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Proposed application of corporate tax on the tax residents and non-residents

The resident individuals would be subject to tax on their UAE-sourced business income only which requires a commercial licence.

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The word ‘resident’ is a key determinant in the application of corporate income tax and personal income tax laws across the globe. Like if the person is a resident of a country, usually its worldwide income is subject to income tax in that country, and if the person is a nonresident in any territory, then their worldwide income is not subject to income tax in that jurisdiction.

Like global practices, the UAE has adopted the same approach. As given in the corporate tax public consultation documents, if the person is a resident — resident as defined in the consultation document of the UAE, then its worldwide income would be subject to corporate tax (CT) in the UAE unless a resident individual whose income from the UAE businesses only would be subject to CT in the UAE.

From the above discussions, it is evident that we need to understand the difference between resident and non-resident persons as given in the consultation document, which would be quite helpful to learn the application of CT in the UAE.

It has been very clearly stated in para 4.3 of the consultation document, that “A legal person that is incorporated in the UAE will automatically be considered a ‘resident’ person for the UAE CT purposes.” From this proposed treatment, all incorporated entities including the entities in free zones and financial free zones would be considered a resident for the UAE CT purposes. This means every legal person including every grocery store, saloon, shops in the high streets etc. would be considered a tax resident in accordance with the proposed provision of the UAE CT law.

The para 4.3 of the consultation document further states that “any natural person who is engaged in a business or commercial activity in the UAE, either in their own name or through an unincorporated partnership, will also be considered a resident person for purposes of the UAE CT regime.” So, every natural person would not be a resident for CT purposes and every individual will not be required to register for CT. However, if the individual engages in any commercial activity or business which requires a permit or trade license from the government or from the respective authority, then the individual would be considered a resident.

Like investment made by the individuals in the property, shares etc. does not require any permit from the government so such individuals would not be considered residents for CT purposes and their income would not be subject to CT. On the other hand, a professional like doctor, accountant etc. who is providing professional services even in their individual capacity or through incorporated partnership, is liable to take the permit from the respective authority so it would be considered a resident for CT purposes.

The foreign companies which are effectively being managed and controlled in the UAE would also be considered a resident for CT purposes as given in para 4.4 of the consultation document. This would be very difficult to ascertain whether the company is being managed and controlled in the UAE, but the decisive test would be to ascertain from where the key management and commercial decisions of the company are taking place. Like, if a company is based in the UK, but the management is based in the UAE, from where all commercial and management decisions related to that company are taking place, then such a company would be considered a UAE resident for CT purposes.

The resident companies would be subject to tax on their worldwide income including capital gains except income earned by UAE companies from investments in other companies, and from operations conducted outside the UAE through foreign subsidiaries or foreign branches. The dividend income and capital gain on the sales of shares in the hands of the corporate shareholders have special treatment and we will cover it in detail in our next articles.

The resident individuals would be subject to tax on their UAE-sourced business income only which requires a commercial licence. An individual who is living out of the UAE, and providing freelance services in the UAE, then their UAE-sourced income would be subject to CT and related withholding tax clauses would be applicable. However, salaries, rental income, dividends, and any other investment income of such non-resident individuals would not be subject to CT.

All residents would be required to register for CT and prepare their financials as per International Financial Reporting Standards (IFRS). They would be required to file their CT return and make payments if any, within nine months from the end of the relevant tax period.

The word resident as defined in the CT, should not be mixed with the normal resident individuals of the UAE, and it should be read and interpreted keeping in view the provisions of the consultation document.

Mahar Afzal is a managing partner at Kress Cooper Management Consultants. The above is not an official but a personal opinion of the writer based on the public consultation document on corporate tax. For any queries/clarifications, please write to him at compliance@kresscooper.com.