UAE TAX RESIDENT VS CORPORATE TAX RESIDENT PERSON: KEY DIFFERENCES

08 December 2024

Shuchi Goel

The concepts of “Resident Person” for Corporate Tax (CT) purposes and “Tax Resident” under UAE double taxation agreements (DTAs) are distinct. The UAE’s Federal Tax Authority (FTA) Guide provides important clarifications to help businesses navigate these definitions.

Dubai: Understanding the complexities of tax residency in the UAE can be a challenging task for both individuals and businesses. The distinction between a UAE tax resident and a corporate tax resident person is crucial for understanding tax obligations, benefits, and compliance requirements. This article aims to highlight the key differences between the two, providing clarity for those seeking to optimize their tax positions and ensure compliance with UAE tax laws.

I.  Key Differences

UAE Tax Resident: Defined as a natural person who resides in the UAE for 183 days or more in a calendar year or has a permanent home in the UAE. These individuals are subject to personal income tax on worldwide income if they meet the residency criteria. They also benefit from double taxation agreements (DTAs) to avoid being taxed twice on income earned abroad.

Corporate Tax Resident Person: Refers to a juridical person (legal entity) that is incorporated or formed in the UAE, or a foreign entity managed and controlled from the UAE. These entities are subject to corporate tax on income generated from UAE sources, regardless of where the entity is incorporated. Non-resident entities with a permanent establishment (PE) in the UAE are also subject to corporate tax on UAE-sourced income.

II.   Concepts & Definitions :

CT Resident Person :

A juridical person qualifies as a Resident Person for CT purposes if it is either:

1. Incorporated, established, or recognized under UAE legislation, regardless of where its effective management and control are exercised, or
2. Established under foreign legislation but effectively managed and controlled in the UAE.

Types of Juridical Persons:

These include Limited Liability Companies (LLCs), Private Shareholding Companies (PSCs), Public or Private Joint Stock Companies (PJSCs), and other entities such as foundations, trusts, civil companies, and offshore companies, subject to UAE legislation. Free Zone entities are also classified as Resident Persons for CT purposes.

Exemptions:
An Exempt Person (e.g., certain government entities or qualifying public benefit entities) is not considered a Resident Person unless engaged in business activities outside their exempted scope.

Place of Effective Management and Control (POEM)

POEM determines where key management and commercial decisions are made. It focuses on strategic decision-making rather than routine management or administrative tasks.

Key factors for assessing POEM include:

• Decision-making authority: Who genuinely makes strategic decisions?
• Location of board meetings and decisions: Regular, substantive decisions versus formal approvals.
• Delegation: Examination of senior management’s role in decision-making.
• Shareholder influence: The extent to which shareholders direct or control decisions.

A juridical person can have multiple management locations but only one POEM, which determines its tax residence under CT rules.

UAE Tax Resident: A juridical person is considered a UAE Tax Resident if it is:

1. Incorporated, formed, or recognized in the UAE, or
2. Classified as a Tax Resident under UAE Tax Laws, including the CT Law.

Tax Residency for Free Zone Entities: Entities incorporated in UAE Free Zones are Tax Residents and can apply for a Tax Residency Certificate (TRC).

Tax Residency for Double Taxation Agreements (DTAs):

Under DTAs, tax residency may differ from domestic CT definitions. DTAs specify criteria to determine whether a juridical or natural person is a tax resident in a signatory country.

Eligibility for DTA Benefits:

• Juridical persons with a TRC issued in the UAE can access DTA benefits.
• Government Entities and Government-Controlled Entities are typically treated as UAE tax residents.
• Exempt Persons qualify for DTA benefits since they are considered liable to tax under UAE law.

If a foreign company’s POEM is in the UAE, it may face dual residency considerations under the DTA.

UAE Tax Residency Certificate (TRC)

A TRC is necessary to claim DTA benefits. The FTA provides specific rules for TRC applications:

1. Time Period:TRCs cover either the current or prior tax period. Newly incorporated companies must operate for 12 months before eligibility.
2. Application Process:
• Juridical persons can apply three months into the financial period.
• Government entities may apply after one day.
• TRCs are issued for a maximum of 12 months and cannot be obtained for future periods.
3. Fees and Timeline: Applications cost AED 500, and the FTA typically processes them within 10 business days.

Documentation Requirements: The FTA outlines specific documentation for TRC applications, ensuring the applicant demonstrates tax residency compliance.

Conclusion

Understanding the distinction between being a CT Resident Person and a UAE Tax Resident is critical for compliance and leveraging DTA benefits. Companies must carefully assess their POEM, legal structure, and jurisdictional ties to determine residency status under CT laws and DTAs. Accurate documentation and timely applications for TRCs will ensure businesses maximize tax treaty advantages while maintaining regulatory compliance.

ALKETBI TOUCH

Seeking ALKETBI professional Tax advise can significantly ease the complexities associated with tax residency. Our Legal professionals can provide invaluable assistance by ensuring compliance with UAE tax regulations, mitigating the risk of penalties and audits, offering expert advice on structuring your tax residency by structuring ownership, shareholder rights, and governance to safeguard your interests, while also taking the lead in implementing necessary mechanisms and company formations to serve the structure while enhancing the long-term stability and growth of your businesses.