UAE clarifies residency rules for corporate tax

Ministerial decision aims to prevent tax avoidance and double non-taxation

Federal corporate tax with a standard statutory rate of 9 per cent will come into effect for businesses whose financial year starts on or after June 1 this year. Chris Whiteoak / The National

The Ministry of Finance has offered a clarification on how non-resident persons in the UAE will be classified as it prepares to implement corporate tax from June.

Ministerial decision no 83 explains when their presence in the UAE could or could not give rise to a permanent establishment for taxation purposes.

In line with the tax regimes of most countries, the UAE’s corporate tax law taxes income depending on the classification of the taxable person, according to the ministry’s website.

He or she will be subject to corporate tax as a “resident person” on income from both domestic and foreign sources, but only in so far as such income is derived from a business or business activity conducted by the natural person in the UAE, the ministry said.

Non-resident persons will be liable to pay tax when they either have a permanent establishment in the Emirates or derive state-sourced income, the ministry added. They will be subject to corporate tax on taxable income that is attributable to their permanent establishment.

Last month, the Finance Ministry clarified the domestic definitions used to determine whether a person or a legal entity may be considered a tax resident of the UAE.

The ministry’s latest decision also specifies what constitutes a temporary and exceptional presence in the UAE.

It provides clarity on situations when a person's presence is due to unforeseen temporary exceptional circumstances, and where they have no intention of staying in the UAE once these circumstances cease, the ministry said in a statement on Friday.

The decision aims to prevent tax avoidance and double non-taxation, in alignment with global best practices, according to the statement.

The ministry also issued ministerial decision no 82 specifying that the taxable persons required to prepare and maintain audited financial statements are those that derive revenue exceeding Dh50 million ($13.6 million), and qualifying free zone persons.

“The decisions bring transparency, simplicity and clarity to the UAE’s corporate tax regime, which facilitates compliance and minimises risks of tax avoidance and double non-taxation, ensuring a fair and well-regulated tax environment for all,” said Younis Al Khoori, undersecretary of the Ministry of Finance.

Last year, the UAE introduced the federal corporate tax with a standard statutory rate of 9 per cent, which will come into effect for businesses whose financial year starts on or after June 1 this year.

In December, the country issued the federal corporate tax law, bringing the income of companies exceeding Dh375,000 into the corporate tax bracket.

The UAE corporate tax law currently exempts certain organisations, including those involved in natural resource extraction activities in the country. However, they are still subject to existing local emirate-level tax.

Other exemptions are available to organisations such as government bodies, pension or investment funds and those that contribute to the welfare of society.

Organisations that qualify for the exemption, which was decided by the UAE Cabinet, will include those that focus on activities such as philanthropy, community services and corporate social responsibility.

Existing free-zone organisations are also exempt from corporate tax because they are among the drivers of the UAE’s economic growth, the ministry said in December.

The UAE’s corporate tax regime is based on a self-assessment principle, which means businesses are required to ensure that the documents submitted to the Federal Tax Authority are correct and comply with the law.