The corporate tax public consultation document provides details on the basis of the taxation. 9% corporation taxation is something we expect to come into effect mid of 2023. We will discuss resident and non-resident persons, we will also understand concepts relating to the permanent establishment and what UAE sourced income is.
It is important to understand what the basis of taxation is for both resident and non-resident persons in the UAE. It is only after understanding this concept can the calculation of taxable income be understood.
Who is Treated as a Resident?
The consultation document issued by the ministry of finance basically states that all of the following will be treated as a resident-
- Any entity incorporated in UAE
- Any natural person who is a UAE resident conducting business or commercial activity in the UAE
- Foreign company that is effectively managed and controlled in the UAE, this is based on if the directors, decision-makers, and key management is located in the UAE.
What is the Tax Basis for a Resident?
UAE residents will be taxed on –
- Worldwide income for legal persons and UAE income for natural persons,
- Less, certain exempt overseas income,
- Less, tax credit paid in the foreign jurisdiction for non-exempt overseas income.
Do Non-Residents have to Pay Corporate Tax?
In general non residents do not come in the purview of UAE corporate tax system, unless-
- They earn taxable income with a permanent establishment in the UAE
- The income was sourced from the UAE
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What is a Permanent Establishment?
The concept of permanent establishment (or PE) is used to determine if a company is taxed in another jurisdiction, and is commonly used internationally. UAE will be using OECD Model Tax Convention Article 5 for assessing the permanent establishment, this way it will be easier for the international businesses to assess. The same rules will also apply to freezone companies to determine if they have PE in the mainland.
There is however an exemption for investment fund managers. Investment and wealth management centers that are regulated in the UAE can provide advice to foreign customers without triggering the PE corporate tax.
PE in UAE will be triggered if the following two tests have been met-
- Fixed Place of Business Test
- Dependent Agent Test
What is the Fixed Place of Business Test?
This is determined on the basis of if there is a “fixed place” in the UAE through which business is done wholly or partially.
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.
However, in the following cases, no PE will arise –
- If only preparatory or auxiliary business activities occur. For example, marketing, market research, and promotional activities.
- If the PE is used only to store, display or deliver goods of foreign companies or keeping stocks for making them available to another person for processing
What is the Dependent Agent Test?
If there is no fixed place of business in the UAE, but there is a “dependent agent” in the UAE it may still attract PE in the UAE. If a foreign company has UAE based person or business travelers that act on their behalf, habitually, the PE is in the UAE. This includes cases 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 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.
What is UAE Sourced Income?
Identifying UAE-sourced income by a foreign person will help identify if the transaction is subject to withholding tax. The withholding tax rate will be 0% for now. Therefore for now there is no tax impact, but when this increases in the future, it will impact business This could increase in the future to a higher rate.
The income will generally be considered UAE sourced if –
- The income is earned from a UAE resident person,
- The payment is attributed to a PE in the UAE of a foreign company, or
- 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.
From the above discussion, we can learn in summary the basis on which residents and non-residents are taxed in the UAE as per the new corporate tax regime.
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