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Direct Tax

Tax Residency in the UAE

November 08, 2022

Background

A Tax Residency Certificate (‘TRC’) is a document issued by the prescribed authority to eligible juridical and natural persons to establish their Tax Residency in the UAE.

Until 11 November 2020, a TRC was issued by the Ministry of Finance, UAE.  Thereafter, the powers to issue the same were delegated to the Federal Tax Authority (‘FTA’).

On 28 April 2022, the Ministry of Finance issued a Public Consultation Document (‘PCD’) for the introduction of a Federal Corporate Tax regime in the UAE from Financial Rears beginning on or after 1 June 2023.  Under the PCD, the scope of income taxable in the UAE is dependent upon a person’s residential status.  Further, even under the Double Tax Treaty (‘DTT’) signed between the UAE and other countries, the benefits of the DTT are available to “Residents” of a Contracting State.  Thus, with the introduction of the Corporate Tax regime in the UAE and to avail benefits under a DTT, it will be crucial for juridical and natural persons to determine their residential status and substantiate the same with a TRC.

Currently, there exists a user guide issued by the FTA which provides eligibility criteria for natural and juridical persons to obtain a TRC.  For example, for a natural person, one of the criteria under the user guide is that the applicant must have been a resident of the UAE for at least 180 days.  Similarly, for juridical persons, one of the criteria is that it must have been established for a period of at least one year.

To align the tax residency criteria with internationally applicable policies and practices, the Ministry of Finance recently published a Cabinet Resolution No. (85) of 2022 which specifies the conditions for determining the tax residency of a juridical and natural person in the UAE.

Highlights of the Cabinet Resolution:

  1. It is effective from 1 March 2023;
  2. It lays down the requirements and conditions for determining the tax residency of a juridical and natural person in the UAE;
  3. The juridical or natural person will have to apply to the FTA for a TRC; and
  4. If any International Agreement specifies any conditions for determining a person’s tax residency, then the provisions of that International Agreement shall apply. In this relation, the Minister of Finance shall issue a decision specifying the form and manner of issuing certificates for determining the tax residency for the purpose of International Agreement.

Conditions for determining the Tax Residency

A. For a Natural Person

A natural person is considered as a tax resident in the UAE if any of the following conditions are met:

  1. If his usual or principal place of residence and the centre of his financial and personal interest are in the UAE or if he meets the conditions and criteria determined by a decision from the Minister of Finance;
  2. If he has been physically present in the UAE for a period of 183 days or more, within the relevant 12 consecutive months; or
  3. If he

a. has been physically present in the UAE for a period of 90 days or more, within the relevant 12 consecutive months and is a UAE national, holding a valid Residence Permit in the UAE; or

b. holds the nationality of any other Gulf Cooperation Council country; and

c. has either a Permanent Place of Residence (i.e. the place located in the UAE and available to the natural person at all times) in the UAE, or carries on employment of business in the UAE.

B. For a Juridical Person

A juridical person is considered as a tax resident in the UAE if any of the following conditions are met:

  1. It was incorporated, formed, or recognized in accordance with the legislation in force in the UAE and that does not include the branch that is registered by a foreign juridical person in the UAE
  2. It is considered as a Tax Resident under the Tax Law in force in the UAE

Procedural aspects

  1. The eligible person may make an application to the FTA for the purpose of issuing a TRC;
  2. The application shall be submitted in accordance with the form and manner specified by the FTA;
  3. If the FTA is satisfied that the applicant meets the eligibility criteria and the application is submitted in accordance with the form and manner specified by the FTA, then the FTA may approve the application and issue the TRC;

Currently, as per the user guide, the application for TRC is to be made online along with submission of prescribed supporting documents.

Other aspects

The FTA may request all information, data, and documents relating to any Person from all government entities of the State, for the purposes of implementing the provisions of the Cabinet Decision.  All government entities of UAE are expected to fully cooperate with the FTA for the purposes of implementing the provisions of this Decision, including providing the FTA with all information, data, and documents relating to any Person as requested by the Authority.

Further, the Minister of Finance shall issue the decisions required to determine the conditions, controls and criteria for implementing any of the provisions of this Cabinet Decision.  The FTA has been conferred with the powers to issue clarifications and directives for implementing any of the provisions of this Cabinet Decision.

Our Comments

With the introduction of the UAE Corporate Tax regime from 1 June 2023, the determination of the tax residency status plays a significant role in order to determine the scope of taxable income and to be able to avail the benefits, if any, under International Agreements including DTT.  The Cabinet Resolution is issued to align the criteria for determining the tax residency of juridical and natural persons with internationally applied tax residency conditions.

While we await the Decree Law on the Corporate Tax regime, we expect that the aforesaid criteria provided in the Cabinet Resolution may eventually get subsumed in the Decree Law.

 

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