With several recent amendments to the existing Tax Procedures Laws in the UAE and the issuance of several new related Cabinet Decisions, the initial steps for implementing a successful Corporate Income Tax (“CIT”) regime in the UAE are already underway. One essential latest edition is the first issuance and formalization of the Tax Residency criteria in the UAE for natural and legal persons. It is the first time the UAE has legal residence criteria on a Federal level. This is essential for issuing Tax Residence Certificates and is a significant step forward in clarity for taxpayers. It is also the first step towards implementing the UAE Corporate Income Tax regime, for which residency criteria are essential. The Free Zone and offshore companies are not excluded from being considered residents under the UAE tax residency criteria.
Clear and precise tax residency definitions and policies are critical to reducing any cross-border disputes resulting from the UAE implementing a corporate tax regime.
The United Arab Emirates (UAE) issued Cabinet Decision No. 85 of 2022, dated 2 September 2022 (Decision), laying down the criteria for being considered a tax resident for legal and natural persons. Below is a summary of the Decision:
- Conditions for a Legal Person – a legal person is considered a tax resident in the UAE in any of the following are met:
- It has been established, formed, or recognized in accordance with the laws and regulations enforced in the UAE, and which does not include a branch of a foreign legal entity,
- It is considered a tax resident under the applicable tax law in the UAE.
- It is worth noting that though this provision mentions’ tax resident’ and not where the legal person is ‘effectively managed’, as provided in the Public Consultation Document (PCD) in Paragraph 4.4, which reads, “A foreign company may be treated as a resident person if it is effectively managed and controlled in the UAE. Determining whether an entity is effectively managed and controlled in the UAE is a question of fact, but would typically look at where the directors or other decision makers of the company make the key management and commercial decisions.” It appears that the spirit of the provision of the Decision does include, within its ambit, the concept dealt with in the PCD.
- Conditions for Natural Person – an individual is considered a tax resident in the UAE if any of the following are met:
- If his primary place of residence and the center of his economic and personal relations are in the UAE or meets certain criteria and conditions that are determined/set by the Minister,
- If he has been physically present in the state for a period of (183) one hundred and eighty-three days or more, during a period of (12) twelve consecutive months,
- If he:
- Has been physically present in the state for a period of (90) ninety days or more, during a period of (12) twelve consecutive months, and
- Holds either the nationality of the UAE (or) a valid residence permit in the UAE (or) the nationality of any other GCC country, and
- Either has a permanent place of residence in the UAE or a job/business in the UAE.
- A person who is considered a tax resident may submit a request for obtaining a Tax Residency Certificate (TRC) in the prescribed form. For some time now, such a request has been submitted to the Federal Tax Authority (“FTA”) and is no longer with the Ministry of Finance.
- If any Double Tax Treaty (DTT) specifies any conditions for determining a person’s tax residency, the provisions of that DTT shall apply.
- The FTA has the authority to request the necessary information related to any person or government body in the country to implement this Decision.
The Decision is effective from 1 March 2023.