By Alia Noor, FCMA, CIMA, MBA, Oxford fintech programme, GCC VAT Comp Dip,COSO Framework.
Associate Partner Ahmad Alagbari Chartered Accountants, UAE
With the introduction of Corporate Income Tax (CIT), which will enter into effect for financial years starting on or after 1 June 2023, it was necessary for the UAE to establish clear domestic tax residency criteria. The new domestic law was issued on 22 February 2023, which provides a clear definition of 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). The Corporate Tax Law applies with effect from 1 June 2023. A 9% tax rate will apply on income exceeding AED 375,000 (approx. US$102k).
Corporate tax would be imposed on taxable persons comprising ‘resident persons’ and ‘non-resident persons’.
Natural persons will be subject to Corporate Tax as a “Resident Person” on income from both domestic and foreign sources, but only insofar as such income is derived from a Business or Business Activity conducted by the natural person in the UAE.
Non-Resident Persons are juridical persons who are not Resident Persons and will be subject to Corporate Tax on Taxable Income that is attributable to their Permanent Establishment insofar as such income is derived from a Business or Business Activity conducted in the UAE.
UAE NEW TAX RESIDENCY CRITERIA
The UAE has recently introduced new domestic tax residency criteria through Cabinet Decision No. (85) of 2022, issued by the Cabinet of Ministers on 2 September 2022. On 22 February 2023, the UAE Ministry of Finance issued Ministerial Decision No. (27) of 2023 to provide further clarification on the conditions and requirements for determining tax residency, as stipulated in the Cabinet Decision. These new rules became effective on 1 March 2023.
Until recently, the UAE did not impose any direct taxes at a federal level, such as corporate or personal income tax. As a result, there were no formal tax residency criteria in place.
The Cabinet Decision specifies tax residency criteria for both natural persons and legal persons. The criteria used to determine tax residency for natural persons or individuals are distinct from those used to determine the tax residency of a legal entity.
Individual -Domestic Tax Residency Rule in the UAE
Under the tax residency rules that became effective March 1, 2023. A natural person shall be considered a ‘tax resident’ in the UAE under any of the following three scenarios:
Scenario -1: The individual’s usual/primary place of residence and the individual’s centre of financial and personal interests are in the UAE;
Scenario -2: The individual has been physically present in the UAE for a period of 183 days or more in the relevant 12 months; and
Scenario -3: An individual was physically present in the UAE for a period of 90 days or more in a consecutive 12-month period and the individual is a UAE national, holds a valid residence permit in the UAE or holds the nationality of any GCC Member State, where:
(i) he or she has a permanent place of residence in the UAE; or
(ii) he or she carries on an employment or a business in the UAE.
Exceptional Circumstances Calculating Days spent in the UAE
- If the natural person extends his presence in the UAE due to any exceptional circumstances, that day will be disregarded by the Federal Tax Authority (FTA) in determining whether the person has met the 183-day or 90-day threshold.
- An exceptional circumstance is an event or situation outside of the individual’s control, which could not have reasonably been anticipated or prevented and which stops the individual from leaving the UAE when they originally planned.
What includes in Centre of Financial and Personal Interests?
A natural person’s centre of financial and personal interests is in the UAE if the UAE is the jurisdiction where the person’s personal and economic interests are the closest or of the greatest significance to the natural person. The Ministerial decision mentions several factors to take into account while determining the natural person’s centre of financial and personal interests. It includes:
- The place of the natural person’s occupation
- Family and social relations
- Cultural or other activities
- Place of business
- The place from which the property of the natural person is administered
- Any other relevant facts and circumstances
What is a Permanent Place of Residence ?
- A Permanent Place of Residence is a furnished house, apartment, room or other form of dwelling place
- The residence must be continuously available to the individual and occupied by them on a regular basis with some degree of permanency and stability.
- The individual does not need to own the residence – it can be rented or otherwise occupied by them.
When is an individual carrying on an employment in the UAE?
- An individual is carrying out an employment if they are party to an employment contract with an employer, which is incorporated or otherwise formed or recognised in the UAE.
- Certain other employment-like arrangements will also qualify, provided all or substantially all of the individual’s income for their labour carried out in the UAE is derived from one party
- The employment can be limited or unlimited and the work may be carried out on a full time or part time basis. Voluntary roles will not be classed as employment.
Juridical Person-Domestic Tax Residency Rule in the UAE
A juridical person is considered to be a Tax Resident of the UAE if:
a. it is incorporated or otherwise formed or recognised in the UAE; or
b. it is otherwise considered a Tax Resident of the UAE under the applicable legislation in the UAE.
UAE branches of a domestic or a foreign juridical person are an extension of their “parent” or “head office” and are not considered separate juridical persons. A branch of a foreign juridical person registered in the UAE would therefore generally not be considered a Tax Resident of the UAE
DOES MEETING UAE DOMESTIC TAX RESIDENCY CRITERIA MEAN CORPORATE TAX APPLICABILITY?
Not for Individuals, the UAE does not levy any personal income tax on the employment or other personal income of individuals. As such, where an individual meets the above criteria to be considered a UAE Tax Resident, they would generally not be subject to taxation in the UAE on their personal income.
The UAE does not impose personal income tax on individuals, meaning that they are not liable to pay tax on their income from employment or personal investments.
However individuals specified by any cabinet decision may fall under corporate tax.
Juridical persons falling under the ambit of UAE Tax Residency may be liable to the new Corporate Tax to be introduced from June 1, 2023 onwards, i.e., under Federal Decree Law No. 47 of 2022 on the Taxation of Corporations and Businesses. A foreign juridical person will also be liable to pay tax but under the Corporate Tax regime only.
Double Tax Agreements (DTAs)
The UAE has double taxation treaties (DTAs) and bilateral agreements with 137 countries. The new tax residency criteria will primarily benefit individuals seeking to claim tax treaty benefits under applicable double tax agreements .
The Domestic Tax Residency allows a UAE tax resident to be exempted from paying double taxation in their home country as well as the UAE.
However, in order to claim treaty benefits, an individual or legal entity must first establish their tax residency status in accordance with the rules set out in the respective DTA. Once tax residency under a DTA has been established, the individual or entity can then apply for a tax residency certificate from the relevant tax authority on the basis of domestic tax residency criteria.
A Tax residency certificate serves as proof of their tax residency status and can be used to claim the benefits of the DTA in other countries.
HOW TO GET TRC
Applicants can follow this process to obtain a certificate:
- Create an account on the Federal Tax Authority (FTA) website.
- After logging in, click on the ‘Services’ tab.
- Click on ‘Certificates’ in the drop-down menu.
- Click on ‘Request for Tax Residency Certificate’.
- This will open up an application form. Fill in all details such as name, Emirates ID number, tax registration number, contact details, etc.
- Upload all required documents like copies of passport, Emirates ID, tenancy contract, and utility bill, to name a few.
- It is crucial to review all the details in the application are accurate and up to date before submitting.
- After clicking on ‘Submit’, the user will be directed to a payment gateway. A processing fee will be charged.
- Upon receiving your application, the FTA will review it thoroughly. If they grant an approval, the individual will be issued a TRC within a few days.
- This certificate will be sent by email but will also be available for download in the individual’s FTA account.
The cost is Dh50 for submission, Dh500 for all tax registrants, Dh1,000 for non-tax registrant natural persons and Dh1,750 for non-tax registrant legal persons.
The introduction of the new UAE tax residency criteria provides additional clarity, and will streamline the application of DTAs and the issuance of tax residency certificates and is aligned to internationally recognised standards.
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