Introduction
The UAE has long been recognized as a favourable tax destination for individuals and businesses, drawing expatriates worldwide with its strategic location, flourishing economy, and accommodating tax policies. However, recent challenges faced by some expats regarding their new tax residence status encouraged the UAE government to take significant action.
The UAE Cabinet issued Decision No. 85/2022 on the Determination of the Tax Domicile, accompanying in a new era of tax residency regulations aimed at modernizing the tax system and aligning with international standards.
In a significant development for expatriates residing in the UAE, the Ministry of State for Financial Affairs has issued Ministerial Decision No. 247/2023, outlining the rules for obtaining a Tax Residency Certificate for international agreements.
Understanding Cabinet Decision No. 85/2022 On the Determination of the Tax Domicile
Cabinet Decision No. 85/2022, effective from March 1, 2023, aims to simplify the process for expatriates to establish their tax residency in the UAE. Before its implementation, the lack of clear rules presented challenges, making it difficult for expatriates to prove their tax residency and access benefits from double taxation agreements.
The decision introduces a definition and criteria aligning with international standards, providing expatriates with a clearer and more transparent framework for determining their tax status in the UAE. This simplification is anticipated to update procedures and enhance expatriates' ability to control the advantages offered by double taxation agreements.
Criteria for Tax Residency
According to Article 3 of Cabinet Decision No. 85/2022, legal persons are considered Tax Residents if they are established, formed, or recognized following the laws of the UAE; and it is not a branch that is registered by a foreign legal person.
According to Article 4 of Cabinet Decision No. 85/2022, natural persons are considered Tax Residents if:
- Habitual or Primary Residence: If a natural person’s main home and the place where they handle financial matters are in the UAE, meeting conditions specified by the Minister.
- Physical Presence Criteria: Spending 183 days or more in the UAE within a 12-month period.
- Additional Conditions: Being physically present in the UAE for 90 days or more within a 12-month period, holding UAE nationality, a valid Residence Permit, or the nationality of any GCC Country, and meeting specific conditions like having a permanent residence or holding a position in the UAE.
While the number of days remains a factor, the determination of tax residence now involves a comprehensive evaluation of an individual's situation, recognizing substantial links and economic activities in the UAE. These definitions provide clarity and specificity in determining tax residency for both legal and natural Persons under the new decision.
Tax Residence under Double Taxation Agreements (DTAs)
Ministerial Decision No. 247/2023 on tax residence under double taxation agreements are mutual agreements entered into by two countries to avoid the double taxation of income and to promote cross-border trade and investment. These agreements generally provide rules for determining the tax residence of individuals and legal entities, as well as rules concerning how the two countries allocate taxation rights on certain forms of income. Currently, the UAE has signed double taxation agreements with more than 130 countries.
The new tax residence criteria are important for those wishing to benefit from the advantages afforded by the UAE's tax agreements. To do so, individuals and legal entities must first establish their tax residency status in accordance with the rules set out in the applicable DTAs.
As per Article 5 of Cabinet Decision No. 85/2022, if a legal or natural person qualifies as a Tax Resident, they may apply for a tax domicile certificate with the Federal Tax Authority. However, it is still to be determined what the application process will be. Article 6 of Cabinet Decision No. 85/2022 outlines that if a bilateral or multilateral agreement specifies conditions for tax residency, those provisions will be applied.
Ministerial Decision No. 247/2023 in the UAE outlines procedures for obtaining a Tax Residency Certificate for international agreements, effective from March 1, 2023. In cases where an international agreement specifies tax domicile determination, Article 6 of Cabinet Decision No. 85/2022 mandates applying the agreement's specifications.
The tax minister will define the format and method for issuing tax domicile certificates for international agreements. Applications for a Tax Residency Certificate, submitted with the requisite information, will be approved if the applicant meets the conditions outlined in the relevant International Agreement. Additionally, Article 7 of Cabinet Decision No. 85/2022 empowers the Federal Tax Authority to seek information from government agencies to implement the decision, mandating full cooperation from all government entities.
Conclusion
The new tax residency rules in the UAE represent a positive step towards transparency and compliance with international standards. Expatriates can navigate these regulations with a clearer understanding, ensuring they establish their tax residency and avail themselves of the benefits outlined in double taxation agreements.
