Cabinet Decision No. 85 of 2022 on the Determination of the Tax Domicile (hereinafter referred to as the “Decision”) is the newest development in the tax related legislation of UAE. The Decision will come into effect on 1 March 2023.
This overhaul is aimed at clarifying and expanding the tax residency rules for both individuals and body corporates, in view of facilitating the regime of corporate tax on profits, after its introduction in June 2023. At the outset, we maintain that individual income still falls outside the ambit of direct taxation. However, as a general rule, a tax legislation considers “residency” as a key determinant in the application of corporate tax.
The Decision does not depart from the existing practice of the Federal Tax Authority (FTA) but does provide a set of new rules for the determination of tax residency. Prior to the enactment of this Decision, the FTA issued Tax Residency Certificates that acted as evidence of tax residence in UAE. With the enactment of this Decision, the conditions for determining tax residency, especially of natural persons, have been widened.
Tax Residence in case of a Juristic or Legal Person
According to the Decision, a legal person is deemed to be a tax resident in UAE if it is established, formed or recognized in the UAE (except branches of foreign entities) or is considered as a tax resident under applicable UAE tax law.[1]
[1] Article 3, Cabinet Decision No. 85 of 2022 On the Determination of the Tax Domicile.
The second condition makes reference to the applicable tax law, including the corporate tax law that has not yet been enacted. More clarity on this condition is expected once the legislation is released.
[2] Article 4, Cabinet Decision No. 85 of 2022 On the Determination of the Tax Domicile.
In the realm of enacting this law, the UAE Ministry of Finance launched a Public Consultation Document on Corporate Tax earlier this year and states that foreign companies may be treated as residents if they are effectively managed and controlled in the UAE. As such, foreign entities may be taxed if they have a Permanent Establishment (PE) in the UAE.
The PE concept is expected to be introduced in UAE on the framework of the 2017 OECD Model Tax Convention on Income and on Capital, however there might be changes to this, proprietary to the regulatory and business landscape of UAE. For example, a PE is considered the fixed place of business (place of management and operation of the company), thorough which the activity of that company is carried out fully or partly in UAE. The definition is excepting auxiliary activities such as marketing and promotion. In the OECD Model Convention, even intermediaries that habitually represent a company in UAE, without a fixed place of business, may be considered as creating a PE. These elements are not included in the documents released by the UAE Ministry of Finance so far.
- The place of residence and the place of fiscal and personal interests are located in the UAE and they meet the conditions determined by the Minister of Finance (to be determined); or
- They are physically present in the UAE for 183 days or more in a period of 12 consecutive months; or
- They are physically present in the UAE for 90 days or more in a period of 12 consecutive months, if such persons are UAE nationals, persons holding valid residence permits in UAE or GCC nationals. They may either a permanent residence in the UAE or hold a position or exercise specified activities[3] in the UAE.
[3] Activities have been defined in the Decision as “Any activity practised on a regular, ongoing and independent basis by a Person, such as industrial, commercial, agricultural, craftsmanship, or service activities, or any excavation activities, or whatever is related to the use of tangible or intangible properties”.
The Decision thus broadens the scope of natural persons to be considered as tax resident in UAE. Previously, physical presence of 183 days was required to be considered as a tax resident. With the introduction of the Decision, a person who does not meet the 183 days’ criteria may still be considered as a tax resident. The period required for individuals having valid residence permits in UAE has been reduced considerably, to 90 days in a 12 consecutive months span.
The Decision also rules that the relevant international agreements to which the UAE is a party will take prevalence over the provisions of the Decision. This is consistent with earlier practice of the FTA on the matter. The international agreements referred to in the Decision include the OECD Model Tax Convention on Income and on Capital 2017 or other relevant instruments concluded at the bilateral or regional levels.
The Decision further provides for issuance of a Tax Domicile Certificate by the Federal Tax Authority (FTA), upon application by a person that meets the abovementioned criteria for becoming a tax resident. This process is already implemented in UAE, the FTA being the competent authority to issue tax residency certificates even in the current state of the legislation.
Way ahead
It is advisable for the corporate entities in UAE or with business in UAE to conduct assessments on their activities and on the type of income they generate in UAE. This approach has a two-fold effect: possible taxation issues or PE risks when the corporate tax law is in effect or possible benefits from double tax avoidance treaties, knowing that the UAE has an extensive network of such treaties in place.
Our team has in-depth experience on tax matters and is ready to advise on the tax residency rules in UAE. Our contact email is info@fichtelegal.com .
