UAE announces new tax residency criteria
The UAE has recently introduced new domestic tax residency criteria through Cabinet Decision No. (85) of 2022, issued by the Cabinet of Ministers on 2 September 2022. On 22 February 2023, the UAE Ministry of Finance issued Ministerial Decision No. (27) of 2023 to provide further clarification on the conditions and requirements for determining tax residency, as stipulated in the Cabinet Decision. These new rules became effective on 1 March 2023.
Until recently, the UAE did not impose any direct taxes at a federal level, such as corporate or personal income tax. As a result, there were no formal tax residency criteria in place1. However, with the introduction of Corporate Income Tax (CIT), which will enter into effect for financial years starting on or after 1 June 2023, it has become necessary for the UAE to establish clear domestic tax residency criteria.
The Cabinet Decision specifies tax residency criteria for both natural persons and legal persons. The criteria used to determine tax residency for natural persons or individuals are distinct from those used to determine the tax residency of a legal entity.
Individuals
There are three situations where a natural person will be considered a UAE tax resident:
- Situation 1: the individual has their habitual or primary place of residence and their centre of financial and personal interests in the UAE; or
- Situation 2: the individual was physically present in the UAE for a period of 183 days or more during a consecutive 12-month period; or
- Situation 3: the individual was physically present in the UAE for a period of 90 days or more in a consecutive 12-month period; and
- the individual is a UAE national; or
- the individual is a GCC national; or
- The individual holds a valid residence permit in the UAE, where:
- the person has a permanent place of residence in the UAE; or
- the person carries on an employment or a business in the UAE.
As mentioned, the UAE does not impose personal income tax on individuals, meaning that they are not liable to pay tax on their income from employment or personal investments. The new tax residency criteria will primarily benefit individuals seeking to claim tax treaty benefits under applicable double tax agreements (DTAs), see below.
It's worth noting that self-employed individuals, such as freelancers, may be subject to tax under the new CIT regime if their activity falls under a taxable business or business activity as specified by Cabinet Decision (yet to be issued).
Legal Persons
A legal person will be considered a UAE tax resident in either of the following cases:
- The legal person is incorporated, formed or recognised in accordance with the applicable legislation in the UAE; or
- The legal person is otherwise considered a tax resident of the UAE in accordance with the applicable tax legislation in the UAE.
Under the CIT law2, a legal entity is considered a UAE tax resident, if it is incorporated or otherwise established or recognised under the applicable legislation of the State, or if it is effectively managed and controlled in the UAE.
The Cabinet Decision also clarifies that a branch of a foreign legal entity will not be considered a tax resident in the UAE. This is mainly because a branch is not a legal entity separate from its parent company, and it is not considered to be a distinct taxpayer. It is however possible that a foreign legal entity is considered a UAE tax resident, where the entity is effectively managed and controlled from the UAE branch.
Double Tax Agreements
DTAs are bilateral agreements between two countries that are designed to prevent double taxation of income and to promote cross-border trade and investment. These agreements typically provide rules for determining the tax residency of individuals and entities, as well as rules for the allocation of taxing rights on certain types of income between the two countries. In this respect, it is worth noting that the UAE has signed DTAs with over 130 other jurisdictions.
The new tax residency criteria are important for persons who seek to claim tax treaty benefits under DTAs entered into by the UAE. However, in order to claim treaty benefits, an individual or legal entity must first establish their tax residency status in accordance with the rules set out in the respective DTA. Once tax residency under a DTA has been established, the individual or entity can then apply for a tax residency certificate from the relevant tax authority on the basis of domestic tax residency criteria. This certificate serves as proof of their tax residency status and can be used to claim the benefits of the DTA in the other country.
Several DTAs which the UAE has signed with other jurisdictions refer to the UAE's domestic laws to determine whether a person is a resident of the UAE for the respective DTA’s purposes. The introduction of the new domestic tax residency criteria provides additional clarity, and will streamline the application of DTAs and the issuance of tax residency certificates by the UAE in relation to specific DTAs.
Key takeaway
The introduction of the new UAE tax residency criteria provides additional clarity, and will streamline the application of DTAs and the issuance of tax residency certificates.
1It should be noted that the UAE has previously applied UAE tax residency criteria for Common Reporting Standard (CRS) purposes.
2Article 11, clause 3 of Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses
