Here's whether or not an expat should pay taxes on income earned in the UAE when repatriating. Picture used for illustrative purposes only. Image Credit: Gulf News archives

Dubai: From a taxation perspective, what regulations or regulatory norms do you need to keep in mind when it comes to settling down in your home country, as you keep your salary account active in the UAE.

UAE is a tax-free country and no taxes are levied on the expatriates while in the Emirates. But when you are leaving the country in which you are employed, you are ending your tax residency, and after a grace period – which differs with each nation – you will fully become a tax-paying resident of the country you are residing in, with every rule applying to an ordinary resident applying to you as well.

“While your income still may not be taxed in the UAE, after you leave the country, depending on the country you are moving to, any income earned abroad is treated differently when you are a non-resident versus when you become a resident of that country,” said Dixit Jain, managing director at The Tax Experts DMCC.

“Suppose your global income is taxed abroad, then you may check if there is a Double Taxation Avoidance Treaty (DTAA) between the countries, if yes then you may be able to claim the credit of taxes paid in the other country while filing return in the recently moved country,” Jain added. “However, that applies only if one moves from one tax-paying country to another tax-paying country and does not apply to this situation.”

As the tax rules that apply for a returning expatriate more or less are based on similar principals, its vital one knows the specifics, so as to avoid losing any hard-earned dirhams or falling into any legal trouble. So, let’s break this down by country.

If you are moving back to India from the UAE

Returning Non-Resident Indians (NRIs) can save tax on their overseas income through their Residential Status until a period of two years after return. To understand how and why, one needs to understand a bit about Residential Statuses with respect to India.

Residential status describes the duration of the physical presence of a citizen inside Indian Territory. The Income-Tax Act defines the provision for determining the residential status of a person. The taxability of an individual is highly dependent on the residential status of that person for a particular financial year.

When you return to India as a NRI, you will be considered with the NRI status only for a limited period of time – dependent on a number of factors we discuss below – and then you will become an RNOR (Resident Not Ordinary Resident).

RNOR, which stands for ‘Resident Not Ordinary Resident’, is a category or status an NRI falls under, as per the Indian Income Tax law, if you have been a non-resident in India in 9 out of 10 years preceding that financial year, or, if you live for less than 729 days out of 7 years preceding that financial year.

Also, as per the latest amendments made and came into effect since April this year, you are an RNOR if you are not a tax-resident in any other country and your non-foreign income exceeds Rs1.5 million (Dh75,136) and your period of stay in India in the previous year ranges from 120 days to 181 days.

Then you are considered as RNOR for that particular financial year you are returning to India and the subsequent year (2 years). A Resident other than an NRI otherwise known as NOR is generally referred to as an Ordinary Resident (ROR). You can find out your residential status through the Indian government’s official Income-Tax Residential Status Calculator.

Indian government’s official Income-Tax Residential Status Calculator.

So, your NRI status after returning to India will be deemed as RNOR status for two years and then eventually when the conditions for RNOR status is not satisfied, your residential status will become a ROR (Ordinary Resident). However, taxability of an NRI and RNOR are the same.

“If you are withdrawing from overseas bank accounts, it is advisable to do these when you are an NRI or RNOR to avoid taxation in India,” Jain said. “You must know the things to do before losing your RNOR status (Two years includes the year of returning and the immediate subsequent year), as once you lose your RNOR status you will be restricted from many tax benefits.

“Over time, you will lose your RNOR status as and when you stop satisfying any one of the conditions mentioned for being an RNOR. When you move out from RNOR and become an ordinary resident then even your global income will be taxed in India.”

“When you are an Indian with an NRI status in India, you are not required to show any proof of overseas income. However, once leaving the UAE for good or on an exit visa, you are an RNOR from the day you arrive in India, you have a grace period of 2 years, after which you will have to declare it as as an income earned overseas when filing tax returns.”

In this particular situation discussed above, when you have an active bank account or overseas income abroad, with the RNOR status, you are exempted from taxes for a period of 2 years, after which you will have to declare the income when you file your income tax returns in the country.

“It is not necessary for the NRI returned and turned Resident, to obtain any permission from RBI or any other authority to retain your overseas assets, as India’s FEMA (Foreign Exchange Management Act) has granted permissions for returning NRIs to retain the overseas assets,” Jain further added.

So, to summarise, an Ordinary Resident (ROR) is liable to pay tax on his global income, while an NRI is liable to tax on the income ‘earned’ in India.

If you are moving back to Pakistan from the UAE

Taxation in Pakistan, much like in other countries, is based on an individual’s residential status instead of their nationality. Previously, a person was considered a tax resident if they stay in the country for a period of 183 days (or longer) during a tax year, which starts from July 1 and ends on June 30 the following year. However, the period was reduced to four months after the Finance Act, 2019.

That means, for the fiscal year 2019-20, an individual has to stay in a foreign country for at least eight months or so in order to claim ‘tax-free status.’ It is also important to understand that residents of Pakistan are taxed on all of their income – be it earned domestically or in another country. Meanwhile, when it comes to filing tax returns for overseas Pakistani, they are only required to file an income tax return on the income sourced from Pakistan, if any.

Non-resident Pakistanis are not obliged to show proof of their wealth either. Overseas Pakistanis can become tax filers if their Pakistan-sourced income falls below the legal tax bracket or doesn’t exist at all. If they have a valid Pakistan ID (CNIC), they can still file nil tax returns to get the benefits of a filer, like paying lower taxes on financial transactions, when investing in the real estate sector, stock exchange, mutual funds or saving schemes.

So, coming to the situation discussed above, wherein an overseas Pakistan citizen, returns to his home country. What taxation rules apply to him or her?

Any overseas-sourced salary received by a Pakistan individual shall be exempt from tax if the individual has paid foreign income tax in respect of the salary. UAE does not levy tax on expatriates in the Emirates, but after you leave the country you are no more a tax resident in the country and cannot avail that benefit.

So, any Pakistani expat after returning to his or her hometown will have to pay taxes on the whole amount, after the requisite 4 month eligibility period for residency - if the amount needs to be utilised in the home country, and will need to be declared as foreign or overseas income when filing for returns.

If you’re moving back to the US from the UAE

If you are a US citizen or permanent resident, you are obligated to file US expat taxes with the US federal government each year, whether you reside in US or the UAE. In addition to the regular income tax return, you could also be required to file an informational return on your assets held in foreign bank accounts. While the US is one of the few governments that tax the worldwide income of its citizens and permanent residents, it does have provisions to help protect from double taxation.

One provision allows you to exclude a certain amount of your income earned overseas from US tax. For tax year 2019 (filing in 2020) the exclusion amount is $105,900 (Dh388,991), and by $103,900 (Dh381,645) for your 2018 taxable income. Moreover, another federal government provision allows an additional exclusion from taxable income for certain amounts paid for household expenses that occur as a consequence of living abroad.

“So, if you are a US citizen or resident, you are required to report your worldwide income on your tax return,” Jain said. “This means that you must not only report income you receive from US sources, but you must also report income you receive from foreign sources. The UAE has tax treaties with a number of countries but not with the US. Luckily, your UAE-sourced income is taxed only via your US taxes.”

If you’re moving back to the UK from the UAE

The UK tax system operates on a worldwide basis. This means that if you are a returning British expatriate, your income and capital gains will generally be taxable in the UK, regardless of the country in which they arise.

You’re considered a UK resident for tax purposes if you spend at least 183 days in the UK each tax year, or if your only home is in the UK. You must have owned, rented or lived in it for a minimum of 91 days and spent at least 30 days there in the tax year.

If you’re deemed to be a UK resident once you move to the UK, you’ll pay UK tax on your income, whether you receive it in the UK or abroad. If you come back to the UK after living abroad, you'll usually be classed a UK resident again. This means you pay UK tax on: your UK income and gains and any foreign income and gains - although you may not have to if your permanent home ('domicile') remains outside the UK.

The concept of domicile is different to that of residence. You will generally be a UK domiciled individual if the UK was the country of origin of your father, unless you have successfully changed your domicile. You also stayed UK resident if you were abroad less than a full tax year (6 April to 5 April the following year). This means you usually pay UK tax on foreign income for the entire time you were away.

If you’re a non-resident, you’ll pay tax on your UK income but not on any foreign income. You’re considered a non-resident if you spent less than 16 days in the UK in the tax year, or fewer than 46 days if you haven’t been classed as a UK resident for the previous three tax years. You’ll also be considered non-resident if you work abroad full-time and spent fewer than 91 days in the UK. Of these 91 days, no more than 30 can be spent working.

You may have to pay tax on certain income or gains made while you were non-resident, if you return to the UK within 5 years, but this doesn’t include wages or other employment income.

Summary or key takeaways

So, although it varies with every country – as each nation abides by different norms and regulations, if you are an expat moving to India, there is an option where you can avail a grace period on income tax of up to two years, which helps you retain the benefit of not having your overseas income taxed.

However, when it comes to Pakistan, US, UK or most other nations, after you have left the country for good or have an exit visa stamped, from the time you land, up until a certain period of time – which ranges from four to six months (about 120-180 days), you are not obliged to pay taxes on the income earned overseas.

The time periods discussed above, be it two years or between four to six months, is all the time you have until your status of ‘non-resident’ changes to ‘resident’ of your home country, after which you must declare your overseas income and pay taxes on them as well.