What Income of a Non-Resident Person is Subject to Corporate Tax in UAE?

Under the UAE corporate tax law, income from a Non-Resident person's Permanent Establishment (PE) or nexus in the country is subject to the same tax rate as that applied to resident persons. Thus, it is advisable for Taxable Persons to seek the expert services of Tax Consultants in UAE to effectively determine Taxable Income and to ensure compliance with corporate tax regulations.

Corporate tax rates for non-resident

The corporate tax rates for non-resident persons are as follows:

  • 0% on the first AED 375,000 of taxable income.
  • 9% on the amount exceeding AED 375,000 of taxable income.

It's important to note that if the non-resident person qualifies as a Free Zone entity, the tax rates are different. For Qualifying Free Zone Persons, the tax rates are:

  • 0% on Qualifying Income.
  • 9% on taxable income that is not considered Qualifying Income.

Taxable income attributed to a non-resident's permanent establishment can come from both within and outside the UAE. Additionally, income derived from immovable property in the UAE is also subject to taxation. To calculate taxable income for a specific period, one must refer to the financial statements prepared in line with UAE accounting standards, making necessary adjustments according to the Corporate Tax Law.

Business or Business Activities of a Non-Resident Natural Person

Non-resident natural persons in the UAE may be subject to corporate tax if their total turnover from business activities exceeds AED 1,000,000 in a calendar year. However, certain income sources, such as wages or salary received from employers, personal investments made directly by the individual, and income from real estate investments without a licensing authority license, are not considered business activities and are exempt from corporate tax. These income sources are not considered commercial businesses and are not subject to taxation.

State Sourced Income

State Sourced Income refers to income that originates within the specific jurisdiction or state in question. In the context of the UAE, income is considered state sourced in three scenarios.

  • Firstly, if it comes from a resident person within the UAE.
  • Secondly, if it is earned from a non-resident person, but the income is linked to and can be attributed to a permanent establishment of that non-resident entity in the UAE.
  • And finally, if the income is generated from activities, assets, investments, rights, services, or benefits connected to the UAE, regardless of the residency status of the party involved.

This essentially means that income earned within or connected to the UAE, from residents or non-residents, falls under the category of state-sourced income and may be subject to tax regulations.

Withholding Tax

In some cases, when a non-resident person earns State Sourced Income that cannot be linked to a Permanent Establishment, it may be subject to Withholding Tax. In the UAE, the current Withholding Tax rate is 0%, meaning that for now, no tax is withheld from this type of income. However, it's important to note that tax laws and rates can change over time, so it's advisable to stay informed about any updates or amendments to tax regulations.

Intersection of State Sourced Income and Permanent Establishment

In the UAE, State Sourced Income and income linked to a Permanent Establishment are interconnected concepts, requiring Corporate Tax to be applied to any income originating within the country. This means that any income, regardless of whether it's classified as State Sourced Income, may be subject to Corporate Tax if it can be linked to a Permanent Establishment. It's crucial for businesses to be aware of these interactions to ensure compliance with tax regulations in the UAE.

Overlapping State Sourced Income and Nexus

In the UAE, State Sourced Income and income associated with a nexus are not separate categories, but can intersect. State Sourced Income includes all income originating within the UAE, including income generated from a nexus. When income is linked to a nexus, it falls under the State Sourced Income category and becomes subject to Corporate Tax. Understanding the connections between income sources and a nexus is crucial for individuals and businesses to ensure compliance with tax regulations in the UAE.

Small Business Relief and Non-Resident Eligibility

The Corporate Tax Law in the UAE only allows small business relief to Resident Persons, excluding Non-Resident Persons. However, the availability of this relief may be influenced by Double Taxation Agreements, which can modify or override certain provisions of the Corporate Tax Law. Therefore, Non-Resident Persons should be aware of the specific terms in any relevant Double Taxation Agreements. This highlights the importance of considering residency status and international tax agreements to determine eligibility for small business relief in the UAE.

Exemption for International Transportation Activities

In the UAE, Non-Resident Persons or businesses involved in international transportation activities are granted an exemption from Corporate Tax. This exemption applies to income earned from these activities, including passenger, livestock, mail, parcels, merchandise, and goods by air or sea. Those who lease or charter aircraft or ships used in international transportation are also eligible. This exemption ensures fair treatment for both resident and non-resident entities, ensuring fair treatment in the UAE.

Interaction between Corporate Tax Law and Double Taxation Agreements

The UAE Corporate Tax Law allows Non-Resident Persons, whether juridical or natural, to seek relief through a Double Taxation Agreement. These agreements, if in force, take precedence over the Corporate Tax Law in case of inconsistencies. This means that being classified as a Resident Person under the UAE Corporate Tax Law doesn't automatically translate to tax residency in the UAE. Tax residency could be attributed to either the UAE or another jurisdiction, depending on the specific circumstances and the content of the agreement. It's crucial for Non-Resident Persons to be aware of these potential implications and seek professional advice if needed.

Choose Corporate Tax Consultants in UAE

Understanding the significant impact of corporate tax on non-resident persons in the UAE is crucial for effective compliance with tax regulations. This includes understanding the tax rates, exemptions, and interactions with Double Taxation Agreements, which all play a significant role in determining their tax liability. It is advisable for non-resident persons to seek professional advice from reputable Tax Consultants in the UAE to effectively ensure compliance with the UAE corporate tax law. Thus, contact us today and we shall be glad to assist you.