Basis of Taxation
[Based on the Public Consultation Document released by the Ministry of Finance, UAE on 28 April 2022.]
Taxation of Residents:
UAE resident persons will be taxable in the UAE on their worldwide income.
Exception:
- The income of a natural person will be taxable only if it is earned from their business activity carried out in the UAE
- Certain Income of legal person earned from overseas, viz:-
- income from a foreign branch
- income from qualifying foreign shareholdings
Where income earned from abroad is not exempt, income taxes paid in the foreign jurisdiction can be taken as a credit against the Corporate Tax payable in the UAE on the relevant income to prevent double taxation.
Resident for the purpose of Corporate Tax means:
- A natural person engaged in business or commercial activity in the UAE, either in his own name or through an unincorporated partnership
- A legal person that is incorporated in the UAE
- A foreign company if it is effectively managed and controlled in the UAE
Taxation of Non-Residents:
Non-residents will be subject to UAE Corporate Tax on:
- Taxable income from their Permanent Establishment in the UAE (Exemption is available for Investment Managers subject to conditions); and
- Income is sourced in the UAE.
Our comments:
The Corporate Tax Consultation Document has indicated that the effective management and control test is a question of fact. It has also indicated that one will have to see where the directors / decision makers make the key management and commercial decisions. Thus, to determine residence status of a legal person, one will have to analyse where the decision makers meet and which country are they resident of.
In this connection, analogy can be drawn from the Article 4 of the OECD Model Tax Treaty and its commentary.
