Does meeting UAE Domestic Tax Residency criteria mean Corporate Tax Applicability?

Introduction of Corporate Income Tax (CIT) and UAE Domestic Tax Residency Criteria

With the introduction of Corporate Income Tax (CIT), set to take effect for financial years starting on or after 1 June 2023, it became necessary for the UAE to establish clear domestic tax residency criteria. On 22 February 2023, a new domestic law was issued to define what constitutes a Tax Resident in the UAE.

UAE CORPORATE LAW APPLICABILITY

The UAE enacted its Corporate Tax Law in December 2022 (Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses). This law, effective from 1 June 2023, imposes a 9% tax rate on income exceeding AED 375,000 (approx. US$102,000).

Corporate tax will apply to “resident persons” and “non-resident persons.”

• Natural Persons: These individuals will be subject to Corporate Tax as “Resident Persons” on both domestic and foreign income, but only if such income is derived from a business or business activity in the UAE.
• Non-Resident Persons: Juridical persons not classified as Resident Persons will be subject to Corporate Tax on taxable income attributable to their permanent establishment within the UAE, provided the income is derived from business or business activity in the country.

UAE NEW TAX RESIDENCY CRITERIA

The UAE has introduced new domestic tax residency criteria through Cabinet Decision No. 85 of 2022, issued on 2 September 2022. Additionally, Ministerial Decision No. 27 of 2023, released on 22 February 2023, provides further clarification on these criteria. These rules became effective from 1 March 2023.

Previously, the UAE did not impose direct taxes at the federal level, leading to the absence of formal tax residency criteria. The new Cabinet Decision outlines distinct criteria for natural persons and legal entities to determine tax residency.

Individual – Domestic Tax Residency Rule in the UAE

A natural person will be considered a ‘tax resident’ in the UAE under any of the following three scenarios:

• Scenario 1: The individual’s usual or primary place of residence and the center of their financial and personal interests are in the UAE.
• Scenario 2: The individual has been physically present in the UAE for at least 183 days in the relevant 12-month period.
• Scenario 3: The individual has been physically present in the UAE for at least 90 days in a consecutive 12-month period and is either a UAE national, a valid UAE residence permit holder, or holds the nationality of a GCC member state, provided that:
• They have a permanent place of residence in the UAE; or
• They carry on an employment or business in the UAE.

Exceptional Circumstances – Calculating Days Spent in the UAE

If a natural person extends their presence in the UAE due to exceptional circumstances, the Federal Tax Authority (FTA) will disregard these days when calculating the 183-day or 90-day threshold. Exceptional circumstances are events beyond an individual’s control, which could not have been reasonably anticipated or prevented.

What is the Centre of Financial and Personal Interests?

A person’s center of financial and personal interests is in the UAE if it is the jurisdiction where their personal and economic interests are closest or of the greatest significance. Factors to consider include:

• Place of occupation
• Family and social relations
• Cultural or other activities
• Place of business
• Location where personal property is administered
• Any other relevant facts or circumstances

What is a Permanent Place of Residence?

A permanent place of residence includes any furnished dwelling (house, apartment, room) continuously available and regularly occupied by the individual with some degree of permanency and stability. The residence does not need to be owned by the individual—it can be rented or otherwise occupied.

When is an Individual Carrying on Employment in the UAE?

An individual is considered to be carrying on employment if they are party to an employment contract with an employer incorporated, formed, or recognized in the UAE. Other employment-like arrangements may qualify, provided that all or most of the individual’s income for labor performed in the UAE is derived from a single party. However, voluntary roles are not classified as employment.

Juridical Person – Domestic Tax Residency Rule in the UAE

A juridical person is considered a Tax Resident of the UAE if:

• It is incorporated, formed, or recognized in the UAE, or
• It is otherwise considered a Tax Resident under applicable UAE legislation.

UAE branches of domestic or foreign juridical persons are extensions of their parent companies or head offices and are not considered separate juridical entities. Thus, a branch of a foreign juridical person registered in the UAE would generally not be considered a Tax Resident.

DOES MEETING UAE DOMESTIC TAX RESIDENCY CRITERIA MEAN CORPORATE TAX APPLICABILITY?

For individuals, meeting the UAE domestic tax residency criteria does not mean they will automatically be subject to Corporate Tax, as the UAE does not levy personal income tax on employment or personal income. Individuals are not required to pay tax on income derived from employment or personal investments unless specified under a cabinet decision.

However, juridical persons considered UAE Tax Residents may be liable for the new Corporate Tax introduced from 1 June 2023 under Federal Decree Law No. 47 of 2022. Foreign juridical persons will also be subject to taxation under the Corporate Tax regime only.

Double Tax Agreements (DTAs)

The UAE has signed DTAs and bilateral agreements with 137 countries. The new tax residency criteria primarily benefit individuals seeking to claim tax treaty benefits under applicable DTAs.

A Domestic Tax Residency status allows a UAE tax resident to avoid double taxation in both their home country and the UAE. However, to claim treaty benefits, individuals or legal entities must first establish their tax residency status under the relevant DTA. Once this is confirmed, they can apply for a Tax Residency Certificate (TRC) from the relevant tax authority.

HOW TO GET TRC

To obtain a Tax Residency Certificate, applicants can follow these steps:

1. Create an account on the Federal Tax Authority (FTA) website.
2. Log in and navigate to the Services tab.
3. Select Certificates from the dropdown menu.
4. Choose Request for Tax Residency Certificate.
5. Complete the application form and provide all necessary details (name, Emirates ID number, tax registration number, etc.).
6. Upload required documents such as copies of your passport, Emirates ID, tenancy contract, and utility bill.
7. Review the application for accuracy and click Submit.
8. A processing fee will be charged.
9. The FTA will review your application, and upon approval, a TRC will be issued within a few days. The certificate will be sent by email and can also be downloaded from the applicant’s FTA account.

KEY TAKEAWAY

The new UAE tax residency criteria offer greater clarity and streamline the application process for DTAs and the issuance of tax residency certificates, aligning with internationally recognized standards.