22/11/22

UNITED ARAB EMIRATES: Government legislates tax residence rules for first time.

As published on step.org/industry-news, Monday 21 November, 2022.

The United Arab Emirates (UAE) government has issued a cabinet resolution that, for the first time, sets out rules to determine when a natural or legal person is to be considered a tax resident.

Until now, the UAE has not had a domestic legal definition of tax residency. If disputes arose, tax residency has been decided by the text of income tax treaties concluded with other jurisdictions and by criteria established by the Federal Tax Authority of the UAE. For individual taxpayers, these have included the availability of an annual lease agreement, together with a minimum of 180 days of residence in the UAE. For legal persons, the criteria have included availability of audited accounts and a minimum of one year of establishment.

Now, however, Cabinet Resolution No.85 of 2022 (the Resolution) lays down explicit tests of residence. Natural persons will be deemed tax-resident if any of various conditions are met.

Individuals will be tax-resident if their usual or principal place of residence is in the UAE and the centre of their financial and personal interests are in the UAE, or if they have been physically present in the UAE for a period of 183 days or more in a consecutive 12-month period. An individual will also be considered tax-resident if they have been physically present in the UAE for a period of 90 days or more over a consecutive 12-month period and are a UAE citizen, UAE resident or Gulf Cooperation Council national either holding a permanent place of residence or carrying out business in the UAE.

A corporate entity will be considered UAE-tax-resident where it has been established, formed or recognised in the UAE, excluding a UAE branch registered by a foreign entity, or if it is considered tax resident under the applicable tax law of the UAE. The legislation to implement this second test has not yet been enacted, but a public consultation document released by the Ministry of Finance in April 2022 indicated that a company established outside the jurisdiction may still be treated as a UAE tax resident if it is effectively managed and controlled in the UAE.

The Resolution also deals with the special case where an international agreement such as a tax treaty specifies certain conditions for determining tax residency. In such cases, the Resolution provides that the international agreement shall continue to apply, so that UAE persons who are assessing their tax residence for the purposes of applying a tax treaty would need to refer to the specific criteria set forth in the treaty itself.

Persons assessing their tax residency can apply to the tax authority for a tax residency certificate, under a procedure also set out in the Resolution. Such a certificate is often a formal requirement for UAE residents wishing to claim tax relief or other benefits in another jurisdiction under the relevant tax treaty.

The resolution will enter into force on 1 March 2023.