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Tax residence establishes the taxation rights of the residence state. It also enables a taxpayer to claim benefits under a tax treaty.
In its recent guide, Tax Resident and Tax Residency Certificate, the FTA has elaborated the concept of residence in the UAE for natural persons, juridical persons as well as the administrative procedures for applying for a tax residence certificate (TRC).
This article explains the concept of tax residence for a juridical person.
Taxation of Income
A juridical person that is considered a Resident in the UAE is subject to Corporate Tax on its worldwide income. This includes taxable income derived from both inside and outside the UAE. Certain types of income earned outside the UAE may be exempt. The UAE’s Double Taxation Agreements (DTAs) provide relief by allowing a credit for taxes paid in foreign jurisdictions on income that is also subject to UAE Corporate Tax.
Non-Resident juridical persons are generally taxed on income sourced from the UAE. This may include income attributable to a Permanent Establishment (PE) in the UAE or income derived from a nexus with the UAE.
Residence Determined by Incorporation
Juridical persons incorporated in the UAE, such as Limited Liability Companies (LLCs), Private Shareholding Companies (PSCs), and Public or Private Joint Stock Companies (PJSCs), are established under UAE regulations and are considered UAE tax residents. Foundations and trusts formed under UAE mainland legislation are also categorized similarly.
A branch office of a UAE entity is treated as an extension of its head office, not as a separate entity. However, in case of foreign companies operating branches in the UAE, such branches are considered PEs, i.e., the foreign company is treated as a Non-Resident Person for Corporate Tax purposes.
A juridical person formed in a UAE Free Zone is also considered a Resident Person for Corporate Tax purposes, subject to the relevant regulations applicable to Free Zones.
Certain entities, designated as Exempt Persons for Corporate Tax purposes, are not considered Resident Persons subject to Corporate Tax unless they engage in a business or business activity outside the scope of their exempted activity.
Residence Determined by Place of Effective Management and Control
For juridical persons incorporated outside the UAE, the determination of tax residency depends on where the entity is effectively managed and controlled. This is assessed based on specific facts and circumstances in each case.
If a foreign entity is effectively managed and controlled within the UAE, it is treated as a Resident Person and is subject to Corporate Tax on its worldwide income, just like a UAE-incorporated entity.
Several tests are used to determine the place of effective management, including the board of directors test, the delegation of authority test and the shareholder activity test as detailed in the guide.
Conclusion
The determination of a company's place of effective management is often contentious and prone to litigation, as it directly impacts tax residency. While domestic legislation and OECD guidelines provide general clarity, the interpretation of management and control can vary across jurisdictions, leading to disputes. The growing prevalence of virtual meetings and remote work further complicates this issue. Hence, it is important for entities to maintain adequate and effective documentation to substantiate their tax position.
Disclaimer: Content posted is for informational and knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice
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