We often ask, “What is the resident status of a business?” How is it related to a firm? One significant aspect of this relationship is taxation. This is because taxes are usually applicable based on the resident status of a business. For instance, UAE corporate tax law distinguishes taxable persons as either resident or non-resident. In this blog, we elaborate on the tax residency rules in the UAE. This is crucial for businesses operating in the UAE, whether they have a physical presence or use other business models. We begin by explaining some basic terms necessary to understand the concept.
Tax Residency Rules in the UAE
A taxable person is an individual (natural or juridical) who is subject to corporate tax under the UAE corporate tax law. Article 11 of the tax law states that a taxable person can either be a resident or a non-resident. The taxation rules differ for both categories.
Corporate Tax Rates in the UAE
Corporate tax in the UAE is applied at a standard rate of 9% on taxable income exceeding AED 375,000. Income below this threshold is taxed at 0%. This applies to both resident and non-resident entities, depending on their tax residency status and income sources.
Exemptions from Corporate Tax
Certain types of income and entities may be exempt from corporate tax under the UAE tax law. These exemptions include:
- Government Entities: Entities that are part of the government and carry out sovereign activities are exempt from corporate tax.
- Qualifying Free Zone Entities: Businesses operating in free zones may benefit from 0% corporate tax on qualifying income, provided they meet specific requirements outlined by the FTA. However, these entities must still comply with corporate tax filing requirements.
- Public Benefit Entities: Certain non-profit organizations, such as those serving the public benefit (e.g., charities and community service entities), can also be exempt from corporate tax.
- Natural Resource Extraction: Businesses involved in the extraction of natural resources (such as oil and gas) are generally exempt from corporate tax, but these activities may still be subject to Emirate-level taxation.
For more specific exemptions, further guidance can be found in the Cabinet Decision related to corporate tax exemptions.
Resident Person
A resident person can be any of the following:
a) A juridical person incorporated, established, or recognized under the applicable legislation of the UAE. This also includes a Free Zone person. In general terms, a juridical person refers to a legal entity.
b) A juridical person incorporated, established, or recognized under the applicable legislation of a foreign jurisdiction but is effectively managed and controlled in the UAE.
c) A natural person conducting business or business activities in the UAE.
d) Any other person as defined by Cabinet Decision, based on the recommendation of the Minister.
A resident person is subject to corporate tax based on the following:
- A resident person is taxed on their taxable income earned within or outside the UAE, according to the provisions of the tax law.
- For a natural person, taxable income includes income obtained within or outside the UAE but is limited to the business or business activities conducted by the individual in the UAE. This is in accordance with Clause 6 of Article 11 of the tax law.
Non-Resident Person
A non-resident person is an individual who does not meet the resident criteria above or who has either:
a) A permanent establishment in the UAE, as per Article 14 of the tax law.
b) State-sourced income, as defined in Article 13 of the tax law.
c) A nexus in the UAE, as outlined in a Cabinet Decision, based on the recommendation of the Minister.
A non-resident person is subject to corporate tax on the following types of income:
a) Taxable income attributable to the permanent establishment in the UAE.
b) State-sourced income attributable to the permanent establishment of the non-resident person in the UAE.
c) Taxable income attributable to the nexus of the non-resident person in the UAE, as specified by the Cabinet Decision.
State-Sourced Income
Understanding state-sourced income is especially important for non-residents. According to Article 13 of the CT law, state-sourced income can be any of the following:
a) Income derived from a resident person.
b) Income derived from a non-resident person, where the income received is connected with or attributable to the non-resident’s permanent establishment in the UAE.
c) Income accrued or derived from activities performed, assets located, capital invested, rights used, or services provided or benefitted from within the UAE.
For instance, income from the sale of goods within the UAE is considered state-sourced income.
Permanent Establishment
It is essential to understand the concept of a permanent establishment (PE) for the taxation of non-residents. A non-resident person is considered to have a permanent establishment in the UAE in any of the following cases:
a) The business of the non-resident person, or part of it, is conducted through a fixed or permanent place in the UAE.
b) A person has and habitually exercises the authority to conduct business or business activities in the UAE on behalf of the non-resident person.
c) Any other form of nexus in the UAE, as specified by a decision issued by the Cabinet, based on the recommendation of the Minister.
For example, a fixed or permanent place in the UAE may include a branch or an office.
Conclusion
With the introduction of corporate tax, it is crucial for businesses to understand the tax residency rules in the UAE. A taxable person is subject to corporate tax at rates determined under the law, but the rules vary based on whether the person is a resident or non-resident. A resident person is subject to corporate tax on income earned within or outside the UAE, according to the provisions of the tax law. A non-resident person, on the other hand, is taxed on income that is state-sourced or attributable to a permanent establishment or nexus in the UAE.
It is also important to note that businesses can benefit from various tax exemptions, depending on their activities and status, as outlined by the FTA and Cabinet Decisions.
Creative Zone Tax & Accounting (CZTA)
At CZTA, we strive to provide high-quality services in accounting, taxation, and auditing. Our team understands the complexities of business operations in the UAE and is well-versed in tax residency rules and exemptions. If you are unsure or confused about anything related to your business, feel free to contact us. Reach out today.
