Introduction
UAE Corporate Tax law (‘CT Law’) has become effective from 1 June 2023 with the Corporate Tax rate of 9% within the GCC region. The UAE Corporate Tax regime incorporates global best practices and aims to minimise compliance burdens on businesses and follows the principles of residence taxation for UAE-incorporated entities and source-based taxation for non-residents (‘NR’).
As per CT Law, UAE-incorporated companies including branches, foreign enterprises effectively managed and controlled in the UAE and natural persons who conduct business or business activities in UAE are considered as tax residents of UAE. Furthermore, an NR is a person who is not considered a resident person and either has a permanent establishment (PE) in the UAE or derives UAE-sourced income or has a nexus in the UAE.
NR income streams and taxability
The NR shall be taxable in UAE if it earns income through PE in UAE or has earned UAE-sourced income or has earned income through nexus in the UAE. We have highlighted below the taxability of the NR in UAE:
PE income
UAE Corporate Tax law has PE-based taxation as understood globally. Article 14 – Permanent Establishment of CT Law provides what constitutes PE in UAE, which inter-alia includes fixed-base PE (i.e. in the form of a branch, factory, mine, etc.), construction PE (i.e. where activities last > 6 months) including installation PE and supervisory PE, dependent agent PE (i.e. person having and habitually exercising authority for concluding or negotiating contracts) and any other form of nexus as may be prescribed by a cabinet decision. Exclusion has been provided from the constitution of PE for auxiliary activities or place of storage/display, independent agent, etc. Furthermore, UAE CT Law specifically provides an exemption for investment managers, provided they satisfy prescribed conditions.
From the definitions mentioned in the above paragraph, it is important to note that the concept of service PE is missing in the UAE CT Law.
Where an NR constitutes a PE in UAE, profits attributable to PE functions are taxable in UAE. Transfer pricing principles are usually considered as a basis for computing profits attributable.
UAE-soured income
Income will generally be considered UAE-sourced if earned from a UAE-resident person or derived from the NR in connection with a UAE PE or derived from activities performed, assets located, capital invested, rights used or services performed or benefited in the UAE. UAE CT Law also provides the illustrative list for the UAE-sourced income which includes income from the sale of goods, services rendered/utilised in UAE, income from property/insured asset/IP rights used in UAE, sale of UAE shares/capital, interest from UAE resident, etc.
UAE-sourced income shall be taxable in UAE. Furthermore, 0% withholding tax (WHT) shall also be prescribed on certain categories of state-sourced income. A non-resident will not be required to register for tax if they only earn UAE-sourced income and do not have a PE.
UAE nexus income
An NR juridical person is deemed to have nexus in the UAE if they earn income from any immovable property located in the UAE. However, real estate income earned by foreign individuals would generally not be subject to Corporate Tax provided it is not a licensed business activity. Such treatment is in line with international best practice, wherein such income is taxable in the country in which the property is located.
Exemption
Income earned by an NR from the operation of aircrafts or ships in international transportation shall not be subject to Corporate Tax in UAE provided conditions prescribed in Article 25 of CT Law are fulfilled. Furthermore, an NR person earning income from extractive and non-extractive business activities would not be subject to corporate tax in UAE provided they fulfil the conditions prescribed in Article 7 and Article 8 of CT Law, respectively.
Concluding remarks
- If an NR has a PE in the UAE or has nexus in the UAE, the NR is required to obtain tax registration in UAE except where it has earned only source income without PE in UAE.
- It is important to note that even where income is taxable for the NR, the same is taxable on a net basis (i.e. post deduction of eligible expenses) and must comply with all the provisions of CT Law.
- The tax rate of 9% is applicable on income exceeding AED 375,000.
- The final taxability may need to be determined after considering the applicable of the double taxation treaty between the UAE and the home country of the NR.
- Foreign tax credit can be claimed in UAE to the extent of UAE Corporate Tax, where income is subject to double taxation.
Taxation of non-residents under UAE CT Law aligns with international taxation principles. With evolving law, it is crucial for non-residents to remain updated and compliant.
