Federal Tax Authority publishes corporate tax guide for non-resident taxpayers

Background

The United Arab Emirates (UAE) have introduced Corporate Income Tax (CIT) for financial years starting on or after 1 June 2023. The federal CIT regime will apply to both resident persons and non-resident persons.

Resident persons include the following two categories:

• Natural persons that conduct a business or business activity in the UAE; and
• Juridical persons that are either (i) incorporated, established, recognised or registered under the laws of the UAE, including Free Zone entities, or (ii) effectively managed and controlled in the UAE.

Non-resident persons are persons that are not considered residents and that either:

• Have a Permanent Establishment (PE) in the UAE;
• Derive UAE sourced income (i.e., income accruing in, or derived from, the UAE); or
• Have a Nexus in the UAE.

On 18 October 2023, the UAE’s Federal Tax Authority (FTA) published a new CIT guide¹ (the “Guide”) which provides guidance on the domestic and international tax implications of non-resident persons under the new CIT regime. The Guide includes several practical examples to illustrate how key elements of the CIT Law apply to non-resident persons. In this article we explain the main concepts and highlight some of the most important clarifications.

 

Permanent Establishment

Broadly speaking, a PE refers to a threshold of business presence that, once exceeded, subjects a foreign entity to tax liability within the UAE. This can occur either through a 'fixed place of business PE', where the entity maintains a stable and ongoing business facility, or an 'agency PE', where a person or entity conducts activities for and on behalf of the foreign company and has the authority to conclude contracts on behalf of the non-resident person or habitually negotiates contracts without any material modification (i.e., acts as a dependent agent).

If a company's activities in the UAE surpass either of these thresholds, it is considered to have a PE and may be required to pay taxes in the UAE on the income attributable to the UAE PE. The Guide contains several examples illustrating what constitutes a PE under the CIT Law.

In most jurisdictions, the concept of a PE is most often associated with companies and other types of juridical persons (i.e., legal entities). Surprisingly, the Guide stipulates that a natural person can also have PE in the UAE if the turnover² derived by the natural person from conducting a business or business activity³ in the UAE, exceeds AED 1 million within a Gregorian calendar year and is attributable to the PE.

 

Registration

Non-resident juridical persons will be required to register for CIT purposes and obtain a Tax Registration Number (TRN), if they have a PE or a nexus in the UAE. Non-resident juridical persons that only derive UAE sourced income and who do not have a PE in the UAE, nor a nexus in the UAE, will not be required to register for CIT purposes⁴.

Non-resident natural persons will only be required to register for CIT purposes and obtain a TRN if the turnover attributable to their PE exceeds AED 1,000,000 within a Gregorian calendar year.

 

Compliance

A non-resident person that is required to register will need to prepare standalone financial statements in accordance with accounting standards accepted in the UAE (IFRS). On the same basis, non-residents that are registered must file their tax return with the FTA and settle the CIT payable within nine (9) months from the end of the relevant tax period and maintain all records and documents for a period of seven (7) years following the end of the tax period to which they relate.

 

Qualifying Free Zone Persons

Under the Free Zone tax regime, a Qualifying Free Zone Person will be taxed at the following rates:

• 0% (zero percent) on ‘Qualifying Income’
• 9% (nine percent) on Taxable Income that is not Qualifying Income

A non-resident juridical person may be eligible for the 0% tax rate under the Free Zone tax regime if they operate in a Free Zone through a branch⁵.

 

UAE sourced income

UAE sourced income that is not attributable to a UAE PE, may be subject to UAE withholding tax. Although the current withholding tax rate is 0%, it should be noted that the recently updated FAQs⁶ published by the UAE Ministry of Finance (MOF) indicate that a Cabinet Decision may be forthcoming that will specify applicable withholding tax rates on different categories of UAE sourced income (e.g., dividends, interest, royalties, income from services). No official announcements have been made by the MOF in this respect.

 

Nexus

A non-resident person that is a juridical person can have a nexus in the UAE if they earn income from immovable property in the UAE.

Immovable property is defined as:

• any area or land over which rights or interest or services can be created; or
• any building, structure or engineering work attached to the land permanently or attached to the seabed; or
• any fixture or equipment which makes up a permanent part of the land or is permanently attached to the building, structure or engineering work or attached to the seabed.

The nexus concept is only applicable to non-resident juridical persons and not to natural persons.

Interestingly, a nexus can under certain circumstances also be considered as a PE.

 

Double Taxation Agreements

A non-resident person which is subject to tax under the UAE's CIT Law may be eligible for relief under an applicable Double Taxation Agreement (DTA). It is important for non-residents to evaluate their tax position in light of any relevant DTA. In cases of conflict between the CIT Law and a DTA, the provisions of the latter prevail.

Even if an individual or entity qualifies as a resident under the UAE CIT Law, their tax residency could be determined differently under a DTA, based on specific facts and the terms of that agreement.

Furthermore, the PE definition under applicable DTAs may be different from the domestic PE definition under the UAE CIT Law. As such, applicable DTA provisions should be analysed to determine the existence of PE in the UAE.

 

Conclusion

The UAE's introduction of CIT marks a pivotal shift in its tax regime, impacting both resident and non-resident persons commencing from financial years on or after 1 June 2023.

Non-residents, whether natural or juridical, must understand the implications of establishing a PE or having a nexus, which will subject them to registration and compliance obligations.

The FTA’s Guide sets out the main implications for non-resident taxpayers under the UAE CIT regime and includes several practical examples.

It is critical for non-residents to review the interplay between UAE CIT Law and bilaterally concluded DTAs, as DTAs may override local law and redefine tax residency and PE status, thus potentially altering tax liabilities.

This evolving tax landscape underscores the importance for non-resident businesses to reassess their operations and tax strategies within the UAE.

 

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¹ Federal Tax Authority, Corporate Tax Guide on Non-Resident Persons (CTGNRP1)
² The gross amount of income derived during a Gregorian calendar year (i.e., not taxable income).
³ The following are not considered as a business or business activity: income from employment, personal investments and real estate (except when conducted through a licence).
⁴ UAE sourced income that is not attributable to a UAE PE, may be subject to UAE withholding tax.
⁵ The definition of ‘Free Zone Person’ also includes branches of a non-residents registered in a Free Zone.
⁶ See Corporate Tax FAQs (version September 2023), question 181 and 182.