UAE: Domestic tax residency rules to benefit individuals and companies – News

Internal tax residency allows UAE tax residents to avoid double taxation in their home country and the UAE

International companies and individual advisors would benefit from domestic tax residency rules, experts say. Arun Leslie John, chief market analyst at Century Financial, gave the example of a German-registered company with a trading branch in Dubai that had a taxable income of Dh100 million for the financial year beginning June 1, 2023.

“The company is subject to 15% corporate tax on its worldwide income in Germany, including that of its branch in Dubai,” he said.

“However, under the UAE corporate tax law, companies can choose between two options for their branch profits. They can claim foreign tax credits for taxes paid in Germany, or choose to be taxed at the UAE corporate tax rate of 9%, and repatriate the profits of its affiliates to Germany without further taxation.”

If the company chooses the second option, resulting in a corporate tax of AED 9 million in the UAE, the company can repatriate AED 1 million of its branch profits back to Germany without incurring any additional tax.

According to John, since the company chooses to pay taxes in the UAE, its effective tax rate is lower than the standard German rate of 15%. As a result, it saved AED 6 million in tax compared to paying 15% corporate tax. Additionally, companies can repatriate profits from their affiliates without facing any withholding or double taxation.

Earlier this month, the Ministry of Finance (MoF) issued Ministerial Decision No. 27 of 2023 to implement certain provisions of Cabinet Decision No. 85 of 2022 regarding the determination of tax residency. The law related to this was enacted in September 2022, which stipulates that the number of days an individual will be considered as a tax resident after physical presence in the UAE, among other things.

From June 2023, a corporate tax (CT) of 9% will come into effect for mainland UAE companies. Nazar Musa, CEO of PRO Partner Group, said that given the situation, it would be beneficial for individuals and companies to tax UAE residents. “Compared to the average corporate tax for other companies around the world, a corporate tax of 9% is still quite low compared to the UK’s 25% corporate tax,” he said. “Therefore, it is still in the company’s best interest to become a UAE tax resident and obtain a TRC. This also applies to individuals who may derive income and profits from other jurisdictions.”

Musa gave the example of an advisor as an individual who could benefit from being a tax resident. “Personal advisors who earn income from another jurisdiction will choose to use the UAE as their home base in order to benefit from the zero income tax in the UAE,” he said. “It is in an individual’s best interest to become a UAE tax resident and obtain a tax residency certificate (TRC). Since personal income tax in the UAE is 0%, individuals can submit their TRC to other tax authorities to prove they are tax resident in the UAE, so The relevant income will be taxed according to their residency status in the UAE.”

According to Farhat Ali Khan, managing partner of Century Maxim International, the most important benefit of the scheme is the avoidance of double taxation. “Obtaining a Tax Residence Certificate (TRC) demonstrates transparency and demonstrates responsibility and commitment to operate legally while meeting tax obligations,” he said. “Under the scheme, people can benefit by paying taxes in only one country – both in their country of residence and in the country where the income is generated. They can also receive exemptions from certain taxes, such as personal income tax, capital gains tax and inheritance tax. In addition, TRC holders involved in import and export activities may be able to take advantage of certain tax incentives or exemptions in accordance with applicable laws and regulations.

Internal tax residency status allows UAE tax residents to avoid double taxation in their home country and the UAE. This will come into play when companies and individuals will pay a 9% corporate tax when it comes into effect in June.

The Internal Tax Residency Regulation defines a UAE tax resident as a natural or legal person. A natural person is defined as an individual who has a permanent residence in the UAE, or is employed or carries on business in the UAE. It also refers to individuals who: