Introduction of Corporate Income Tax (CIT) and UAE Domestic Tax Residency Criteria With the introduction of Corporate Income Tax (CIT), set to take effect for financial years starting on or after 1 June 2023, it became necessary for the UAE to establish clear domestic tax residency criteria. On 22 February 2023, a new domestic law was issued to define what constitutes a Tax Resident in the UAE. UAE CORPORATE LAW APPLICABILITY The UAE enacted its Corporate Tax Law in December 2022 (Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses). This law, effective from 1 June 2023, imposes a 9% tax rate on income exceeding AED 375,000 (approx. US$102,000). Corporate tax will apply to “resident persons” and “non-resident persons.” UAE NEW TAX RESIDENCY CRITERIA The UAE has introduced new domestic tax residency criteria through Cabinet Decision No. 85 of 2022, issued on 2 September 2022. Additionally, Ministerial Decision No. 27 of 2023, released on 22 February 2023, provides further clarification on these criteria. These rules became effective from 1 March 2023. Previously, the UAE did not impose direct taxes at the federal level, leading to the absence of formal tax residency criteria. The new Cabinet Decision outlines distinct criteria for natural persons and legal entities to determine tax residency. Individual – Domestic Tax Residency Rule in the UAE A natural person will be considered a ‘tax resident’ in the UAE under any of the following three scenarios: Exceptional Circumstances – Calculating Days Spent in the UAE If a natural person extends their presence in the UAE due to exceptional circumstances, the Federal Tax Authority (FTA) will disregard these days when calculating the 183-day or 90-day threshold. Exceptional circumstances are events beyond an individual’s control, which could not have been reasonably anticipated or prevented. What is the Centre of Financial and Personal Interests? A person’s center of financial and personal interests is in the UAE if it is the jurisdiction where their personal and economic interests are closest or of the greatest significance. Factors to consider include: What is a Permanent Place of Residence? A permanent place of residence includes any furnished dwelling (house, apartment, room) continuously available and regularly occupied by the individual with some degree of permanency and stability. The residence does not need to be owned by the individual—it can be rented or otherwise occupied. When is an Individual Carrying on Employment in the UAE? An individual is considered to be carrying on employment if they are party to an employment contract with an employer incorporated, formed, or recognized in the UAE. Other employment-like arrangements may qualify, provided that all or most of the individual’s income for labor performed in the UAE is derived from a single party. However, voluntary roles are not classified as employment. Juridical Person – Domestic Tax Residency Rule in the UAE A juridical person is considered a Tax Resident of the UAE if: UAE branches of domestic or foreign juridical persons are extensions of their parent companies or head offices and are not considered separate juridical entities. Thus, a branch of a foreign juridical person registered in the UAE would generally not be considered a Tax Resident. DOES MEETING UAE DOMESTIC TAX RESIDENCY CRITERIA MEAN CORPORATE TAX APPLICABILITY? For individuals, meeting the UAE domestic tax residency criteria does not mean they will automatically be subject to Corporate Tax, as the UAE does not levy personal income tax on employment or personal income. Individuals are not required to pay tax on income derived from employment or personal investments unless specified under a cabinet decision. However, juridical persons considered UAE Tax Residents may be liable for the new Corporate Tax introduced from 1 June 2023 under Federal Decree Law No. 47 of 2022. Foreign juridical persons will also be subject to taxation under the Corporate Tax regime only. Double Tax Agreements (DTAs) The UAE has signed DTAs and bilateral agreements with 137 countries. The new tax residency criteria primarily benefit individuals seeking to claim tax treaty benefits under applicable DTAs. A Domestic Tax Residency status allows a UAE tax resident to avoid double taxation in both their home country and the UAE. However, to claim treaty benefits, individuals or legal entities must first establish their tax residency status under the relevant DTA. Once this is confirmed, they can apply for a Tax Residency Certificate (TRC) from the relevant tax authority. HOW TO GET TRC To obtain a Tax Residency Certificate, applicants can follow these steps: KEY TAKEAWAY The new UAE tax residency criteria offer greater clarity and streamline the application process for DTAs and the issuance of tax residency certificates, aligning with internationally recognized standards.
