Tax Procedures Guide on Tax Residency

Introduction

The Federal Tax Authority (FTA) has released Tax Procedures Guide on Tax Resident and Tax Residency Certificate (TPGTR1), which provides guidance on some theoretical and practical aspects of the tax residency rules in the UAE. At a glance, the Guide covers the following aspects:

• General tax residency rules in the UAE;
• Tax residency rules under Double Tax Agreements (DTA);
• Concept of Resident Person for UAE Corporate Income Tax (CIT) purposes; and
• Procedures to obtain tax residency certificates (TRC) both for domestic and DTA purposes.

We have included below the main takeaways from the Guide.

 

Resident Persons under the UAE CIT Law

a. General comments

As anticipated in the UAE CIT Law and additional guidance issued by the FTA, the following are considered Resident Persons for CIT purposes:

• Natural persons who conduct a Business or a Business Activity in the UAE and obtain a total turnover exceeding AED 1m in the calendar year. For this purpose, the Guide defines the concepts of Business and Business Activity, in alignment with previously issued regulations and guidance.
  In addition, the Guide reiterates that wages and salaries, personal investment income (which does not require a license) and real estate investment income (which does not require a license either) are excluded from the scope of CIT for natural persons.
• Juridical persons which (i) are established or otherwise recognized under the laws of the UAE or (ii) are established in a foreign jurisdiction but are effectively managed and controlled from the UAE.

Juridical persons who are considered Resident Persons for CIT are subject to tax on their worldwide income (i.e., derived both from the UAE and from outside). If the resident juridical person obtains income from a Permanent Establishment (PE) in a different jurisdiction, it may apply an exemption on such income for CIT purposes, where certain requirements are met. Foreign tax credits may also be available under certain circumstances.

b. Juridical persons established under the laws of the UAE

With regards to the concept of juridical persons which are established under the laws of the UAE, the Guide clarifies the following:

• UAE branches of foreign entities do not have a separate legal personality and cannot be considered Resident Persons on their own. Instead, the foreign person will be considered as a non-Resident with a PE in the UAE.
• An entity which is incorporated in a Free Zone is considered a juridical person for this purpose.
• Exempt Persons under the CIT regulations are not considered Resident Persons, unless they conduct a business which is in scope of CIT.

c. Foreign juridical persons which are effectively managed and controlled from the UAE

The Guide provides additional guidance in relation to the concept of “place of effective management and control” (POEM) for the purpose of CIT. In general terms, as anticipated in the applicable regulations and previously issued guidance, the POEM is defined as the place where “key management and commercial decisions” that are necessary for the conduct of the juridical person’s business as a whole are, in substance, made.

For the purpose of the above, the Guide further defines the concept of “key management and commercial decisions”, which includes setting the general policies (such as investment or operational policies), determining the strategic direction of the company’s operations, deciding transactions which the company can enter, appointing senior executives, granting them authority to carry out the day-to-day operations of the company and overseeing them or handling key finance matters (such as distribution of profits).

The Guide emphasizes that the above shall be determined following a substance over form approach and will be dependent on the specific circumstances of each foreign juridical person. To facilitate the process for foreign juridical persons to understand whether their POEM is located in the UAE, the Guide provides with a two-step framework, as per the below detail:

Step 1 - Identification of the person who makes the key management and commercial decisions:

Under this first step, the foreign juridical person shall identify the person who substantially makes the key management and commercial decisions, as opposed to someone who merely formalises them. This implies understanding who has legal power or authority to make the decisions and whether that person/s in fact makes those decisions (if not, then identifying who actually does).

To carry out such analysis, the Guide proposes three different tests (applicable depending on the specific case), as per the below detail:

• Board of Directors’ test: as a first step, the relevant legal documents (such as the articles of association) should be analyzed to understand to whom the power to make the key management decisions is formally attributed.
  Typically, it will be attributed to the Board of Directors. However, further analysis should be conducted to understand if the Board of Directors is effectively carrying out those decisions or if its role is simply as a final approver of decisions taken by a different person.
  For this purpose, the Guide points out several factors which can be considered, including whether the members of the Board of Directors have the technical knowledge to carry out those decisions and whether they take instructions from anyone.
• Delegation of authority test: if the person/s who are legally entitled to make those key management decisions have delegated those functions to a third party (such as board executive committees), then the functions/role of both parties would need to be analyzed in detail to reach a conclusion.
  For this purpose, the Guide sets different criteria to determine who makes the decisions, which include understanding if the appointed persons provide advice, recommendations or options relating to the key management and commercial decisions, which are merely approved or implemented by the Board of Directors or whether the Board of Directors can decide to follow or not the recommendations of the delegated party, based on their suitability for the business.

• The shareholders activity test: under circumstances where the shareholders have an increased level of action, this can also determine for them to be considered as carrying out the key management decisions. To be considered as key management decisions, decisions taken by the shareholders need to go beyond decisions related to guidance or mere influence on the normal management and policy formulation of the juridical person’s activities.

Step 2 - Determination of the place where the key management and commercial decisions are in substance made:

Once the person who exercises the key management decisions is identified, the next step is to identify the place where such decisions are being made. To determine the location, the Guide highlights as a key criterion the place where the board meetings are physically held (or the place where the individuals taking the decisions are located in case they are held virtually).

In addition, the Guide also points out that a place of effective management and control will not be created if (i) the decisions are made from the UAE on an occasional or one-off basis (i.e.,  they need to be taken from the UAE on a regular/habitual basis) and (ii) the presence of the person/s making the decisions in the UAE is a result of extraordinary/temporary circumstances, such as natural disasters, acts of war or emergency situations.

 

Tax residency under UAE domestic law

a. General comments

The tax residency criteria for UAE domestic tax purposes are set out in Article 53 of Federal Decree-Law No. 28 of 2022, and Cabinet Decision No. 85 of 2022, along with some additional guidelines with respect to natural persons, set forth in Ministerial Decision No. 27 of 2023. Natural and juridical persons who meet the criteria established in the above regulations will be considered as tax residents in the UAE and, upon request to the FTA, may obtain the relevant TRC which serves as proof of their tax residency status.

b. Juridical persons that are tax residents in the UAE

A juridical person is considered tax resident in the UAE if it is:

• Incorporated or otherwise formed or recognised in the UAE (including companies, foundations, Limited Liability Companies or Private Joint Stock Companies, regardless of whether they are established in Mainland or in Free Zones).
• Otherwise considered as a tax resident in the UAE under other tax legislation, such as the UAE CIT Law (for example, foreign entities effectively managed and controlled from the UAE).

c. Natural persons that are tax residents in the UAE

As set forth in Cabinet Decision No. 85 of 2022, natural persons will be considered tax residents for UAE domestic tax purposes in any of the following scenarios:

• If they were physically present in the UAE for 183 days or more, within the relevant 12 consecutive months. With regards to this first criterion, the Guide highlights several practical considerations for calculating the number of days spent, which include:
  • The concept of “day” and “month” refer to calendar days and months;
  • The days considered for the threshold do not need to be consecutive;
  • Physical presence refers to staying within the borders of the UAE; or
  • Days spent by a person due to exceptional circumstances which prevent the person from leaving the UAE (such as national or personal emergencies) shall not be counted towards the threshold.
• If they were physically present in the UAE for a period of 90 days or more, within the relevant 12 consecutive months, and:
  • They have the right to reside in the UAE, either because they are UAE or Gulf Cooperation Council (GCC) nationals, or because they hold a valid UAE resident permit; and
  • They have a Permanent Place of Residence in the UAE or carry on an employment or Business in the UAE.
    The Guide further elaborates on the concept of “Permanent Place of Residence” for this purpose, which includes a furnished house, apartment or room (regardless of whether it is owned or rented) provided it is available for the person continuously and on a regular basis.
    It also provides guidance on the concept of “Employment” and establishes the following requirements:
    • The natural person needs to have a contract in place with an employer which is incorporated or otherwise formed or recognised in the UAE, where the person serves the employer under its supervision in exchange of a remuneration;
    • All or substantially all of the income derived by the natural person is derived from its labour relation; and
    • It is not an engagement in a voluntary role.
  Finally, it highlights that a “Business” for the purpose of the above shall be understood as “an activity conducted regularly, on an ongoing and independent basis by any Person, such as industrial, commercial, agricultural, professional, vocational, service or excavation activities or anything related to the use of tangible or intangible properties”. The Guide also specifies that this concept shall be broadly interpreted.

• If their usual or primary place of residence and centre of financial and personal interests were in the UAE. To be considered tax resident under this criterion, both conditions need to be complied with simultaneously.
  For this purpose, “usual or primary place of residence” refers to the country where a natural person habitually or normally lives as a part of their settled routine and where they spend most of their time as compared to any other place.
  The concept of “centre of financial and personal interests” includes factors such as the place of employment, place of business, and where the financial and other investments are located and managed or family and social connections.

 

Tax residency under DTAs

In addition to the above, the Guide also provides an overview of the rules regarding tax residency under the DTAs signed by the UAE. A natural or juridical person which is considered resident for the purposes of the DTA will be eligible to obtain the relevant TRC, which will potentially entitle them to apply the provisions and benefits foreseen therein.

a. Tax residency for juridical persons

For juridical persons, the tax residency status under the DTAs will typically require an entity to (i) be liable to tax, (ii) have a legal connection (e.g., be incorporated in the relevant jurisdiction or (iii) have an economic connection (e.g., effective management).

Juridical persons can be deemed as residents in both jurisdictions, leading to dual residency – and double taxation – situations. In those cases, the DTA will foresee certain tie-breaker rules (which may vary depending on the DTA), but typically include the place of effective management or Mutual Agreement Procedure (MAP), as decisive criterion of where the juridical person should be considered resident. 

b. Tax residency for natural persons

For natural persons, the tax residency status for DTA purposes may require the person to be liable to tax, to have the relevant citizenship or nationality, to have physical presence in the relevant country, or be domiciled or resident there (or a combination thereof, depending on the specific DTA).

Natural persons can also face situations of dual residency, for which tie-breaker rules are also foreseen. These tie-breaker rules are dependent on the specific DTA, but typically consider the following factors:

• Country where the natural person has its permanent home;
• If the person has a permanent home in both countries, the place where the person has his/her “centre of vital interests”;
• If the person does not have a permanent home in either country or the “centre of vital interests” cannot be determined, then the place where the person has his/her "natural abode”; and
• If the person has his/her “natural abode” in neither or both jurisdictions, then the jurisdiction in which the person is a national. 

If the above tie-breaker rules are not sufficient to conclude on the tax residency status of a person, then the competent authorities will need to discuss and agree the natural person’s tax residency status.

 

Obtaining a TRC

A person which is resident in the UAE can obtain a TRC which serves as a proof of the condition of tax resident. A TRC can be obtained either for the purposes of the application of a DTA or for (UAE) domestic/other purposes.

As stated in the Guide and as previously anticipated in other guides/regulations, a TRC cannot be obtained for a future period (i.e., it can only be obtained either for past periods or for current periods, which can have a maximum extension of 12 months). Where the TRC is requested for a current period, the application will only be considered by the FTA in the following scenarios:

• For juridical persons, after three (3) months into the period.
• For natural persons, as soon as the criteria to be considered as tax resident is met.
• For Government Entities and Government Controlled Entities, after one day into the period.

Finally, the Guide compiles all the process and documentation required to request a TRC, both for natural and juridical persons (all anticipated and detailed in previous Guidance and legislation).

 

Conclusion

With the introduction of CIT, the tax residency status for a natural or juridical person becomes a relevant aspect to consider and analyse, as this may determine wider tax implications as a taxpayer in the UAE.

The recently issued Guide now provides natural and juridical persons with an overview of all the applicable rules and procedures regarding tax residency and obtaining a TRC, which may serve as a reference to determine their status for tax purposes in the UAE.