The first and foremost particular that impacts corporate tax is the resident status of a company. Therefore, it is important to understand the tax residency guidelines in the UAE. The common differentiating terms in this scenario are resident person and non-resident person. We will explain these in detail in our discussion. The question is: how does tax residency affect corporate tax obligations in the UAE? For instance, if a firm is resident as per the tax laws, how will it impact its taxation? Similarly, we will look into corporate tax responsibilities for a non-resident person. Let’s start with the understanding of the simple term taxable person; the basis of our discussion.
Tax Residency and Corporate Tax Obligations in the UAE
To understand corporate tax based on tax residency, it is necessary to understand the concept of a taxable person.
Taxable Person
A person (natural or legal) who is subject to corporate tax as per the UAE corporate tax law. In simple terms, any business or a natural person is subject to taxation in the UAE, under the UAE corporate tax laws. Moving forward, a taxable person can be a resident or a non-resident person. Therefore, CT obligations will differ for a resident taxable person and a non-resident taxable person.
Resident Person
When we say resident, we refer to the taxable person categorized as a resident person in the UAE. The tax law describes it as follows.
a) A juridical entity incorporated, established, or recognized under the relevant legislation of the state. It includes a Free Zone entity.
b) A juridical entity incorporated, established, or recognized under the applicable legislation of a foreign jurisdiction. However, it is managed and controlled in the UAE.
c) A natural person conducting business in the UAE.
d) Any other person determined in a Cabinet decision at the suggestion of the Minister.
Corporate Tax Responsibilities
A resident person is subject to corporate tax on their taxable income earned within the state or outside. However, it will be applicable as per the provisions of the tax law. On the other hand, for a natural person, taxable income will include income obtained within the UAE or outside. However, it will be limited to business conducted in the UAE.
Non-Resident Person
A non-resident person, in simple words, is a person or entity that does qualify as a resident person (see above). However, it includes any of the following persons:
a) Has a permanent establishment in the state as under Article 14 of the tax law.
b) Derives State-Sourced Income under Article 13.
c) Has a nexus in the state as specified in a Cabinet Decision at the suggestion of the Minister.
Corporate Tax Responsibilities
A non-resident person is subject to corporate tax on the taxable income attributable to their permanent establishment in the UAE. Furthermore, they are also subject to their state-sourced income. However, it only includes the income that is not attributable to their permanent establishment in the state. It also includes the taxable income attributable to the nexus of the non-resident person in the UAE. This will be as determined in a Cabinet decision under Article 11 (4c) of the tax law.
How to Determine the Resident Status Correctly?
Moving forward, how would you determine the resident status of your business? This is important for knowing your corporate tax obligations correctly and, therefore, being compliant with the UAE’s tax laws. However, it can sometimes be tricky to determine the correct tax status. This is because sometimes the presence of physical location does not necessitate that a firm is a resident person. Furthermore, the presence or absence of any factor can create confusion in determining the correct status. Therefore, it is ideal for businesses and natural persons to consult an expert before moving forward. This will reduce the chances of non-compliance and ultimately the penalties. For smooth and streamlined assistance, you can reach us.
Conclusion
It might be awkward to think that tax residency affects corporate tax obligations in the UAE. Yes, depending on whether the entity is a resident person or a non-resident person, the taxation obligations might differ. For instance, for a business that is a resident person, corporate tax is applicable on the worldwide income. However, for a non-resident person, corporate tax is applicable on the permanent establishment, state-sourced income (not attributable to the permanent establishment), and nexus of the non-resident person in the state. For proper taxation and understanding, it is important to determine the correct resident status as per the UAE laws.
Creative Zone Tax & Accounting (CZTA)
Are you confused about tax residency and respective corporate tax obligations in the UAE? We are at ease to assist you with your business. As keeping your business compliant is your top priority, therefore, we know how to keep your corporation in line with the UAE laws. Contact us today.
