Foreign companies and non-UAE resident individuals (collectively ‘non-residents’) might get a bit confounded by the UAE corporate tax compliance requirements.
A non-resident deriving only ‘state sourced income’ and does not have a UAE ‘permanent establishment’ is not required to register for corporate tax. But this doesn’t apply to those foreign companies having a ‘nexus’ in the UAE.
Specific situations apply to non-UAE resident individuals.
For non-residents, it is of significance to understand three prime concepts namely:
- Having a permanent establishment in the UAE.
- Deriving UAE-sourced income (‘state-sourced income’).
- • Having a 'nexus' in the UAE.
State-sourced income earned by non-residents covers:
- Income derived from a resident person - UAE companies, corporate tax-registered individuals and other specified payors.
- Income derived from another non-resident persons attributable to their UAE permanent establishment.
- Income accrued or derived from activities performed, assets located, capital invested, rights used, or services performed or benefitted from in the UAE. The category includes income from the sale of goods in the UAE, from services rendered/utilised in the UAE, from the use or right to use IPR (intellectual property rights) in the UAE, etc.
Non-residents earning state-sourced income would generally not be required to register for corporate tax.
But does the non-registration mean that non-residents’ income go untaxed? No.
Specified categories of state-sourced income would be subject to withholding taxes, which means that the UAE payor would be required to deduct taxes from the payments made to non-residents and deposit the same with the tax authorities. The current rate of withholding tax is 0 per cent.
The concept of permanent establishment is evolving with growing tax litigation in many jurisdictions. Typically, a branch, office, place of management in the UAE, presence of employees beyond a specified period in a country could create a permanent establishment in that country.
A foreign company having a permanent establishment in the UAE is required to obtain corporate tax registration. Once registered, income attributable to such a permanent establishment would be subject to corporate tax. It is important to note that any other global income of the foreign company would not come in the purview of the tax.
For non-UAE resident individuals, if the revenue from business or business activities conducted in the UAE exceeds Dh1 million, such individuals would be required to obtain corporate tax registration. Wages, investment income and real estate income should remain outside the purview of CT.
UAE nexus and real estate
Foreign companies shall have a nexus in the UAE if they earns income from any immovable property situated in the UAE. Income from immovable property shall include that derived from the ‘right in rem’ (which essentially means legal rights to a property), sale, disposal, assignment, direct use, letting, including subletting and any other form of exploitation of the immovable property.
Though income from real estate located in the UAE is also a state-sourced income that does not trigger corporate tax registration, foreign companies earning such real estate income should register under the nexus theory.
Individuals earning real estate income should generally be outside the purview of the tax.
Non-resident persons deriving business income within or from UAE must assess the tax compliance requirements. Additionally, double tax avoidance agreements– tax treaties between UAE and respective countries - would play a vital role in determining the net tax impact on such non-residents.
As much as for UAE businesses, it is important for non-residents to ask the right questions about UAE taxation.