The businessmen in UAE need to understand the concept of tax residency in order to optimize corporate tax benefits. As per the UAE corporate tax law, taxable persons can be categorized as either resident or non-resident. This article explains tax residency rules in the UAE in detail.
What is Tax Residency?
Tax residency refers to the status of an individual or business for tax purposes within a specific jurisdiction. Being a tax resident in the UAE exempts individuals from income tax on foreign income, enabling companies to enjoy corporate tax benefits on their cross-border economic activities. Tax residency determines where an individual or business is liable to pay taxes and influences how tax treaties between countries are applied.
Tax Residency Rules in the UAE
A taxable person is a person (natural or juridical) who is subject to corporate tax under the UAE corporate tax law. According to the corporate tax law, a taxable person can either be a resident or a non-resident. The tax residency rules are different for both categories.
1. Resident Person
Tax Resident is defined as the Person who is a resident of the UAE as specified in Articles 3 and 4 of Cabinet Decision No. 85 of 2022.
A “Resident Person” includes both companies (juridical persons) and individuals (natural persons) who are tax residents in the UAE.
- Juridical Person
A company considered a Resident Person must pay Corporate Tax on its worldwide income, whether it’s earned inside or outside the UAE.
- Natural Person
An individual who is considered a Resident Person is only subject to Corporate Tax on income earned from businesses or business activities that they conduct within the UAE.
In order for the corporate tax to apply, the income from these activities must exceed AED 1,000,000 in a Gregorian calendar year.
Exemptions and Credits
- Both natural persons and juridical persons who are tax residents within the UAE receive certain exemptions for income earned outside the UAE.
- Additionally, they may get a tax credit for any taxes paid in another country on income that’s also taxed in the UAE. The purpose of this credit is to avoid being taxed twice on the same income.
2. Non-Resident Person
A “Non-Resident Person” is an individual or a business that is not considered a UAE tax resident.
- Non-residents are generally subject to Corporate Tax only on income sourced within the UAE.
- If a non-resident has a Permanent Establishment in the UAE, such as a branch office, then income related to this Permanent Establishment is also subject to UAE Corporate Tax.
- A non-resident company with a significant connection (or “nexus”) to the UAE may also be taxed on UAE-related income. This “nexus” could refer to various situations where a company has economic ties to the UAE, even if they don’t have a physical presence there.
Tax Exemptions for Dual Residents
According to the tax procedures guide issued by the Federal Tax Authority (FTA), a person is considered a dual resident if they are a tax resident in two countries or jurisdictions. In order to qualify as a tax resident, they have to meet certain criteria such as spending significant time in both countries or having homes in both jurisdictions. The applicable DTA (Double Taxation Agreement) between the two jurisdictions determines the jurisdiction that has primary taxing rights and is designed to avoid taxing the same income twice. One jurisdiction may be considered the “residence state” while the other jurisdiction may be considered the “source state”.
- The residence state is the country where the person is primarily considered a resident.
- The source state is the country where the income originates.
If both countries tax the person on the same income, the DTA allows the person to claim relief (such as a reduced tax rate or a refund) in one of the countries. This helps to avoid double taxation on the same income. In order to claim relief from double taxation, a Person is required to provide a Tax Residency Certificate (TRC) issued by a jurisdiction. For that, the Person is required to apply to the FTA for a Tax Residency Certificate.
Conclusively, it is essential for businessmen to understand the corporate tax residency rules in the UAE. Being a tax resident in UAE, provides tax residents with notable benefits including tax exemptions and easier access to global markets. Thus, it is advisable for the businesses to seek the expert services of premier Tax Consultants in UAE to meet corporate tax requirements and ensure compliance effectively. Contact us today and we shall be glad to assist you.
