Tax Group in UAE Corporate Tax: Who Qualifies as a Resident Person?

Federal Decree-Law No. 47/2022, governing UAE Corporate Tax Law, defines "resident persons" as individuals and entities that have a significant economic and/or physical connection to the UAE. The determination of residency status directly influences business tax obligations and eligibility for tax group benefits. This article explains the residency criterion outlined in Article 3 of the recent amendments, along with the residency qualifications for parent companies and subsidiaries, and the implications of tax residency in foreign jurisdictions.

How are resident Persons defined?

Following are the categories of Residents as outlined below:

Treatment to business entities/companies as resident: -

Business entities and other Companies are deemed residents if they fulfill the following: -

Prerequisite for Subsidiaries and Parent Companies (Article 40)

Each parent company and the set of subsidiaries is, according to Article 40, required to satisfy all the residency rules set for forming or joining a tax group:

Compliance with Residency Requirements by Parents and Subsidiary Companies

A company qualifies to be classified a resident in UAE if it satisfies one or more of the raised criteria below:

Subsidiary Companies

These companies are deemed residents of the UAE if:

Tax Grouping Merger Restrictions

To be able to form a tax group, the additional requirements below must be fulfilled:

• Non-Exempt Status: The parent or the subsidiary cannot be categorized as exempt persons.
• Subsidiary Ownership Requirement: -The parent firm shall have a minimum of 95% subsidiary share, voting, and profit participation. 
• Unified Fiscal Year & Consistent Accounting Standards: - In the group consolidation, all members shall have the same fiscal year, with identical accounting principles.

Loss of Advantages of UAE Tax Systems

The new tax residency status outside the UAE can result in losing the advantages of:

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FAQs: Residency And Tax Grouping Under the UAE Corporate Tax Law

• What is the meaning of “resident person” as defined in the UAE Corporate Tax Law?
  A resident person is:

• • An individual who lives in the United Arab Emirates, or is present at this region for more than a half calendar year number, which is 183 days.

• • An employee from the UAE or working in the UAE.

• • Any Company that is established under the laws of the United Arab Emirates or that has its legal base of business practice in the UAE.

• How is tax residency status defined for companies in the UAE?
  A Company becomes a tax resident if:

1. 1. The United Arab Emirates' rules were followed in the development of this.
   2. Its senior officers and managers carry out center control and decision making in the UAE (Place of Effective Management or POEM).

• What is a tax group and what is its residency?
  A tax group is an assortment of affiliated parent companies and subsidiaries as a single entity for the purposes of taxation. The parent and subsidiary companies are required to be tax residents of the UAE if they are to be part of a tax group. It is therefore an important factor.

• Is it possible for a free zone enterprise to be included in the tax group?
  A free zone enterprise can be part of a tax group only if they are not free zone qualifying individuals or entities. There are certain free zone persons that are deemed qualifying and usually do not fall within the categorization of tax groups in order to maintain their zero percent corporate tax payment obligations.

• When a resident of a tax group changes, what are the implications of such an action?
  If a member becomes a tax resident of another country, it could happen that such a member no longer qualifies under specific residency rules for the tax group. That could entail being exited out of the tax group or even the disbandment of the tax group altogether, depending on other factors surrounding the case.

• What are the possible consequences of moving and changing tax residency to a different jurisdiction?
  There could be implications such as:

• • Tax is applied on a person’s income earned all over the world.
  • Ineligibility to tax benefits in UAE, for example personal income taxes and corporation taxes on qualifying free zone entities are set at zero percent.
  • Falling under the jurisdiction of tax inversions in the new country in which income taxes and social security contributions are set at higher rates.

• What benefits do UAE tax residents receive from Double Taxation Avoidance Agreements (DTAAs)?
  DTAAs allow taxpayers, both other individuals and businesses, to avoid double taxation in different jurisdictions. The UAE has entered into over 90 DTAAs that bring in a lot of specificity into the equity of cross-border taxation.

• What are the repercussions for losing the UAE tax residence?
  The loss of tax residency in the UAE could result in:

• • The loss of the benefits of tax exemptions and benefits, like no income or capital taxes.
  • Increased corporate tax in other jurisdictions.
  • Greater compliance and operational costs.

• From your perspective, how does the corporate tax in UAE measure up against other countries?
  The UAE is one of the few countries that have a relatively competitive corporate tax rate set at 9% while some free zones provide further tax exemptions. Most countries have a corporate tax rate in excess of 20%-30% coupled with personal income tax and capital gains tax.

• What are the considerations businesses need to address before altering their tax residency?
  Businesses must consider the following:

• • Jurisdiction of the new location and the possible severing of tax benefits associated with UAE.
  • Obligations which need compliance like the transfer of pricing, reporting, and taxation of other persons.
  • The existence of DTAAs to protect against the potential risks associated with double taxation.

• Does the United Arab Emirates allow a foreign parent firm to be considered a tax resident?
  A foreign parent company is eligible to qualify as a tax resident in the UAE if its point of effective management lies within the country, where key strategic and management decisions are executed in the UAE.