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The United Arab Emirates (UAE) has long been known for its tax-efficient business environment. With the introduction of the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (commonly referred to as the Corporate Tax Law), the tax landscape is changing. Understanding the implications of this law is crucial, particularly for non-resident persons who derive income from the UAE. This guide will break down everything non-resident individuals and businesses need to know about corporate tax obligations in the UAE.
Who is a Non-Resident Person?
Under the Corporate Tax Law, a non-resident person refers to an individual or entity that is not a resident of the UAE but engages in specific business activities within the country. This includes juridical persons (legal entities) not incorporated in the UAE and natural persons who do not reside in the UAE but earn state-sourced income.
Non-resident status is determined by:
- No incorporation or effective management in the UAE.
- No physical presence for more than 183 days in a calendar year for natural persons.
Key Criteria:
- Permanent Establishment (PE): If a non-resident has a fixed place of business or conducts substantial business in the UAE, it can be deemed to have a PE.
- State-Sourced Income: Any income derived from the UAE, whether through business activities or contracts, may be subject to corporate tax.
When Should a Non-Resident Register for Corporate Tax?
Non-residents must register for corporate tax under specific conditions:
- Juridical persons: If the non-resident has a permanent establishment or nexus in the UAE, it must register with the Federal Tax Authority (FTA).
- Natural persons: If their turnover from UAE business activities exceeds AED 1,000,000 within a Gregorian calendar year(Taxable Non-Resident Person).
Example Scenario:
If a non-resident marketing company earns income from a UAE client but has no office or employees in the UAE, they are likely exempt from registration unless the business has a nexus, such as owning property in the UAE.
Income of a Non-Resident Subject to Corporate Tax
The Corporate Tax Law applies a 0% tax on the first AED 375,000 of taxable income and a 9% tax on income above this threshold, applicable to both residents and non-residents.
Non-resident persons’ income subject to corporate tax includes:
- Profits attributable to a Permanent Establishment or nexus in the UAE.
- State-sourced income: Income derived from UAE-based activities, assets, or services. This includes business income, rental income from property, and any other commercial activities conducted in the UAE.
State-Sourced Income Explained
State-sourced income plays a critical role in determining a non-resident’s tax obligations. It is income derived directly from business or investments within the UAE, including:
- Income from a UAE resident person or UAE-based business.
- Income from assets located in the UAE.
- Income from services performed in the UAE.
In certain cases, state-sourced income may also be subject to withholding tax, which is currently set at 0%(Taxable Non-Resident Person).
Permanent Establishment for Non-Residents
A Permanent Establishment (PE) is crucial in determining taxability for non-residents. According to the law, a PE arises when a non-resident has a fixed or permanent place in the UAE through which they conduct business. PEs can take the form of:
- Fixed Place PE: An office, branch, factory, or even a hotel room used for conducting business.
- Agency PE: When a person or entity in the UAE habitually exercises authority to conduct business on behalf of the non-resident.
For example, a non-resident company providing long-term consultancy services through employees based in the UAE for over 6 months will likely have a PE.
Nexus in the UAE
A nexus refers to the relationship a non-resident entity has with the UAE that results in tax liability. This often arises when the non-resident derives income from immovable property in the UAE, such as real estate or land. The presence of a nexus will require the non-resident to register for corporate tax.
Exemptions and Relief
Non-residents are not eligible for Small Business Relief, a tax benefit available to UAE resident businesses with turnover below a certain threshold. However, non-residents can benefit from the exempt income provisions for operating aircraft or ships in international transportation.
This exemption applies if:
- The non-resident is involved in the international transport of passengers, goods, or merchandise.
- The non-resident leases or charters aircraft or ships.
Record-Keeping and Filing Requirements
Like resident businesses, non-residents are required to:
- Maintain accurate financial records for at least seven years.
- Submit tax returns within nine months of the end of their fiscal year(Taxable Non-Resident Pe…).
Failure to comply with these requirements can lead to penalties, even for non-residents.
Interaction with Double Taxation Agreements (DTAs)
The UAE has signed Double Taxation Avoidance Agreements (DTAs) with numerous countries, allowing non-residents to avoid being taxed twice on the same income. DTAs take precedence over local tax laws, meaning if a non-resident qualifies for relief under a DTA, they may reduce or eliminate their tax liability in the UAE.
For instance, a non-resident company operating in both the UAE and another country may avoid paying corporate tax twice if a DTA is in place between the two countries.
Case Studies
Case 1: Marketing Company with Nexus A foreign marketing company without a permanent office in the UAE but earning rental income from property it owns in the UAE will be required to register for corporate tax based on its nexus, even if it does not have a PE.
Case 2: Consultant Working in the UAE A consultant working in the UAE for a foreign employer creates a PE if they habitually exercise authority to conduct business in the UAE. If the consultant's turnover exceeds AED 1,000,000, they must register for corporate tax.
Conclusion
The introduction of corporate tax in the UAE significantly impacts non-resident persons and businesses. To avoid penalties and ensure compliance, non-residents need to determine whether their activities in the UAE create a Permanent Establishment or generate State-Sourced Income. Understanding the implications of DTAs, complying with tax registration and filing requirements, and ensuring proper record-keeping are crucial steps for non-resident businesses operating in the UAE.
