Navigating the complexities of UAE corporate tax can be challenging for non-residents. This blog post aims to clarify the key aspects of the UAE corporate tax, offering valuable insights into tax rates, filing requirements, and potential exemptions.
Under the Corporate Tax Law, a Non-Resident Person is defined as a Person who is not a Resident Person. A Person is a Resident Person in the following cases:
- A natural person if they conduct a business or business activity in the UAE.
- A juridical person if it is incorporated or otherwise established or recognised in the UAE or is incorporated or otherwise established or recognised outside the UAE but effectively managed and controlled in the UAE.
Therefore, a Non-Resident Person is:
A natural person who is not a Resident Person but:
- Has a Permanent Establishment in the UAE and has a turnover attributable to their Permanent Establishment that exceeds AED 1,000,000 within a Gregorian calendar year; or
- Derives state sourced income (i.e., income accruing in, or derived from, the UAE)
A juridical person that is incorporated or formed outside the UAE and not effectively managed and controlled in the UAE to the extent they:
- Have a Permanent Establishment in the UAE;
- Derive state sourced income;
- Have a Nexus in the UAE by way of earning income from immovable property in the United Arab Emirates.
When is a Non-Resident Person required to register for Corporate Tax purposes?
a. Juridical persons:
1. Permanent Establishment in the UAE;
2. A nexus in the UAE:
- As soon as the Person determines that their activities will trigger the above, they should register with the FTA for Corporate Tax purposes to avoid any compliance delays that may result in administrative penalties.
- If it derives only state-sourced income and does neither have a Permanent Establishment in the UAE nor a nexus in the UAE, it shall not register for Corporate Tax purposes.
b. Natural persons:
When the Non-Resident Person has a turnover attributable to their Permanent Establishment in the UAE that exceeds AED 1,000,000 within a Gregorian calendar year.
What income of a Non-Resident Person is subject to Corporate Tax in the UAE?
a. Income attributable to a Permanent Establishment or Nexus
b. Business or business activities of a non-resident natural person that are subject to Corporate Tax (if the gross amount of turnover exceeds AED 1,000,000 during a Gregorian calendar year)
c. State-sourced income
d. Small business relief: This is unavailable to a Non-Resident Person. However, this may be affected by applicable Double Taxation Agreements.
e. Exempt income from operating aircraft or ships in international transportation: This exemption only applies if similar provisions are applied to a UAE Resident Person conducting the same activities in the country or territory in which the Non-Resident Person is resident.
f. Interaction of the Corporate Tax Law with Double Taxation Agreements: A Double Taxation Agreement that is in force in the UAE, takes precedence over the provisions of the Corporate Tax Law to the extent there is any inconsistency.
Other UAE Corporate Tax requirements for a Non-Resident Person
a. Standalone financial statements and attribution
- The Taxable Income for a Non-Resident should be prepared in accordance with accounting standards accepted in the UAE (which are International Financial Reporting Standards “IFRS”).
- A Taxable Person may calculate its Taxable Income based on financial statements prepared using the cash basis of accounting, if specific conditions are met.
- A Non-Resident Person must determine its Taxable Income which is attributable to a Permanent Establishment or nexus in the UAE. Attribution of income and expenditure to a Permanent Establishment should be based on the arm’s length principle and internationally accepted attribution methodologies, as a Non-Resident Person and its Permanent Establishment are considered to be Related Parties.
b. Tax Return submission
- On the same basis as a Resident Person, a Non-Resident Person must file a Tax Return with the FTA and settle the Corporate Tax payable no later than nine months from the end of the relevant Tax Period.
- A Tax Period, the period for which a Tax Return is required to be filed for the purposes of Corporate Tax, is normally the Gregorian calendar year, or the twelve-month period for which the Taxable Person prepares financial statements.
- However, in specific cases, a Taxable Person can make an application to the FTA to extend a current period to a maximum of 18 months or to shorten the subsequent period to between 6 and 12 months.
c. Record keeping: Notwithstanding the provisions of the Tax Procedures Law, a Non-Resident Person must maintain all records and documents for a period of 7 years following the end of the Tax Period to which they relate.
Permanent Establishment
A Permanent Establishment of a Non-Resident Person can arise in the UAE where:
- There is a fixed or permanent place in the UAE through which the Non-Resident Person wholly or partly conducts its business;
- A Person habitually exercises an authority to conduct a business or business activity in the UAE on behalf of the Non-Resident Person; or
- A Non-Resident Person has any other form of nexus in the UAE as may be specified in a decision issued by the Cabinet.
Two types of Permanent Establishments are explained as below:
1. Fixed Place Permanent Establishment
a. Essential factors determining the existence of a fixed place Permanent Establishment:
- The Non-Resident Person must have a “place of business” in the UAE.
- The place of business must be “fixed”, i.e. it must be established at a distinct place with a certain degree of “permanence”.
- The place of business must be at the disposal of the Non-Resident Person.
- The activities performed by the Non-Resident Person at such A place of business must be core income-generating activities and not of a preparatory or auxiliary nature.
b. Immaterial factors for determining the existence of a fixed place Permanent Establishment:
- Ownership of the Non-Resident’s place of business is immaterial. Even rented premises can constitute a Permanent Establishment.
- The formal legal right to use a particular place is not required if the Non-Resident Person has effective control over such a location i.e. it is at its disposal to conduct its business activities.
- An exclusive right over a place is immaterial. A Non-Resident Person can have a Permanent Establishment even in cases where it conducts its Business through a specific location that belongs to another Person or that is used by several other Persons to perform their own business activities at the common location.
c. Specific inclusions in a fixed place Permanent Establishment.
The Corporate Tax Law provides a list of illustrative and non-exhaustive examples of a fixed or permanent place of business in the UAE. These terms must be interpreted in such a way that such places of business constitute Permanent Establishments only if they meet the requirements of fixed-place Permanent Establishment and are not used solely for “preparatory’’ and “auxiliary’’ activities.
2. Agency Permanent Establishment
Even if a Person, that is not a Resident Person, does not have a fixed place of business in the UAE, it could nonetheless have an agency Permanent Establishment unless it is an agent that is legally or economically independent from the principal.
A Person would create an agency Permanent Establishment for a Non-Resident Person if such Person, on a regular basis:
- Concludes contracts in the UAE on behalf of a Non-Resident Person; or
- Negotiates contracts in the UAE on behalf of a Non-Resident Person and such contracts are concluded by the Non-Resident Person without any material modification to the terms of the contracts.
State Sourced Income
Corporate Tax shall be imposed on a Taxable Person, including a Non-Resident Person, if the Non-Resident Person derives state sourced income, i.e., income accruing in, or derived from, the UAE.
In the case of a Non-Resident Person, State Sourced Income includes:
1. Income derived from a Resident Person, i.e., income derived from a juridical person or natural person that is considered a Resident Person as per the Corporate Tax Law.
2. Income derived by a Non-Resident Person from another Non-Resident Person to the extent it is attributable to a business or business activity conducted by that other Non-Resident Person through a Permanent Establishment in the UAE.
3. Income otherwise accrued in or derived from activities performed, assets located, capital invested, rights used, or services performed or benefitted from in the UAE.
4. Further examples of state sourced income (which are subject to any conditions and limitations that the Minister may determine) include:
a. Income from the sale of goods:
- The general rule for the sale of goods is that the income is sourced to where the sale and resulting transfer of title take place.
b. Income from services:
- Income from services would generally be considered state sourced income where the service is rendered in the UAE or where the ultimate recipient or beneficiary of the service is located in the UAE.
c. Income from a contract:
- Income from the performance of contracts would generally be sourced in the place where the contract is performed or to where the ultimate recipient or beneficiary of the performance under the contract is located.
d. Income from movable or immovable property:
- Income arising from the use or sale of tangible property is sourced from the place where the property is located.
e. Income from the disposal of shares or capital rights of a Resident Person:
- Capital gains and other income derived from the sale of shares or other rights in the capital of a juridical person is considered to be state sourced income where the juridical person is incorporated or resident in the UAE for Corporate Tax purposes.
f. Income from intellectual or intangible property:
- Income received from the use, the right to use, or the granting of the permission to use in the UAE of patents, trademarks, trade brands, copyrights, artistic or scientific work, secret formula or process, goodwill, and other such intangible or intellectual property in the UAE would generally be sourced from the UAE. This is irrespective of the location and residence for Corporate Tax purposes of the payor and recipient of the income.
g. Interest income: Interest income is sourced from the UAE if it meets any of the following conditions:
- The loan is secured by movable or immovable property located in the UAE or
- The borrower is a Resident Person; or
- The borrower is a government entity
h. Insurance income: Insurance or reinsurance premiums are considered to be state sourced income in any of the following instances:
- The insured asset is located in the UAE;
- The insured Person is a Resident Person; or
- The insured activity is conducted in the UAE
Nexus in the UAE
A juridical Non-Resident Person will be considered to have a nexus in the UAE if it derives income from any Immovable Property in the UAE, which means:
a. Any area or land over which rights, interest or services can be created; or
b. Any building, structure, or engineering work attached to the land permanently or attached to the seabed; or
c. Any fixture or equipment that makes up a permanent part of the land or is permanently attached to the building, structure, engineering work, or seabed.
Income from Immovable Property will include income derived by way of sale, disposal, assignment, direct use, leasing or subleasing or any other form of exploitation of Immovable Property.
Conclusion
Understanding the residency rules is critical for taxable persons to maximise tax benefits and maintain compliance. Gatestone Group, with its extensive knowledge of the UAE’s business tax situation, can offer important advice in this area.
How the Gatestone Group Can Help?
- Comprehensive tax assessment: Our experts undertake a full examination of your business to determine your residency status.
- Tax structure optimisation: We assist you in structuring your operation to achieve optimal tax benefit.
- Documentation and compliance: We help you keep complete records and documentation to support your residency status and demonstrate compliance with tax legislation.
- Ongoing advisory services: Our team provides ongoing support to meet the changing tax landscape and ensure your company remains compliant with the most recent legislation.
Partnering with Gatestone Group allows you to obtain clear guidance while focusing on expanding your business. Contact Gatestone Group and book a free consultation with our tax experts via email at [email protected] or call +971 52 410 0849 or +971 4 450 1023.
