Companies and other legal persons incorporated, created or otherwise recognized under the laws of the UAE will automatically be considered a resident for corporate tax purposes. This includes legal persons established in the country under the main territory legislation of the country or applicable free zone regulations, as well as legal persons established under a specific law (for example, by special decree).
Foreign companies and other legal persons may also be treated as residents for corporate tax purposes if they are effectively managed and controlled in the country. Determining this requires taking into account the specific circumstances of each entity and its activities, with the sole factor being the place where key management and business decisions are actually taken.
Natural persons will be subject to corporate tax as “resident persons” on income generated from both domestic and foreign sources, but only to the extent that it relates to the business or business activity of the natural person within the country. The scope of corporate tax will not include any other income earned by a natural person.
Who Is A Non-Resident Person?
Non-resident persons are legal persons who are not considered residents and any of the following cases apply to them:
They have a permanent establishment in the country.
They earn an income generated in the country. Non-residents will be subject to corporate tax on the taxable income of their permanent establishment (which will be explained in Section 8).
Certain types of income arising in the state for a non-resident person will be subject to withholding tax at the rate of 0%, if the income does not accrue to a permanent establishment belonging to him in the state.
What Is A Permanent Establishment?
The concept of a permanent establishment is an important tenet of international tax law used in corporate tax systems around the world. The main purpose of the concept of permanent establishment in a country’s corporate tax law is to determine if (and when) a foreign person has a sufficient presence in the country to warrant the business profits of that foreign person being subject to corporate tax.
The definition of a permanent establishment in the corporate tax law was formulated on the basis of the definition contained in Article 5 of the OECD model tax agreement related to income and capital taxes and the position adopted by the UAE under the multilateral agreement to implement measures related to tax agreements to prevent erosion of the tax base and transfer profits. This will allow a foreign person to use the relevant explanation of Article 5 of the OECD Model Tax Agreement on Income and Capital Taxes when assessing whether or not he has a permanent establishment in the country. In this assessment, the provisions of any bilateral tax agreement between the country of residence of the non-resident person and the UAE must be taken into consideration.
