26 Jun 2023
Introduction
The UAE Ministry of Finance (MoF) released Ministerial Decision Number (27) of 2023 on February 22, 2023, regarding the implementation of several provisions of Cabinet Decision Number (85) of 2022 on the determination of tax residency. The UAE has recently implemented new tax residency rules, bringing significant implications for individuals and businesses in the country. These rules have been introduced to align the UAE's tax framework with international standards, enhance transparency, and promote economic stability. In this article, we will explore the implications of the new tax residency rules in the UAE and understand how they may impact various stakeholders.
The criteria for a natural person to be eligible for tax residency in the UAE are further described in this recent ruling. Individuals may be regarded as UAE tax residents beginning on March 1, 2023, if they satisfy any one of the requirements listed in Cabinet Resolution Number (85):
- The UAE serves as both their primary abode and the focal point of their financial and personal interests.
- The person is a citizen of the UAE, a resident of the UAE, or a member of the Gulf Cooperation Council (GCC) who either resides permanently in the UAE or works or does business there for 90 days or more in any 12-month period.
- The person has spent at least 183 days physically residing in the UAE over the course of a single 12-month period.
The Cabinet Resolution Number (85) of 2022, provides that the provisions of a tax treaty shall apply for the purposes of applying the tax treaty if the tax treaty sets forth particular requirements to be qualified for tax residence.
Key Elements
Determination of Tax Residency:
Under the new rules, an individual will be considered a tax resident in the UAE if they spend 183 days or more in the country during a calendar year. Previously, tax residency was determined based on the individual's physical presence without a specific minimum requirement. This new criterion brings clarity to the tax residency status of individuals and helps them plan their tax obligations accordingly.
Tax Liability for Resident Individuals:
Residents of the UAE are subject to personal income tax on their worldwide income. With the implementation of the new tax residency rules, individuals who meet the 183-day threshold may become liable to pay taxes on their global earnings. This implies that expatriates and foreign nationals residing in the UAE need to assess their tax obligations in their home countries as well as in the UAE to avoid double taxation.
Impact on Businesses:
The new tax residency rules also have implications for businesses operating in the UAE. Previously, businesses enjoyed the benefit of zero corporate and personal income tax in the country. However, under the new rules, if the majority of the company's shares are held by UAE resident individuals, the company may be subject to corporate tax on its global profits. This may affect the profitability and overall attractiveness of establishing and operating businesses in the UAE.
Double Taxation Avoidance:
To alleviate the burden of double taxation, the UAE has entered into double taxation avoidance agreements (DTAAs) with various countries. These agreements provide relief to individuals and businesses by allowing them to claim tax credits or exemptions on income taxed in both jurisdictions. It is crucial for taxpayers to understand the provisions of the DTAAs and ensure compliance with the relevant regulations to optimize their tax positions.
Enhanced Compliance and Reporting:
The introduction of tax residency rules reinforces the need for enhanced compliance and reporting obligations for individuals and businesses in the UAE. Tax residents are required to maintain proper records of their financial transactions and income sources. Businesses must ensure accurate reporting of their global profits and comply with local tax filing requirements. Non-compliance with these obligations may result in penalties and legal consequences.
Investment and Financial Planning:
The new tax residency rules in the UAE may influence individuals' and businesses' investment and financial planning strategies. With the possibility of tax liability on global income, individuals may need to review their investment portfolios and consider tax-efficient options. Similarly, businesses operating in the UAE may reassess their corporate structures and explore avenues to optimize their tax positions.
Economic Impact:
The implementation of tax residency rules aligns the UAE's tax framework with international standards and enhances its reputation as a transparent and reliable business hub. This move may attract foreign direct investment (FDI) and spur economic growth in the long run. However, the introduction of taxes on individuals and businesses may also impact consumer spending and the overall cost of living, which could have short-term economic implications.
The implementation of the new tax residency rules in UAE brings several advantages for individuals, businesses, and the overall economy. Some of the key advantages of these rules:
Enhanced Clarity and Certainty: The new tax residency rules provide clear guidelines on determining an individual's tax residency status. The 183-day threshold offers a definitive criterion, eliminating ambiguity and providing certainty to individuals regarding their tax obligations. This clarity allows individuals to plan their finances better and make informed decisions regarding their tax liabilities.
Improved Tax Compliance: With the introduction of tax residency rules, there is an increased focus on tax compliance. Individuals and businesses are required to maintain accurate records, report their income sources, and fulfil their tax obligations accordingly. This promotes a culture of compliance, reduces tax evasion, and contributes to a fairer and more transparent tax system.
Double Taxation Avoidance: The UAE has entered into double taxation avoidance agreements (DTAAs) with various countries to mitigate the impact of double taxation on individuals and businesses. These agreements provide relief by allowing taxpayers to claim tax credits or exemptions on income taxed in both jurisdictions. The presence of robust DTAAs enhances the attractiveness of the UAE as a business and investment destination, fostering economic growth and international cooperation.
Attractiveness for Foreign Investment: The introduction of tax residency rules and the alignment of the UAE's tax framework with international standards enhance the country's reputation as a transparent and reliable business hub. This increased transparency and predictability in the tax system make the UAE more attractive for foreign direct investment (FDI). Businesses and individuals seeking tax-efficient structures may find the UAE a favourable location for establishing their operations.
Revenue Generation for the Government: The implementation of tax residency rules expands the tax base in the UAE. Previously, the country relied heavily on revenue from sources such as oil and other non-tax-related sectors. The new tax regime allows the government to generate additional revenue from personal and corporate income taxes. This diversified revenue stream can contribute to the overall economic development of the country and support public infrastructure and services.
Economic Stability and Fiscal Discipline: By introducing tax residency rules, the UAE demonstrates its commitment to international tax standards and fiscal discipline. This move contributes to economic stability, as it ensures that individuals and businesses are fulfilling their tax obligations and sharing the responsibility of supporting the country's infrastructure and public services. It helps maintain a sustainable economic environment and strengthens investor confidence in the UAE.
International Cooperation and Reputation: The adoption of tax residency rules align the UAE with global tax frameworks and demonstrates its willingness to cooperate with other nations in matters of taxation. This fosters positive relationships with other countries, promotes international cooperation, and enhances the UAE's reputation as a responsible global player. It opens avenues for partnerships, trade agreements, and collaborations, benefiting the overall economy and facilitating global business opportunities.
Implications
To determine whether any of the requirements for determining UAE tax residency for persons apply to them or their employees, respectively, individuals and businesses should review the requirements. If applicable, it should be confirmed that these people can fulfil the necessary conditions under the applicable condition. The days that a person is deemed to be physically present in the UAE should also be taken into consideration, particularly when entering or leaving the country. For assessing whether a person is a resident of the UAE for the purposes of a particular treaty, many of the bilateral tax agreements the UAE has signed with foreign territories refer to UAE domestic law. The application of these treaties and the granting of tax residency certificates under such treaties will be made easier by the new domestic law's precise definition of a tax resident in the UAE.
Conclusion
In conclusion, the new tax residency rules in the UAE mark a significant shift in the country's tax landscape. While these rules enhance transparency and align the UAE with global tax standards, they also bring implications for individuals and businesses in terms of tax liabilities, compliance obligations, and investment strategies. It is crucial for stakeholders to understand the new rules, seek professional advice, and adapt their financial plans accordingly to navigate the changing tax environment in the UAE.
The Decision does not change the fact that, for purposes of assessing whether a person's business income is subject to UAE taxation, the UAE Corporate Tax Law would classify foreign natural people conducting business in the UAE as Resident Persons (as defined in the Corporate Tax Law). Whether or not the natural person is regarded as a tax resident in the UAE for other tax reasons has no bearing on this corporate tax law notion.