The introduction of the Corporate Tax Law in the UAE marks a pivotal development in the taxation landscape, particularly affecting individuals and entities not residing within its borders. This article explores the criteria and implications of establishing a taxation connection, or “nexus,” for non-residents in the UAE.
Understanding Non-Resident Person’s Nexus in UAE for CT
What defines a Non-Resident for Tax Purposes?
Under the UAE Corporate Tax (CT) regulations, the term ‘Non-Resident’ encompasses:
I. Individuals without residency status who either:
- Operate a permanent establishment within the UAE, or
- Earn income originating from within the state.
Specifically, an individual qualifies as a Non-Resident for tax purposes if they operate a Permanent Establishment (PE) in the UAE with a yearly revenue exceeding AED 1 million attributable to this PE.
II. Entities formed outside the UAE that are not managed or controlled within the nation are classified as Non-Resident Taxable Entities provided they:
- Maintain a Permanent Establishment within the UAE,
- Generate income from within the country,
- Have a tax nexus within the UAE through income earned from real property located within the nation.
Establishing Non-Resident Person’s Nexus in UAE for CT
A non-resident entity is recognised as having a tax nexus within the UAE if it generates income from real estate within the territory.
Such entities are required to enrol with the UAE Federal Tax Authority (“FTA”) and secure a Tax Registration Number.
Earnings Linked to Real Estate
Income-related to real estate that falls under taxable earnings includes proceeds from the ownership, sale, transfer, usage, leasing (including subleasing), or any other exploitation of real property situated in the UAE.
Determining Taxable Income with a UAE Nexus
Income linked to either a Permanent Establishment or a tax nexus in the UAE, whether sourced domestically or internationally, is liable for Corporate Tax. This taxable income is determined based on the financial statements prepared under the UAE’s accepted accounting standards for a specified Tax Period.
Tax Obligations for Non-Resident Individuals
Non-resident individuals earning revenue from within the UAE must pay Corporate Tax when their revenue from a Permanent Establishment exceeds AED 1,000,000 annually.
It’s important to note that Corporate Tax does not apply to earnings from salaries, wages, personal investments, or unlicensed real estate ventures among others.
Definition of State-Sourced Income
Under Article 13(1) of the Corporate Tax Law, certain types of income are classified as State-Sourced Income. This classification subjects the income of Non-Resident Individuals to Corporate Tax within the UAE.
Identifying a Permanent Establishment in the UAE
The determination of a Permanent Establishment is a common practice in global tax regulation, assessing whether a foreign entity has a significant presence in a country to justify direct taxation on its profits. The definition of ‘Permanent Establishment’ often follows the guidelines of the OECD and UN model conventions, alongside international treaties designed to prevent double taxation. Typically, the right to tax a foreign entity’s profits is contingent upon the existence of a Permanent Establishment within the host country.
Clarifying ‘Fixed Place PE’ and its Criteria
The term ‘Fixed Place Permanent Establishment’ (PE) encompasses specific criteria:
- The presence of a tangible business location, such as premises, or in certain cases, machinery or equipment.
- This business location must be established in a specific location with a degree of permanence.
- The business must operate through this stationary location.
Identifiable Locations for Fixed Place Permanent Establishment
According to Article 14(2), certain locations qualify as permanent establishments due to the nature of business activities conducted:
- The ‘place of effective management,’ where key operational decisions are made.
- Physical locations like branches, offices, factories, or workshops.
- Real assets, including land and buildings.
- Sites for exploring natural resources.
- Locations like mines, oil or gas wells, quarries, or places for resource extraction, along with related equipment or structures.
- Construction sites, project areas, or installation sites operational for more than six months, encompassing activities by the non-resident’s associated entities.
Detailed Explanations
- Place of Effective Management (PoEM)
A globally recognised criterion for determining a company’s tax residence. It signifies a location where day-to-day operational decisions are made, beyond strategic or high-level decision-making, emphasizing daily business operations.
- Business Premises
This includes not just branches or offices but also factories, workshops, lands, buildings, and other tangible real estate properties considered fixed-place permanent establishments.
- Installation or Construction – PE status
Permanent Establishment status is granted to installations for natural resource exploration or construction projects extending beyond six months. This duration accounts for all related activities, highlighting a potential loophole for tax avoidance through strategic project division among associated entities.
- Dependent Agent Permanent Establishment
Often, multinational corporations employ dependent agents in the UAE to manage business activities, thus circumventing the establishment of a Fixed Place PE. This is highlighted in Article 14(1)(b), where a person, consistently executing contracts or conducting business on behalf of a non-resident, establishes a dependent agent PE. This contrasts with independent agents who may promote goods without forming contracts, thus not constituting a dependent agent PE.
Activities Exempt from Constituting PE
Utilizing a UAE-based business location solely for:
- Storing, displaying, or delivering the non-resident’s goods.
- Holding goods for processing by another entity.
- Procuring goods or gathering information for the non-resident.
- Undertaking any preparatory or auxiliary activity.
These activities, individually or combined, if ancillary in nature, do not form a Permanent Establishment.
Special Circumstances
For example, a company based abroad that uses a UAE warehouse for logistics does not establish a PE under these guidelines, highlighting the specificity required for PE determination.
Comprehensive Examples and Other Requirements
Fixed Place PE Example: ABC Consultancy Inc. creates a UAE subsidiary for a significant project, with the Dubai branch making essential business decisions, qualifying as a Fixed Place PE.
Dependent Agent PE Example: MNP Design Limited employs a consultant in the UAE, granting him authority to finalize deals, establishing him as a dependent agent PE.
Exemptions and Exceptions for Preparatory or Auxiliary Activities: Certain activities, deemed preparatory or auxiliary, such as a tech company’s use of a warehouse for storage managed by an external provider, do not qualify as a PE.
Additional scenarios elaborate on when business operations split across different locations or activities might collectively constitute a PE, emphasizing the need for genuine business operations.
Additional Corporate Tax Obligations for Non-residents in the UAE
Maintaining Records and Financial Reporting
Non-resident entities with operational activities in the UAE are required to accurately determine their taxable income. These entities must retain their tax-related documents for seven years following the conclusion of the tax year. Furthermore, non-residents who are registered for corporate tax are subjected to the identical regulatory framework that applies to residents.
Filing of Tax Returns
The obligation to file a Tax Return extends to both non-resident and resident individuals. They must submit their Tax Returns to the Federal Tax Authority (FTA) and pay any outstanding Corporate Tax within nine months after the tax year has ended.
Final Thoughts on Non-Resident Person’s Nexus in UAE for CT
- Grasping the intricacies of the relationship between non-resident entities and the UAE is paramount for navigating the Corporate Tax landscape effectively. This relationship hinges on whether these individuals or organizations, regardless of their nature, have established a significant economic presence or connection within the nation. For individual entrepreneurs, the critical threshold is a business turnover exceeding AED 1,000,000. In contrast, corporate entities must consider their permanent establishment status, engagement in generating state-sourced revenue, and the establishment of economic ties within the UAE.
- Central to the concept of economic nexus for foreign corporations in the UAE is their income from real estate, encompassing everything from land and buildings to various installations and equipment. The taxation framework is structured with a progressive approach, exempting the first AED 375,000 from taxation and applying a 9% rate on subsequent income. Special regulations are in place for entities operating within Free Zones, offering a distinct Corporate Tax regime.
- The determination of taxable income, linked to either a substantial economic presence or direct connection, relies on financial documentation compliant with UAE’s accounting standards. Both residents and non-residents are obligated to file their tax returns and finalize their tax obligations within nine months from the tax year’ end, while ensuring record retention for seven years.
- Identifying the presence of a Permanent Establishment encompasses several criteria, including but not limited to the nature of business premises, operational installations, and the role of dependent agents, underscoring the importance of effective control and regular business engagement by non-resident entities.
- The UAE Corporate Tax Law integrates specific measures to counteract tax avoidance strategies, such as the fragmentation of business activities, to uphold the integrity of business operations. The effectiveness of anti-fragmentation provisions is highlighted in their aim to prevent the exploitation of tax regulations.
- In essence, comprehension of the UAE’s tax regulations, the prerequisites for establishing a Permanent Establishment, and the mechanisms to counter avoidance tactics are indispensable for non-resident entities. The UAE’s tax regime is designed to encourage foreign investment while preventing abuse, highlighting the necessity for diligent compliance by all businesses within its jurisdiction. Achieving this balance is essential for sustaining an equitable and efficient tax system.
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