UAE updated its tax residency test for individuals

The UAE Cabinet of Ministers has issued a Decision dated September 2, 2022 (Effective March 1, 2023)[1] on “Determination of Tax Residency” (“Decision”) that for the first time introduces the criteria for natural person and legal entity to be considered the UAE tax resident.

Under the Decision, a natural person is considered tax resident in the UAE if she or he complies with one of the of the following:

• The natural person’s usual or primary place of residence and the centre of his financial and personal interests are in the UAE;
• The natural person has been physically present in the UAE for a period of 183+ days within the past 12 months;
• The natural person has been physically present in the UAE for a period of 90+ days within the past 12 months AND holds a valid UAE residency visa AND meets any of the following:
  • Has a permanent place of residence in the UAE (rent or ownership);
  • Is employed or is engaged in business activity in the UAE.

The Decision was issued in the light of upcoming UAE tax reform, that has introduced a new Corporate Income Tax law (effective June 1, 2023)[2] (“Corporate Tax Law”, “CTL”). The CTL framework provides for a new corporate tax law (with the rate up to 9%) applicable to both natural persons (being tax residents of the UAE) and legal entities.

Comparably, according to the Corporate Tax Law, a natural person is considered UAE Resident (for the purposes of income tax calculation) if she or he “conducts a Business or Business Activity in the State” (Art. 11(3)(c) Corporate Tax Law). The income of such person is taxable under the Corporate Tax Law if it is derived from the UAE or from outside the UAE if it relates to the business or business activity conducted in the UAE (Art. 12(2) Corporate Tax Law).

It is important to underline that Income Tax is applicable to the income derived from business activity that exceeds an amount that will be further specified by the UAE Cabinet. Plus, per Art. 11(6) Corporate Tax Law, the UAE Cabinet shall clarify the exact list of taxable business activities for individuals.

The UAE Cabinet of Ministers is given a broad discretion in further interpretation of the Decision. For instance, the Cabinet of Ministers must issue a directive clarifying the criteria of “center of financial and personal interests” of an individual. Plus, additional criteria and conditions may be introduced.

We can expect further clarification on the matter of a tax residency status over the coming months.

[1] https://tax.gov.ae//Datafolder/Files/Legislation/Corporate%20Tax/Cabinet%20Decision%2085%20of%202022%20-%20For%20publishing.pdf.

[2] See our recent publication on the subject of new corporate income tax law: https://enr-law.com/publications/news/uae-introduces-a-new-corporate-tax-law/, https://enr-law.com/publications/articles/uae-new-corporate-tax-a-detailed-analysis/.