In the tax landscape, we often refer to the specific resident status of a company. Why is it so? The primary reason is that businesses might have different taxation rules depending on their resident status. The point of reference is, therefore, the relevant tax laws. In the UAE, the primary corporate tax framework is provided under Federal Decree-Law No. 47 of 2022. As per the tax law, a taxable person can be either a resident, a non-resident business, or a natural person. In this blog, we will explain how tax residency status and UAE corporate tax obligations are related.
Tax Residency Status and UAE Corporate Tax Obligations
A taxable person is a legal or a natural person subject to corporate tax as per the tax law. As per UAE law, a taxable person can be either a resident or a non-resident. The point to ponder is that tax obligations will differ depending on the tax residency.
Resident Taxable Person
Article 11 of the tax law describes a resident person as follows:
- A juridical entity incorporated, established, or recognized under the relevant legislation of the state. It also includes a Free Zone entity.
- A juridical entity incorporated, established, or recognized under the applicable legislation of a foreign jurisdiction. However, it is managed and controlled in the UAE.
- A natural person conducting business in the UAE.
- Any other person determined in a Cabinet decision at the suggestion of the Minister.
Corporate Tax Responsibilities
A resident taxable person is subject to corporate tax on their taxable income earned within the state or outside, worldwide income. 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 from outside. However, it will be limited to business activities conducted in the UAE.
Non-Resident Taxable Person
A non-resident taxable person is a person or entity that does not qualify as a resident person (see conditions above). However, it also includes that either:
- Has a permanent establishment in the state under Article 14 of the tax law.
- Derives State-Sourced Income under Article 13.
- 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 determined in a Cabinet decision under Article 11 (4c) of the tax law.
Natural Person and Cabinet Decision No. (49) – 2023
For a natural, the rules are slightly different for both resident and non-resident statuses. Cabinet Decision No. 49 of 2023 specifies that a natural person can only be subject to corporate tax if they meet a specific condition. The decision specifies that businesses or business activities conducted by a resident or non-resident natural person shall be subject to corporate tax only where the total turnover derived from such businesses or business activities exceeds AED 1,000,000 (one million United Arab Emirates dirhams) within a Gregorian calendar year.
If a natural person generates income from wages, personal investment, and real estate investment, it is not subject to corporate tax. Accordingly, there is no need to register for corporate tax in this case. Furthermore, if the business activity of the natural person generates less than 1 million AED in a year, there is no need to register for corporate tax.
What’s next?
It is sometimes tricky to determine the correct tax residency status in the UAE. This is because sometimes the presence of a 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 individuals to consult an expert before moving forward. This will reduce the chances of non-compliance and, ultimately, the penalties. For smooth and streamlined assistance with your residency issues, reach us any time.
Conclusion
Tax residency status plays an important role in determining the UAE corporate tax obligations. To keep things simple, there are two main categories: resident and non-resident. Both these taxable persons have different sets of tax responsibilities. The resident person is subject to UAE corporate tax on its worldwide income. On the other hand, a non-resident taxable person is subject to corporate tax on its income attributable to permanent establishment, state-sourced income, or nexus in the state. Natural persons are also subject to corporate tax, but only if they have an income of over AED 1 million in a year. Personal income, such as salaries, personal investments, and real estate investment incomes, is not subject to corporate tax.
Creative Zone Tax & Accounting (CZTA)
Are you not sure about your current or prospective tax residency status in the UAE? Or are you not sure about your respective tax obligations per your status? We at CZTA are experts in the field of corporate taxation. Allow us to carefully assess your tax circumstances and provide the utmost services for your business. Contact us today.
