To determine eligibility as a non-resident entity for corporate tax purposes, it is essential to differentiate between juridical entities and natural individuals. Non-resident juridical entities in the UAE are defined by either having a Permanent Establishment or establishing a significant nexus within the country. A Permanent Establishment refers to a fixed business location, whereas a nexus represents a substantial relationship or presence in the United Arab Emirates. This comprehensive guide for Non-Resident Persons explains some frequently asked questions.
In the context of the UAE Corporate Tax Law, a Non-Resident Person refers to a juridical (legal) entity or a natural person who is not considered a resident of the UAE for tax purposes.
For a juridical person, this classification applies if it is incorporated in a foreign country and its operations are effectively managed and controlled outside the UAE. In simpler terms, if a company is registered in another country and its key decision-making processes and management occur outside of the UAE, it is considered a non-resident entity.
Similarly, for a natural person to be considered a non-resident, they must not be engaged in any taxable business or business activity within the UAE. This means that if an individual does not conduct business activities subject to taxation in the UAE, they will be classified as a non-resident person under the Corporate Tax Law.
According to the Corporate Tax Law and Cabinet Decision No. 49 of 2023, a Non-Resident Person, which can be either a juridical (legal) person or a natural person, must register for Corporate Tax purposes under certain conditions.
For juridical persons, they are required to register if they have a Permanent Establishment or a significant connection in the UAE. If they anticipate that their activities will lead to a Permanent Establishment or nexus in the UAE, they should register promptly to avoid any compliance delays and potential penalties. However, if a juridical person only earns income from the UAE without having a Permanent Establishment or nexus, they are not obligated to register for Corporate Tax purposes.
Whereas, natural persons are required to register for Corporate Tax if their Turnover attributable to their Permanent Establishment in the UAE exceeds AED 1,000,000 within a calendar year. This means that if a natural person conducts business activities in the UAE and generates revenue beyond the specified threshold, they must register for Corporate Tax purposes.
In the UAE, non-resident individuals and businesses are subject to Corporate Tax on specific types of income.
For a Non-Resident Person in the UAE who is required to register for Corporate Tax, they have to follow similar reporting rules as a Resident Person. This means they need to determine their Taxable Income based on standalone Financial Statements prepared according to UAE-accepted accounting standards, specifically the International Financial Reporting Standards (IFRS). However, they may also use the Cash Basis of Accounting under certain conditions.
If a Non-Resident Person has a Permanent Establishment in the UAE, they must calculate the income and expenses attributed to it using internationally recognized methods, ensuring fairness (known as the arm's length principle). They must then submit their Tax Return to the Federal Tax Authority (FTA) and pay any Corporate Tax owed within nine months from the end of the relevant Tax Period.
The Tax Period is typically the Gregorian calendar year or the twelve-month period for which the Taxable Person prepares Financial Statements. In exceptional cases, they can apply to the FTA to extend or shorten these periods. Additionally, a Non-Resident Person must keep all related records and documents for seven years after the end of the relevant Tax Period, as per the Tax Procedures Law.
In the UAE, a Permanent Establishment (PE) of a Non-Resident Person can be established in three main scenarios.
It is important to consider the provisions of any Double Taxation Agreement between the country of tax residence of the Non-Resident Person and the UAE in order to determine whether a specific case constitutes a Permanent Establishment in the UAE. This ensures that taxation matters are appropriately addressed in accordance with international agreements.
In the UAE, a Non-Resident Person can be considered to have a Permanent Establishment (PE) through either a fixed place or an agency.
For a fixed place PE, several factors need to be examined, including the presence of a "place of Business" in the UAE used on a regular basis, its permanence (typically over six months in a 12-month period), and the disposal of this place by the Non-Resident Person. Importantly, the activities conducted at this place must be core income-generating, not auxiliary.
On the other hand, an agency PE can be created even without a fixed place of Business. It arises when a Person regularly concludes or negotiates contracts in the UAE on behalf of a Non-Resident Person. However, the agent must be legally or economically independent from the principal. This assessment should consider the commercial realities of the situation, with an emphasis on substance over form, ensuring that even commissionaire arrangements, where a Person sells products on behalf of another, can trigger a PE if the Non-Resident Person is bound by the activities of the Person, irrespective of whether contracts are in the Non-Resident Person's name.
State Sourced Income refers to income derived from activities, assets, services, or contracts performed or located in the UAE. In the context of Corporate Tax in the UAE, it is an important factor in determining whether a person is subject to taxation. Non-Resident Persons who earn State Sourced Income may be subject to Corporate Tax, unless the income is not attributable to a UAE Permanent Establishment. While Withholding Tax may apply, it is currently levied at a rate of 0%. State Sourced Income encompasses various sources, including income from resident persons, business activities conducted through a Permanent Establishment, sale of goods, provision of services, contracts, property use or sale, disposal of shares, and intellectual property. It also includes interest and insurance income under specific conditions. Understanding whether income qualifies as State Sourced is essential for tax compliance for Non-Resident Persons in the UAE.
Under the UAE Corporate Tax, the concept of "nexus" applies to non-resident juridical persons and is used to determine their tax obligations. A non-resident person is considered to have a nexus in the UAE if they derive income from immovable property in the country, which includes land, buildings, structures, and associated equipment. Income derived from such immovable property, whether through sale, leasing, or other forms of exploitation, is subject to Corporate Tax.
However, there is a tax exemption for the first AED 375,000 of taxable income, with a 9% tax rate applied to any amount exceeding this threshold. Additionally, if a non-resident person qualifies as a Free Zone entity, they may be subject to the Free Zone Corporate Tax regime for income derived from immovable property. This system is designed to tax income generated from property in the UAE by non-resident entities while exempting natural persons from the nexus concept.
To determine eligibility as a non-resident entity and to ensure compliance with the corporate tax law, businesses should seek the expert services of trusted corporate Tax Consultants in UAE. Thus, contact us today and we shall be glad to assist you.
Mostafa is a seasoned Tax Consultant with over 5 years years of experience gained in diverse taxations matters. He has vast expertise in settling tax disputes with the Federal Tax Authority and handling of tax procedures in compliance with tax laws. He is adept in investigating underlying tax intricacies and offering expert tax advisory. He is also well-versed in conducting tax analysis’s and negotiations with the Tax Regulators, upon tax preparation and filing. Mostafa specializes in the areas of Tax law, Auditing, Accounting and Banking law.