Home is where the tax is! Establishing your tax residency in the UAE

In the last few years, the United Arab Emirates (UAE) has become an increasingly popular destination for individuals and families to move their lives. The UAE’s favourable tax regime, warm climate and endless economic opportunities have made it an attractive choice for expats and entrepreneurs, alike. Although no personal income tax is levied on individuals in the UAE, the UAE has entered into various Double Tax Agreements (DTAs) with other jurisdictions (more than 136 as of the date of this article).

Analysis

Further, the UAE has begun establishing its own local regulations to determine tax residency. As these laws are still new, individuals who are wishing to establish lives in the UAE are increasingly looking for bespoke legal advice on what constitutes tax residency for UAE purposes particular to their circumstances.

Tax residency – legislative basis in the UAE

Most recently the UAE has released the Ministerial Decision No. 27/2023 on The Implementation of Certain Provisions of Cabinet Decision No. 85/2022 on Determination of Tax Residency (Ministerial Decision) which further clarifies the application of the rules around individual tax residency (for natural persons) following the Cabinet Decision No. 85/2022 on the Determination of Tax Residency (Cabinet Decision).

The Cabinet Decision originally set out a statutory definition of what tax residency is for both judicial persons and natural persons. Natural persons are regarded as Tax Residents where they have a principal place of residence in the UAE, their centre of financial and personal interests are in the UAE and they have been physically present in the UAE for either 183 days or 90 days subject to certain conditions (notwithstanding conditions which are at the discretion of the Minister of Finance).

Primary place of residence and centre of financial and personal interests the UAE

The Ministerial Decision clarifies that an individual’s “primary place of residence” is the place where that person “habitually or normally resides”. Following this, the Ministerial Decision also provides that an individual is considered to be habitually and normally residing in the UAE when they spend time in the UAE in a “settled routine”, and in a way that is “more than transient” compared to other jurisdictions.

Notably, there is limited guidance on what a “settled routine” or “time spent that is more than transient” means in practicality, however we understand that a determination of this should be considered using a ‘substance over form’ approach.

More likely than not, any person who has an enduring relationship with the UAE in which they perhaps intend to return to the UAE regularly over a period time may be considered to meet these requirements.

Further, an individual’s centre of personal and financial interests will be in the UAE where their personal and economic interests that are the closest or of the greatest significance to them are in the UAE compared to that of other jurisdictions. In determining this, whether an individual has family and social relations, occupation, cultural and other activities in the UAE may also be taken into consideration. Specifics of the extent to which “social relations, cultural or other activities” will result in this being met have not been provided and one would expect that a limited amount of friends and one-off cultural activities would not in of themselves suggest that this is met.

However, we should not ignore that when determining the primary place of residence or centre of financial interest, the Ministerial Decision refers to comparisons to other jurisdictions. This suggests that the Federal Tax Authority (FTA) will, when determining whether someone habitually resides in the UAE, not just consider an individual’s actions during their time spent in the UAE, but will also take into account an individual’s actions during their time spent in other jurisdictions as a comparative measure. The OCED Model Convention on Tax Residency suggests that where individuals are residents of [1 p.5] two states, tax residency rules should allow a clear preference of interests and attachments of an individual to one State over another. As a result of this, conducting a comparative exercise is therefore required to ensure that a clear residency can be established for individuals. By incorporating such rules into our domestic regulations on Tax Residency, we understand that the FTA will consider and look into an individual’s actions as a whole and take into account a manner of various aspects to determine whether their primary place of residence and/or centre of economic interests lies in the UAE.

183 days or 90 days in the UAE

Notwithstanding the above, the Cabinet Decision provides that in addition to having a primary place of residence or centre of economic interest in the UAE, an individual must also be physically present in the UAE for a period of 183 or 90 days or more in a 12-month period. Unless an individual is a UAE national, a person with a UAE residency permit (UAE resident) or a GCC national, they must be physically present in the UAE for 183 days or more in a 12-month period to be considered a Tax Resident. The Ministerial Decision states that an individual’s physical presence will be calculated using days which are full and partial days. This means that days on which individuals are flying in and out of the UAE will be counted as well, even if they are not full days.

However, a UAE national, UAE residents or GCC nationals are only required to be physically present in the UAE for 90 days or more in a 12-month period, but to determine if they have UAE Tax Residency they must also have a permanent place of residence in the UAE, be employed in the UAE or carry on a place of Business in the UAE. The Ministerial Decision has clarified circumstances in which these conditions will be met.

90-day rule – permanent place of residence and employment

The Ministerial Decision provides that a permanent place of residence for the purposes of this Tax Residency is a home (whether a house, apartment or other type of dwelling) in which a person has a continuous right to occupy with some degree of permanency and stability. It is not necessary that the person owns the home, as long as the property is leased for more than a short term stay or duration.

It is clear therefore that this requirement is satisfied where an individual leases a premises which could be used to evidence a continuous right of occupation. However, what is yet to be revealed is whether, in circumstances where a person does not have a formal lease for an apartment or room, but is able to stay in it as and when they please – for example that of a friend or a family member – a continued right of occupation can be established.

Further consideration must also be given to what is considered “permanent” and the length of time in which a person should have continuous occupation. In certain jurisdictions, permanency does not need to be everlasting, but could simply be for a long duration of time, so long as it is clear that the duration of stay is not intended to be short-term.

In establishing this therefore, we are of the view that a holistic examination of an individual’s stay would be required. Whether it can be evidenced that a home or place of residence could be considered to be permanently available to them would need to be a matter of fact.

In addition to the above, in the absence of a permanent place of residence, a UAE national, UAE resident or GCC national who has spent 90 days in the UAE may be considered a Tax Resident where they are either employed in the UAE or carry on a Business in the UAE.

The Ministerial Decision clarifies that “employment” includes any circumstance in which you receive income for your labour, regardless of whether a formal employment contract is in place with a specific exception of volunteer work. Generally, the UAE Labour Law provides strict guidelines on what constitutes legal employment in the UAE – specifically, that employees are employed on a fixed term employment contract, not exceeding three years in length. However, the Ministerial Decision has clearly made a distinction to consider any form of work conducted in return for income to be considered “employment” for the purposes of Tax Residency. This is important to note because it seems to suggest that the UAE Tax law may take into account broader definitions than ordinarily accepted in UAE law following a strict substance over [legal] form approach.

For completeness, “Business” or “Business Activity” were not clarified in the Ministerial Decision but we understand that it is likely to follow the definitions outlined in the Federal Decree-Law No. 47/2022 on the Taxation of Corporations and Businesses (CT Law).

A ‘model’ resident

In our reading of the Tax Residency regulations, the Cabinet Decision and the clarifications outlined in the Ministerial Decision are endeavouring to fall in line with the OCED’s Model Tax Convention on Tax Residency. These OECD guidelines appear to have also influenced most of the DTAs that the UAE has entered into with other jurisdictions. Given that DTAs will generally supersede any local legislation, the UAE appears to be ratifying the rules from the OCED Model and DTAs into local UAE legislation to avoid ambiguity or conflict. In fact, the Cabinet Decision specifically states that the DTAs should supersede the Cabinet Decision (and therefore the Ministerial Decision) on Tax Residency. As such, we note that when determining tax residency in the UAE it is important to ensure that the local rules are read in conjunction with any applicable DTA.

Where an individual is considered a UAE Tax Resident, although no personal income tax is going to be levied on them, they would need to confirm whether any income earned by them is from a “Business” or “Business Activity” conducted in the UAE to which corporate income tax applies. The term “Business” has been broadly defined in the CT Law, but we note that specific categories of Business and Business Activities in relation to natural persons who will be subject to CT are expected to be released in an upcoming CT Cabinet Decision. To date therefore, it is unclear what exactly will constitute Business Activities, but it must be noted that any activity that falls within these categories, conducted by natural persons/individuals who are Tax Resident in the UAE should be subject to UAE CT. More details to come on this.

Further, where individuals do not conduct any Business or Business Activity in the UAE, the determination of a UAE Tax Residency may be beneficial for those individuals who may be resident of another higher tax jurisdiction. Individuals may wish to establish their lives in the UAE and take advantage of becoming a UAE Tax Resident by being subject to no personal income tax compared to another jurisdiction where all personal income would also be subject to a personal income tax.

Next phase

Overall, the Ministerial Decision has given us a clear indication of how the FTA will determine Tax Residency for individuals /natural persons. Although the OCED Model Conventions will assist in clarifying many aspects of the law, determining whether an individual is a Tax Resident in the UAE will continue to be based on a matter of fact. We will need to holistically consider an individual’s movements and conduct in the UAE to determine whether they, in fact, meet the requirements of being a UAE Tax Resident.

Practically speaking, once an individual is determined to be a Tax Resident, that person’s income earned in his or her personal capacity will not be taxable, unless that person also engages in business, or a business activity. As mentioned, further guidance on what constitutes Business or Business Activities is still awaited. However, we can at this stage safely infer that any person earning passive or employment income, and who does not earn income as a result of commercial activity or running a business in his or her own name (such as a sole proprietor), such income should generally not be subject to the CT Law.
 
Authored by: Zain Satardein, Aakriti Sharma
Originally published via LexisNexis – Click Here