Comprehensive Tax Challenges in the UAE Energy Sector (2025)
The UAE energy sector is a powerhouse. From oil to gas to refined fuels, it’s a key engine of the economy. But things are changing. Fast. The UAE is pushing hard to diversify. That means more focus on non-oil sectors—and big changes in tax policies.
If you’re planning to enter the energy market in 2025, you need to know what’s coming.
This article breaks down the biggest tax challenges facing the energy sector right now.
Not boring theory. Real issues. Real impact.
Let’s dive in.
Regulatory Framework
Tax rules in the UAE have shifted, and energy businesses need to keep up. Here’s what you need to know:
Federal Corporate Tax Regime (Effective 2023)
For the first time, mainland companies in the UAE face a federal corporate income tax.
- Rate: 9% on net profits above AED 375,000
- Who it applies to: All businesses, including energy companies, unless specifically exempted
- Free Zones: Some entities may still benefit from 0% tax, but only if they meet the conditions for a “Qualifying Free Zone Person.” Many energy-related activities may not qualify.
Implications for Energy Businesses:
- Exploration, production, refining, and trading companies now face direct taxation.
- High profits mean high tax exposure, especially for major players in oil and gas.
- Companies must maintain detailed financial records and file tax returns annually.
- Tax grouping, transfer pricing, and deductible expenses must be considered strategically.
Pro tip: Planning ahead matters—poor structuring can lead to high tax bills or penalties.
Excise Tax: Not Yet, But Maybe Soon
At present, Excise Tax is not levied on crude oil, refined fuels, or natural gas in the UAE.
But there’s a growing global trend to tax carbon-heavy products.
And the UAE is under pressure to rethink its approach.
Here’s what could happen:
- The government might introduce a carbon tax or expand the Excise Tax regime to cover certain fuels.
- This could be part of the UAE’s climate commitments and sustainability goals (especially after hosting COP28).
- It would directly impact cost structures for businesses involved in energy import, production, and sales.
If you’re planning a fuel-based business in the UAE, monitor this closely. It could hit profit margins overnight.
OECD Alignment – BEPS and Global Minimum Tax
The UAE has committed to implementing international tax standards from the OECD. Two major developments are especially important:
a. BEPS (Base Erosion and Profit Shifting)
- Designed to stop companies from shifting profits to low-tax jurisdictions.
- Energy companies with international structures must now justify economic substance in each country they operate.
- The UAE has strict Economic Substance Regulations (ESR)—and energy activities like oil & gas are considered “relevant activities.”
b. Pillar Two – Global Minimum Tax (15%)
- Starting soon, large multinational groups (with €750 million+ revenue) must pay at least 15% tax, globally.
- Even if a UAE entity pays just 9% here, the group may need to “top up” the difference elsewhere.
- This reduces the UAE’s advantage as a low-tax jurisdiction for big energy players.
What this means for you:
- Tax planning across borders is getting more complex.
- You’ll need stronger documentation, risk analysis, and legal backing.
- Local advisors with global expertise will become a must-have.
Key Challenges
The tax environment in the UAE energy sector is shifting.
Let’s break down the major challenges you need to know before stepping in.
1. Domestic Minimum Top-Up Tax (15%)
Big companies are under new pressure. If your group makes over €750 million globally, you’re affected by the OECD’s Global Minimum Tax rules.
Here’s how it works:
Even if your UAE entity pays just 9% Corporate Tax, your group might have to pay the extra 6% elsewhere. That’s the top-up.
This hits international oil and gas giants the hardest. It also complicates global tax planning—and reduces the tax benefit of being based in the UAE.
What it means for you:
If you’re part of a multinational group, your global structure needs a full tax rethink.
Note: Oil and Gas sector is primarily taxed by the relevant emirate based on slab rates issued by the emirate. CT and Top up tax does not apply to Extractive and Non-extractive businesses which are taxed at emirate level not CT Law.
2. Complex VAT Compliance
VAT sounds simple, but in the energy sector, it’s anything but.
You need to carefully manage:
- Input vs. output VAT
- Zero-rated vs. standard-rated goods
- Reverse charge mechanism for imported services or cross-border energy flows
One mistake in classification or reporting can lead to heavy penalties.
And here’s the catch:
Energy transactions often involve multiple jurisdictions, contracts, and pricing structures.
This makes VAT filing a major headache—especially for businesses new to the UAE.
3. Dual Compliance Requirements (Federal + Emirate)
Yes, the UAE has federal tax laws now. But each emirate still enforces rules differently.
This creates:
- Confusion in licensing and operational tax duties
- Delays in approvals and filings
- Gaps in enforcement — which can turn into surprise penalties
For energy companies operating across Dubai, Abu Dhabi, and Sharjah, compliance isn’t uniform.
You’ll need local advisors who understand jurisdiction-specific requirements. Not just one-size-fits-all consultants.
4. Foreign Direct Investment (FDI) Friction
The UAE wants FDI. But the new tax regime has raised concerns.
Why?
- Higher compliance costs
- Uncertainty around future tax rules
- Complex licensing and approval processes
This can scare off new investors—especially small to mid-sized energy firms that can’t afford tax teams and lawyers.
If you’re entering the market for the first time, you’ll need strong local support to navigate the system. It’s not “plug and play” anymore.
5. VAT on Petroleum Products
Here’s the simple version:
- Fuel and energy products are subject to 5% VAT in most cases.
- crude oil and natural gas are taxed at 0% VAT.
- Refined or unnatural forms of oil are taxed at 5% and mostly on an RCM basis.
But here’s the problem:
In energy-heavy sectors, 5% can kill margins—especially in retail fuel, logistics, and manufacturing.
These businesses are price sensitive. They can’t always pass the cost to customers.
Result?
Profitability drops. And that 5% starts to feel a lot heavier than it looks.
6. Pressure to Go Green — With Little Tax Support
The UAE is shifting toward clean energy. Solar, hydrogen, and hybrid solutions are gaining attention.
But here’s the challenge:
Tax incentives haven’t fully caught up.
- No clear tax breaks for renewable energy investments
- Few deductions or reliefs for hybrid models
- Licensing for new tech is still a grey area
So, if you’re running a dual model (oil + renewables), the tax system may still treat you like a traditional fossil fuel player.
7. Fuel Subsidy Phase-Out
Subsidies are going. Prices are rising.
This affects:
- Electricity generation
- Transport fleets
- Industrial heating and processing
Operational costs are increasing, and tax planning can’t do much to offset them.
Add inflation to the mix? Your margins get squeezed.
Companies now face a double hit: higher taxes and higher energy costs.
8. Cross-Border VAT Complexity (Place of Supply Rules)
Selling or buying energy across borders? Then you’re dealing with Place of Supply rules under UAE VAT law.
These rules decide where the tax applies. Sounds simple—but it’s not.
- Energy contracts often span multiple countries.
- Products may be shipped through free zones or offshore facilities.
- Misjudging the “place of supply” can trigger double taxation—or audits.
Imports and exports also come with their own complications.
You’ll need to manage:
- Customs VAT
- Reverse charge application
- Proof of export documents
Miss a step? You could lose input VAT recovery—or worse, face penalties.
9. Documentation and Record-Keeping Standards
The UAE is serious about tax audits now.
Energy companies must keep:
- Sales and purchase records
- Invoices with correct VAT/tax treatments
- Transfer pricing documentation
- Evidence of cross-border transactions
The Federal Tax Authority (FTA) can audit you for up to 5 years back. To clarify further, 5 years for VAT purposes and 7 years for CT purposes. And for Real estate, it is 15 years. The FTA requires you to maintain records accordingly.
Penalties for mistakes? They can stack up fast—thousands of dirhams for late filing, missing data, or wrong reporting.
Good records aren’t just good practice anymore. They’re your first line of defense.
10. Influence of Global Tax Policy Changes
The UAE isn’t isolated anymore. It’s reacting to changes from:
- The OECD
- The EU
- Neighboring countries in the Gulf and MENA region
With Pillar Two rules coming in, the UAE wants to stay globally competitive—but still meet international tax expectations.
What this means:
- More updates to local tax laws are coming.
- Businesses may face sudden policy shifts.
- UAE might introduce new taxes or rules to stay in line.
If you’re building a long-term energy business, you’ll need to watch the global tax landscape—not just local headlines.
11. Transfer Pricing in Related-Party Energy Transactions
Have other companies under your group? You’ll need to follow transfer pricing rules—especially in energy.
That means:
- All intra-group sales or services must follow arm’s length pricing
- You must document how prices are set, using OECD-approved methods
- Submit Local Files and Master Files if your group meets revenue thresholds
- Company by company reporting is a mandatory requirement for companies with turnover above Euro 750 million.
Energy firms often share:
- Equipment
- Infrastructure
- Management services
All of these need to be priced fairly, or the FTA could make adjustments—and raise your tax bill.
12. Tax Implications of Carbon Trading or Emissions Reporting
Carbon trading is still new in the UAE—but it’s coming fast.
If your business:
- Buys or sells carbon credits
- Uses emission offsets
- Invests in carbon reduction tech
Then you’ll need to understand the tax treatment of those credits.
- Are they deductible?
- Are they taxed as income?
- How are they reported in VAT filings?
No clear guidance yet—but it’s likely coming. The global trend is to tax pollution and reward green investments.
If you’re betting on clean energy, you need to track both carbon rules and tax effects.
13. Withholding Tax on Cross-Border Energy Services
Hire a contractor from abroad? License tech from another country?
You might owe withholding tax—even in the UAE.
While the UAE doesn’t have domestic withholding tax yet, tax treaties with other countries could trigger obligations.
You’ll need to:
- Check Double Tax Treaties for relief options
- Submit residency and tax forms on time
- Track income sourced from the UAE
If not managed right, foreign governments may demand extra taxes—and your UAE company could be liable.
This matters most in engineering, consulting, and drilling services brought in from overseas.
14. Tax Technology and Digital Filing Requirements
Manual processes won’t cut it anymore.
The FTA is pushing for:
- E-invoicing
- Digital tax return submissions
- Automated compliance tools
Energy companies with high transaction volumes need to invest in tax tech:
- ERP integration
- E-filing platforms
- VAT and CT automation systems
This is especially important for groups with complex supply chains or multiple legal entities.
Skip tech? You’ll struggle to stay compliant.
15. Municipal Taxes and Regulatory Fees
Beyond federal tax, energy companies also face local costs—depending on the emirate.
These include:
- Municipal fees on fuel sales
- Environmental levies
- Infrastructure use charges
- Sector-specific regulatory fees
These can vary widely between Abu Dhabi, Dubai, and other emirates.
If you’re operating in multiple zones, your cost structure might not be the same in each. That can affect everything—from pricing to profit forecasts.
Always factor in local taxes before launching operations.
ADEPTS & TaxAdepts Expertise
Navigating tax in the UAE energy sector isn’t easy. But you don’t have to do it alone.
ADEPTS and our platform, TaxAdepts, are built to guide energy businesses through the most complex tax landscapes.
We’re not generalists. We’re specialists—with deep focus on:
- Corporate Tax
- VAT strategy and recovery
- Transfer Pricing compliance
- Local and federal regulatory frameworks
Whether you’re launching a fuel-based operation, expanding into renewables, or managing cross-border energy flows, we help you stay compliant, profitable, and future-ready.
Here’s how we add value:
- Spot tax risks before they become costly mistakes
- Build efficient tax structures tailored to your business
- Stay ahead of OECD rules, BEPS updates, and UAE law changes
- Support your team through audits, filings, and digital reporting
At ADEPTS, we don’t just file your taxes—we optimize your position and protect your bottom line.
Conclusion
The UAE energy sector is full of opportunity—but also full of tax complexity.
With rules changing fast, from corporate tax to carbon reporting, staying compliant isn’t enough. You need to stay ahead.
From VAT challenges to global tax shifts and ESG-linked requirements, the risks are real—but so are the rewards. Smart businesses plan early. They adapt quickly. And they don’t wait for penalties to learn the rules. That’s where the right partner makes all the difference.
ADEPTS helps you cut through the noise, stay fully compliant, and build a tax strategy that works for today—and tomorrow.
FAQs:
At the moment, carbon trading in the UAE is not fully regulated from a tax perspective. However, this is expected to change soon. As the country moves toward its Net Zero 2050 goals, transactions involving carbon credits and emission offsets may be brought under the VAT system. This means companies could face new reporting obligations and possibly a 5% VAT on credit sales or purchases.
Even though it’s still early, energy firms involved in carbon offsetting or planning to enter the carbon market should start preparing now. Keep clear documentation, assess potential costs, and ensure your accounting systems are ready to handle these new asset classes. It’s not just a green move—it’s a compliance step too.
Double taxation becomes a serious risk when services are provided across borders—especially in the energy sector, where engineering, consulting, drilling, and logistics often involve foreign contractors or overseas entities.
If a UAE-based company hires services from abroad or provides services to another country, that income might get taxed in both jurisdictions—unless a Double Tax Treaty (DTT) is applied correctly. To avoid this, businesses must properly classify income, submit tax residency certificates, and file relevant forms on time.
Failure to do so can lead to withholding tax deductions abroad and corporate tax liability in the UAE. That means the same income could be taxed twice. Careful tax planning and legal coordination are essential to avoid this trap.
Yes, under the UAE’s corporate tax rules (in effect from June 2023), tax losses can be carried forward and used to offset taxable income in future years. However, there are some conditions.
The key rules include:
- Continuity of ownership: The same shareholders must continue to hold at least 50% of the company.
- Same business activity: The loss must relate to the same or a similar business that generated the profit.
- Maximum offset cap: You can use up to 75% of your taxable income in a future year to absorb losses.
This is a powerful tool, especially for capital-intensive energy projects that might report losses in early years due to setup costs or infrastructure investment. Just ensure your loss calculations are well documented and compliant with FTA guidelines.
Currently, fuel products like gasoline and diesel are not subject to excise tax in the UAE. The country has applied excise taxes to products such as tobacco, sugary drinks, and energy drinks—mainly due to public health concerns.
That said, fuel excise taxes could be on the horizon. As the UAE pushes its environmental agenda forward, especially under the Paris Agreement and national clean energy policies, the government might introduce new taxes on carbon-intensive fuels.
Such a move would align with global trends and help drive the shift toward cleaner alternatives. But it would also increase costs for fuel-dependent businesses. Energy firms should be aware of this potential change and build some flexibility into their pricing and forecasting models.
Digital tax tools have become essential for managing compliance in today’s fast-changing tax environment. For energy firms—especially those operating in multiple emirates, across borders, or in complex supply chains—manual processes just don’t cut it anymore.
With the UAE pushing for e-invoicing, real-time VAT filing, and automated reporting, digital solutions are a must. These tools:
- Automate VAT return calculations
- Flag errors before submission
- Maintain audit-ready records
- Help with reverse charge and input-output classification
- Support integration with ERP and accounting systems
They also reduce the time your team spends on manual tracking, lower the risk of fines from filing mistakes, and make audits far smoother. In short: they’re an investment that saves money, time, and stress.
