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Until last year, the United Arab Emirates (hereinafter referred also as UAE) lacked a defined legal concept of tax residence. In the event of a disagreement, tax residence has been determined by the terms of income tax treaties concluded with foreign jurisdictions and by criteria specified by the UAE's Federal Tax Authority.
The Cabinet Resolution No.85 of 2022 (the Resolution) now establishes specific residency tests and provides a new rule that will apply from March 1st, 2023. If any of the certain requirements are satisfied, individuals and entities will be considered tax residents.
The domestic tax resident definition is aligned with internationally recognized standards and provides further clarity to individuals and legal entities in respect of their UAE tax residency position.
Tax Residence for Individuals
An Individual will be deemed as a UAE Tax Resident upon meeting the following criteria:
• Their habitual or main domicile is located in the UAE and the center of his/her financial and personal interests are in the UAE;
• He/she has been physically present in the UAE for 183 days or more in a consecutive 12-month period;
• They have been physically present in the UAE for 90 days or more in a consecutive 12-month period and are a UAE citizen, a
UAE resident, or Gulf Cooperation Council nationals with permanent residency or conducting business in the UAE.
Tax Residence for Corporations
A new definition of a legal person generally refers to: an entity established or recognized under the laws and regulations of the UAE, that has a legal personality separate from its investors, owners, and directors.
Examples of UAE juridical persons include limited liability companies, foundations, public or private joint stock companies, and other entity forms that have separate legal personalities under the applicable UAE mainland legislation or Free Zone rules.
A legal person is considered to be a Tax Resident of the UAE if:
• It was created, incorporated, or recognized in the UAE, excluding a UAE branch registered by a foreign corporation;
• It is considered tax resident under UAE tax legislation.
UAE branches of a local or international legal entity are an extension of its “parent” entity and are not regarded as different legal persons. As a result, a branch of a foreign juridical person registered in the UAE is not normally regarded as a tax resident of the UAE.
Another circumstance for recognition of tax residency in the UAE would also be the case of a corporation founded outside of the jurisdiction, which may be recognized as a UAE tax resident if it is effectively managed and controlled in the UAE.
According to the Resolution, any individual recognized to be a tax resident in the UAE may apply to the Federal Tax Authority for the issuing of a tax domicile certificate.
Consequences of the Status of Tax Residence
Being a UAE tax resident does not subject an individual to personal income tax, but it will assist those who fit the criteria in understanding their tax residence situation. For legal entities, the UAE's 9% Corporate Tax (CT) will be implemented from June 2023. In comparison to worldwide corporation tax rates, the new CT policy is still quite competitive. A 0% CT rate on taxable income up to AED 375,000 (USD 102,100) should also be of great benefit to small and medium-sized enterprises and startups.
At PHC Advisory we are constantly updated on the new regulations in the UAE. If you are interested in knowing more about our professional services, do not hesitate to contact us at info@phcadvisory.com.
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