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Application of The Proposed Corporate Income Tax to Residents And Non-residents

The word “resident” is a key determinant in the application of corporate and personal income tax laws around the world. For example, if a person is a resident in a country, his worldwide income is generally subject to income tax in that country, but if he is a non-resident of a territory, his worldwide income is not subject to income tax in that jurisdiction.

Similar to global practice, the UAE has adopted the same approach. As stated in the corporate tax consultation papers, if a person is a resident individual, as defined in the UAE consultation paper, then his worldwide income will be subject to corporate income tax (CIT) in the UAE, except in the case of a resident individual whose income from UAE business only will be subject to CIT.

Difference between Residents And Non-Residents

It is clear from the above discussion that we need to understand the difference between residents and non-residents as indicated in the consultation paper, which would be quite helpful to know how the UAE applies the tax rate.

The Consultation Paper states very clearly that “a legal entity that is incorporated in the UAE will automatically be considered “resident” in the UAE for tax purposes”. Under this proposed regime, all registered legal entities, including legal entities registered in free zones and financial free zones, will be deemed to be residents in the UAE for CT purposes. This means that under the proposed provision of the UAE CT Law, any legal entity, including any grocery store, salon, high street shops, etc., would be deemed to be a tax residents.

The Consultation Document also states that “any individual carrying on a trade or business in the UAE, either in his own name or through an unincorporated partnership, will also be deemed to be resident for the purposes of the UAE tax regime”. Thus, each individual will not be a resident for CT purposes and each individual will not be required to register with the CT registry. However, if an individual engages in any trade or business which requires a government or relevant authority authorization or trading license, then the individual will be deemed to be a resident.

As investments made by individuals in property, shares, etc. do not require government authorization, such individuals will not be considered residents for CT purposes and their income will not be subject to CT. On the other hand, a professional such as a doctor, accountant, etc., providing professional services even in a sole proprietorship capacity or through a registered partnership, is required to obtain a permit from the relevant authority and will therefore be treated as a resident for CT purposes.

FOREIGN COMPANIES

Foreign companies effectively managed and controlled in the UAE will also be treated as residents for tax purposes as indicated in the Consultation Document. It would be very difficult to determine whether a company is managed and controlled in the UAE, but the decisive criterion would be to ascertain from where the main management and commercial decisions of the company are taken. For example, if the company is based in the UK but the management is based in the UAE from where all commercial and management decisions relating to the company are taken, then such a company would be considered to be resident in the UAE for CT purposes.

Resident companies would be subject to tax on their worldwide income, including capital gains, except for income derived by UAE companies from investments in other companies and from activities carried on outside the UAE through foreign subsidiaries or foreign branches. Dividend income and capital gains from the sale of shares in the hands of shareholders of companies are subject to special treatment.

Resident individuals will only be taxed on their UAE business income, which requires a commercial license. For an individual resident outside the UAE and providing freelance services in the UAE, income earned in the UAE would be taxed and the related withholding tax clauses would apply. However, salaries, rental income, dividends, and any other investment income of such non-residents would not be subject to CT.

CORPORATE TAX REGISTRATION.

All residents will be required to register in CT and prepare financial statements in accordance with International Financial Reporting Standards (IFRS). They should file a CT return and make payments, if any, within nine months of the end of the relevant tax period.

The word “resident” as defined in the Tax Law should not be confused with ordinary UAE residents and should be read and interpreted in light of the provisions of the Consultation Paper.

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