

Retaining overseas assets might be helpful if you plan to return to your home country. That should spare you the money transfer hassle.

For more information on offshore investments, see our section on alternative investments.

Taxation

The first thing to check is your residence status for tax purposes. See TAXATION – Overview of Tax Issues for Expats in the UAE.

If you are resident in the UAE, investment income is not taxed at all, unless:

  • You are a US citizen or green card holder (you have to pay US tax), or
  • You are also resident in a country with which the UAE does not have a tax treaty (you must pay tax in that country).

For more information on investment taxation, see TAXATION – Investment Taxation for Expats in the UAE.

 

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