Defining Tax Residency Under New UAE Corporate Tax Law

Defining Tax Residency Under New UAE Corporate Tax Law

With the implementation of the Corporate Tax (CT) Law, the UAE has aligned its fiscal framework with global standards. Central to this new system is the concept of “Tax Residency.” This is the cornerstone that determines the extent of a person’s or a company’s tax obligations to the UAE government. For businesses and individuals operating in the Emirates, understanding whether you are classified as a “Resident” or a “Non-Resident” for tax purposes is not just a matter of compliance; it’s a critical factor that dictates your entire tax profile, including what income is taxed and your access to international tax treaty benefits.

The distinction is profound: a Tax Resident is generally taxed on their income from both domestic and foreign sources, whereas a Non-Resident is typically only taxed on their UAE-sourced income. The criteria for determining residency are now clearly defined in the law for both juridical persons (companies) and natural persons (individuals). This guide will provide a detailed breakdown of these definitions, explore the specific tests that apply to each category, and explain the significant implications that come with being a UAE Tax Resident.

Part 1: Tax Residency for Juridical Persons (Companies)

For a company or any other legal entity, being a UAE Tax Resident means it is subject to Corporate Tax on its worldwide income, subject to certain exemptions for foreign branches or foreign-sourced dividends and capital gains. A company is considered a resident for CT purposes if it meets either of the following two tests:

Test 1: Incorporation, Establishment, or Recognition in the UAE

This is the most straightforward test. If your company is incorporated, formed, or otherwise established or recognized under the laws of the UAE, it is automatically considered a UAE Tax Resident. This includes:

• Limited Liability Companies (LLCs) and Joint Stock Companies established on the mainland.
• Companies established in any of the UAE’s Free Zones.

Therefore, any entity with a UAE trade license is, by default, a UAE Tax Resident. Strategic company formation in the UAE automatically confers this status.

Test 2: Place of Effective Management and Control (PoEM) in the UAE

This test applies to foreign-incorporated companies. A company established under the laws of another country will still be treated as a UAE Tax Resident if its “place of effective management and control” is in the UAE. PoEM is an internationally recognized standard that looks beyond the place of incorporation to determine where the key management and commercial decisions of the business are actually made. Factors that indicate PoEM is in the UAE include:

• Board Meetings: Where the board of directors or their equivalent regularly meets and makes strategic decisions.
• Executive Management: Where the CEO, CFO, and other senior executives are primarily based and carry out their duties.
• Headquarter Functions: Where core headquarter activities like strategic planning, finance, and HR consultancy are performed.

This rule prevents foreign companies from avoiding UAE tax by simply being incorporated elsewhere while their entire leadership and decision-making apparatus is located within the UAE. A detailed internal audit of governance structures can help clarify where PoEM lies.

Part 2: Tax Residency for Natural Persons (Individuals)

While the Corporate Tax law primarily targets businesses, it also sets out conditions under which an individual can be a Tax Resident. This is particularly relevant for entrepreneurs and freelancers who conduct business in their personal capacity and whose business income might be subject to CT. An individual is a UAE Tax Resident if they meet any one of the following conditions:

Condition 1: Usual or Principal Place of Residence and Center of Interests

This test has two parts, and both must be met:

1. The UAE is their “usual or principal place of residence.” This implies a degree of permanence and physical presence that goes beyond just visiting.
2. The UAE is their “center of financial and personal interests.” This looks at where the individual’s economic and personal ties are strongest. Factors include the location of their family, their primary bank accounts, their social and professional affiliations, and their main assets.

Condition 2: The 183-Day Presence Test

An individual who is physically present in the UAE for 183 days or more in a consecutive 12-month period is automatically considered a Tax Resident.

Condition 3: The 90-Day Presence Test (for UAE Citizens/Residents)

This test is specifically for UAE citizens, UAE residents, or GCC nationals who hold a UAE residence visa. They are considered a Tax Resident if they are physically present in the UAE for 90 days or more in a consecutive 12-month period, AND they hold a permanent place of residence in the UAE (e.g., own or rent a home) and carry on a business or are employed in the UAE.

Part 3: The Strategic Importance of a Tax Residency Certificate (TRC)

One of the most significant advantages of being a UAE Tax Resident is the ability to obtain a Tax Residency Certificate (TRC) from the FTA. A TRC is an official document that confirms your tax residency status to foreign governments.

Its primary purpose is to allow residents to claim benefits under the UAE’s extensive network of Double Taxation Avoidance Agreements (DTAAs) with over 130 countries. These treaties prevent income from being taxed twice—once in the foreign country where it was earned and again in the UAE.

For a UAE resident company receiving dividends or royalties from a foreign country, a TRC can be used to claim a reduced or zero rate of withholding tax in that foreign country, leading to significant tax savings. This requires impeccable financial reporting and documentation.

Part 4: The Role of Meticulous Record-Keeping

The burden of proof for tax residency lies with the taxpayer. The FTA has the right to request evidence to support your residency claim. This makes accurate record-keeping an absolute necessity.

• For Companies: Maintain minutes of board meetings, records of key decisions, and organizational charts that clearly show where management and control are exercised.
• For Individuals: Keep detailed travel logs (entry/exit stamps), tenancy contracts, utility bills, and bank statements that can substantiate your physical presence and center of interests in the UAE.

Modern accounting software can be instrumental in managing this. A platform like Zoho Books helps maintain a clear, auditable trail of all your financial transactions, which is a key component of demonstrating your center of financial interests. Proper accounting system implementation ensures these records are robust from day one.