Taxation under the UAE Corporate Tax

Basis of taxation

This section sets out the proposed basis of taxation under the UAE CT regime.

Residents

Residency is a key determinant of whether business profits will be subject to CT in the UAE.

A legal person that is incorporated in the UAE will automatically be considered a ‘resident’ person for UAE CT purposes. Equally, any natural person who is engaged in a business or commercial activity in the UAE, either in their own name or through an unincorporated partnership, will also be considered a resident person for purposes of the UAE CT regime.

A foreign company may be treated as a resident person if it is effectively managed and controlled in the UAE. Determining whether an entity is effectively managed and controlled in the UAE is a question of fact, but would typically look at where the directors or other decision-makers of the company make the key management and commercial decisions.

UAE resident persons will be taxable in the UAE on their worldwide income, which for a natural person will be limited to the income earned from their business activity carried out in the UAE. However, certain income earned from overseas will be exempt from CT, including income from foreign branches and qualifying foreign shareholdings. Further details of these exemptions are set out in section 5 of this document.

UAE resident persons will be taxable in the UAE on their worldwide income, which for a natural person will be limited to the income earned from their business activity carried out in the UAE. However, certain income earned from overseas will be exempt from CT, including income from foreign branches and qualifying foreign shareholdings. Further details of these exemptions are set out in section 5 of this document.

Non-residents           

Non-residents will be subject to UAE CT on:

● Taxable income from their Permanent Establishment in the UAE; and

● Income is sourced in the UAE.

Permanent Establishment (PE)

The concept of PE is an important principle of international tax law used in CT regimes across the world.

The main purpose of the PE concept is to determine if and when a company has established sufficient presence in a foreign country to warrant the direct taxation of the business profits of the company in that country. Generally, a country only has the right to tax the business profits of a foreign company if that company has a PE in that country.

The PE concept under the proposed UAE CT regime has been designed on the basis of the OECD Model Tax Convention. Article 5 of the OECD Model Tax Convention sets out internationally recognized principles for determining what constitutes a PE, which will form the basis for determining a PE under the UAE CT regime.

This approach allows foreign companies to use the extensive OECD Commentary on Article 5 when assessing whether they have a PE in the UAE, and the outcome of this assessment should typically be aligned with the position where there is a double tax treaty in place between the country of the foreign company and the UAE (as the UAE’s double tax treaties are generally based on the OECD Model Tax Convention).

The activity threshold that will trigger a PE for a foreign company in the UAE will be determined by the following two main tests:

● Fixed place of business test

 ● Dependent agent test

Fixed place of business test

A foreign company will have a PE in the UAE if it has a “fixed place” in the UAE through which the business of the foreign company is wholly or partly carried on.

A fixed place of business will include a place of management, a branch, an office (including a temporary field office or an employee’s home office), a factory, a workshop, real property, and a building site where activities are carried on for over 6 (six) months. Installations and structures used in the exploration of natural resources, as well as mines, oil or gas wells, quarries, and other places of extraction of natural resources will also be considered PEs.

No PE may arise if the activities carried out through the “fixed place” in the UAE are preparatory or auxiliary in nature. Generally, preparatory or auxiliary activities are those performed in preparation or in support of more substantive business activities of the foreign company. Examples of preparatory and auxiliary activities include limited marketing and promotional activities, performing market research, and attending seminars or conventions.

A fixed or permanent place in the UAE may also not be considered a PE if it is used only to store, display or deliver the foreign company’s goods or keep a stock of goods with the sole purpose of making them available to another person for processing.

Dependent agent test

In the absence of a “fixed place of business” in the UAE, the activities of a so-called “dependent agent” in the UAE could still create a PE for a foreign company in the UAE.

The “dependent agent test” may be met where business travelers or UAE-based persons act on behalf of the foreign company in the UAE and have, and habitually exercise, the authority to conclude contracts in the name of a foreign company. This includes situation 16 where the person negotiates or concludes contracts in the UAE on behalf of the foreign company without material intervention from the non-resident company.

A PE would not arise where a person carries on the foreign company’s business in the UAE in the ordinary course of their own business. This so-called independent agent exclusion would only apply where the person does not work exclusively for the foreign company and is truly legally and economically independent from the foreign company.

The same PE rules and principles will apply to determine whether a Free Zone Person has a PE in mainland UAE.

Investment manager exemption

Considering the UAE’s position as a leading investment and wealth management center, the UAE CT regime will allow regulated UAE investment managers to provide discretionary investment management services to foreign customers without triggering a UAE PE for the foreign investor or the foreign investment fund. This exemption will be subject to conditions that are comparable to similar regimes in leading financial centers.

UAE sourced income

UAE sourced income earned by a foreign person that does not have a PE in the UAE will be subject to withholding tax at a rate of 0% (zero percent).

The UAE CT regime will have specific rules and guidelines to determine whether income has a source in the UAE. However, income will generally be considered UAE sourced if the income is earned from a UAE resident person, if the payment is attributed to a PE in the UAE of a foreign company, or if the income is derived from activities or contracts performed in the UAE, assets located in the UAE, or rights used for economic purposes in the UAE.

The same principles will be applied to determine if a Free Zone Person earns income from a source in mainland UAE.

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News Courtesy: Public Consultation Document UAE Corporate Tax