Back in March, we cautioned that individuals should not confuse between UAE;s tax residency rules and being a ‘resident person’ under corporate tax.
It is an illusion that an individual would not be subject to UAE corporate tax if he/she does not have a primary or a permanent place of residence in UAE. Or stays for less than 90 days in UAE.
Recently, the Federal Tax Authority clarified that for individuals, physical residence in the UAE - whether by virtue of citizenship or a residency visa - is not the criterion that determines whether they are ‘resident persons’ for corporate tax purposes, or whether their income is taxable.
Any person who conducts a ‘business’ or ‘business activity’ in the UAE would be considered to be a ‘resident person’, and therefore a taxable person. Although the registration obligations and tax liabilities should arise only if the total turnover thereof exceeds Dh1 million within a year. The correctness of individual’s immigration, visa status, work permit and business licensing requirements would not impact the tax implications.
Business vs ‘business activity’
It is not just conducting business in the UAE but even conducting a ‘business activity’ in the UAE could possibly trigger corporate tax liability.
‘Business’ means any activity conducted regularly, on an ongoing and independent basis by any person and in any location, such as industrial, commercial, agricultural, vocational, professional, service or excavation activities. Or any other activity related to the use of tangible or intangible properties.
‘Business activity’ means any transaction or activity, or series of transactions conducted in the course of business.
Would a tax liability trigger if only a business activity is conducted in UAE even though the main business is conducted outside UAE? Perhaps, yes.
The tax law refers to ‘conducting’ - rather than the ‘carrying on’ - a business or a business activity. The Federal Tax Authority has clarified that conducting short-term activities in the UAE could be within the scope of corporate tax.
The determinative elements include whether persons who contributed to producing/selling the services are working from UAE. Or whether the assets that contributed to the rendering of the services are located in the UAE.
The guide provides an illustration where a person conducts a business in another country as an architect. He travels to the UAE on a regular basis with a view to establishing himself as an architect here and provides architectural services.
Subject to the Dh1 million threshold, he is considered to be a ‘resident person’, i.e. conducting a business or business activity in the UAE.
Tax aspects for overseas individuals
Singers performing at concerts, sportspersons playing in local tournaments, and other celebrities should evaluate if they are conducting business activity in the UAE.
Subject to a Dh1 million turnover threshold, such individuals could be obligated to comply with corporate tax.
Double tax avoidance agreements (tax treaties) with various countries would also impact the tax obligations.
Where overseas individuals are not considered as conducting a business activity in the UAE, their UAE sourced income - i.e., state-sourced income - may be subject to withholding tax. Withholding taxes – a globally recognized mechanism – would help in checking if the recipient is conducting a business or business activity in the UAE.
The current rate of withholding tax is 0 per cent.
The guide clarifies that an individual’s activities that are not typically considered a business or a business activity would include raffle winnings or game show prizes. However, the game shows may not be equated to tournaments and competitions.
The concept is not unique, sports personalities have often commented on the tax paid on their winnings and income generated as an athlete in other countries.
Tax aspects for resident individuals
Resident individuals conducting business activities on their own such as doctors, artists, social media influencers, etc. would need to examine the tax implications thereon. Individuals such as those on Golden Visas earning an income - other than wages, investment income or personal investment income - should pay special attention.
Individuals and working professionals need to take note of their tax obligations. A timely consultation to evaluate their tax obligations will help them transition into the tax era with certainty and confidence.