Do not mix new UAE tax residency rules with that of corporate tax

By now you must have heard or read of the UAE’s Corporate Tax laws and Tax Residency Rules (TRR) . Both use an important expression – resident - for tax purposes, but for two different contexts.

The two should not be mixed as it could lead to a grave misunderstanding of the tax’s impact, especially on individuals. Let’s understand the tax residency rules, its impact on you and how it differentiates from corporate tax laws.

Individual’s tax residency

Under the tax residency rules that became effective March 1, 2023, a natural person shall be considered a ‘tax resident’ in the UAE under any of the following three scenarios:

• The individual’s usual/primary place of residence and the individual’s centre of financial and personal interests are in the UAE;

• The individual has been physically present in the UAE for a period of 183 days or more in the relevant 12 months; and

• An individual has been physically present in the UAE for 90 days or more (in the relevant 12-month year); (ii) the individual is a UAE National, a UAE resident or a GCC national and (iii) the individual has a permanent place of residence in the UAE or carries on employment/business in the UAE.

A ministerial decision was released clarifying these conditions and criteria of tax residency. While first clause refers to the primary place of residence, the third refers to the permanent place of residence. A person’s financial and personal interests will be in the UAE if the person’s interests that are the closest or of the greatest significance to the individual are in the UAE.

Corporate tax on Individuals

Corporate tax would be imposed on taxable persons comprising of ‘resident persons’ and ‘non-resident persons’. An individual conducting any of the specified businesses will be treated as a ‘resident person’. The profits from such businesses would be subject to CT.

Even a foreign individual will be taxable as a ‘resident person’ insofar as he/she is engaged in a business in the UAE.

The Ministry of Finance (MoF) is expected to soon specify the categories of businesses for which individuals would be covered under CT. The specified businesses could be carried on by the individual directly (e.g., freelancers or as such), through a sole proprietorship or a civil company.

Dispelling the illusion

As the CT laws specifies the individuals would be taxable as a ‘resident person’, the tax residency rules are being incorrectly read into the corporate tax laws. As a result, an illusion is being created that an individual can avoid CT by ensuring that he/she does not get covered under the tax residency rules while conducting business in the UAE.

For example, if an individual doing business in the UAE ensures that he/she stays in the UAE for less than 90 days, then the corporate tax could be avoided. Or, an individual should not have a primary or a permanent place of residence in the UAE. Such illusions are incorrect.

Is individual’s global income taxable?

Another concern amongst individuals is the impact on their global income if they become UAE tax resident. For example, if an individual stays for more than 183 days in the UAE (i.e., become a ‘tax resident’ as per the tax residency rules), will his/her global income be taxable in the UAE?

It has been clarified that the taxable income of an individual conducting a business in the UAE would include income earned from outside the UAE insofar as it relates to the business activity conducted in the UAE. It is inferred that an individual’s global income, independent of his/her UAE business, should not be taxable in the UAE even if the individual is a tax resident in the country.

Interplay of residency rules and corporate tax

The tax residency rules have no direct bearing on being treated as a ‘resident person’ for corporate tax laws. These are aimed to determine an individual’s status for the purpose of double tax avoidance agreements between UAE and other countries. Just because an individual is tax residence in the UAE as per the residency rules does not make him/her covered under the UAE CT or vice versa.

Individuals & businesses should ensure to make it matter by getting a detailed and comprehensive understanding of the tax laws.