Do not mix new UAE tax residency rules with corporate tax

By now, you must have heard or read about the corporate tax laws and the Tax Residency Rules (TRR) in the UAE. Both use an important expression – resident – for tax purposes, but in two different contexts.

The two should not be confused as this could lead to serious misunderstandings of the tax implications, especially on individuals. Let’s learn about the tax residency rule, how it affects you and how it differs from corporate tax law.

According to the tax residency rules which came into effect on March 1, 2023, a natural person shall be considered a “tax resident” in the UAE in the following three situations:

• The individual’s habitual/principal residence and the individual’s center of financial and personal interests is in the UAE;

• The individual was physically present in the UAE for 183 days or more within the relevant 12-month period; and

• The individual has been physically present in the UAE for 90 days or more (within the relevant 12 months); (ii) the individual is a UAE national, UAE resident or GCC national, and (iii) the individual has a permanent Residence or work/business in the UAE.

A ministerial decision was issued setting out these conditions and the criteria for tax residency. The first refers to the principal residence, and the third refers to the permanent residence. A person’s financial and personal interests will be in the UAE if the closest or most important interests to the individual are in the UAE.

Corporate tax will be levied on taxpayers consisting of “resident” and “non-resident”. An individual who is engaged in any particular business will be considered a “resident”. Profits from such businesses will be subject to CT.

Even a foreign individual will be taxed as a “resident” as long as he/she conducts business in the UAE.

The Ministry of Finance (MoF) is expected to soon specify the categories of personal business covered by CT. Designated businesses may be directly run by individuals (eg, freelancers, etc.) through sole proprietorships or private companies.

The tax residency rule has been misinterpreted as corporate tax law because CT law states that individuals will be taxed as “resident persons.” Hence, an illusion is created that an individual can avoid CT by ensuring that he/she is not covered by the tax residency rules while conducting business in the UAE.

For example, corporate tax can be avoided if an individual doing business in the UAE ensures that his/her stay in the UAE is less than 90 days. Alternatively, the individual should not have a principal or permanent residence in the UAE. This fantasy is not true.

Another concern for individuals is the impact on their worldwide income if they become UAE tax residents. For example, if an individual stays in the UAE for more than 183 days (i.e. becomes a “tax resident” under the tax residency rules), will his/her worldwide income be taxed in the UAE?

It has been clarified that the taxable income of individuals carrying on business in the UAE will include income earned outside the UAE in connection with business activities carried out in the UAE. It is presumed that an individual’s worldwide income, independent of his/her UAE business, should not be taxed in the UAE, even if the individual is a tax resident of the country.

Tax residency rules are not directly related to the treatment of “resident persons” under corporate tax law. These are designed to identify individuals to comply with double tax avoidance agreements between the UAE and other countries. Just because a person is a tax resident in the UAE under the residency rules, it does not mean that he/she is covered by UAE CT and vice versa.

Individuals and businesses should make sure to make it count by having a detailed and comprehensive understanding of tax laws.