Draft application of corporation tax to tax residents and non-residents


The word “resident” is a determining factor in the application of corporate income tax and personal income tax laws around the world. As if the person is a resident of a country, their worldwide income is generally subject to income tax in that country, and if the person is a non-resident in any jurisdiction, their worldwide income is not is not subject to income tax in that jurisdiction.

Similar to global practice, the United Arab Emirates has adopted the same approach. As stated in the public consultation papers on corporation tax, if the person is a resident – resident as defined in the UAE consultation paper, then his or her worldwide income would be subject to corporation tax (IC ) in the UAE unless a resident individual whose income only UAE companies would be subject to CT in the UAE.

From the above discussions, it is obvious that we need to understand the difference between resident and non-resident as stated in the consultation document, which would be very helpful in learning the application of TC in the UAE.

It was very clearly stated in paragraph 4.3 of the consultation document that “a legal entity which is incorporated in the UAE will automatically be considered a ‘resident’ person for the purposes of the UAE TC”. From this proposed treatment, all incorporated entities, including entities in free zones and financial free zones, would be considered residents for the purposes of the UAE TC. This means that every legal person, including every grocery store, saloon, shops in the shopping streets, etc. would be considered a tax resident under the proposed provision of the UAE CT Law.

Paragraph 4.3 of the consultation document further states that “any natural person who carries on business or commerce in the UAE, either in his own name or through an unincorporated partnership, will also be considered as a resident person for the purposes of the UAE CT scheme.Thus, any natural person would not be a resident for the purposes of the TC and each individual would not be required to register for the TC.However, if the individual engages in a commercial activity or business that requires a business permit or license from the government or relevant authority, then the individual will be considered a resident.

Like investments made by individuals in property, stocks, etc. do not require any government permits, so these individuals would not be considered residents for TB purposes and their income would not be subject to TB. On the other hand, a professional like a doctor, an accountant, etc. who provides professional services, even as an individual or through a general partnership, is likely to withdraw the license of the competent authority so that he is considered a resident for the purposes of the TC.

Foreign companies that are effectively managed and controlled in the UAE would also be considered residents for the purposes of the TC, as set out in paragraph 4.4 of the consultation document. It would be very difficult to determine whether the company is managed and controlled in the United Arab Emirates, but the litmus test would be to determine where the main management and business decisions of the company are taken from. For example, if a company is based in the UK, but the management is based in the United Arab Emirates, from where all business and management decisions related to that company are made, then such a company would be considered a resident. of the United Arab Emirates for TC purposes.

Resident companies would be subject to tax on their worldwide income, including capital gains, with the exception of income derived by UAE companies from investments in other companies and from operations conducted outside the UAE by the intermediary of foreign subsidiaries or branches. Dividend income and capital gains on sales of shares in the hands of corporate shareholders are given special treatment and we will discuss them in detail in our upcoming articles.

Resident individuals would be subject to tax on their UAE-sourced business income only, which requires a business license. A person who lives outside the UAE and provides self-employed services in the UAE, then their income from the UAE would be subject to CT and the related withholding clauses would apply. However, salaries, rental income, dividends and any other investment income of these non-resident individuals would not be subject to CIT.

All residents would be required to register with TB and prepare their financial statements in accordance with International Financial Reporting Standards (IFRS). They would be required to file their 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 TC should not be confused with normal residents of the UAE, and it should be read and interpreted bearing in mind the provisions of the consultation document.

Mahar Afzal is Managing Partner at Kress Cooper Management Consultants. The above is not an official opinion but a personal opinion of the author based on the public consultation document on corporation tax. For any questions/clarifications, please write to him at [email protected]

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