Tax residence in the UAE

Donatello Pirlo TEP and Guido Ravaglia TEP consider the UAEs tax residency criteria

From a taxation perspective, the United Arab Emirates (UAE) has historically promoted a policy of absence of direct federal taxes, such as corporate or personal income tax. However, the UAE is aiming to shed its reputation as a so-called tax haven. The removal of the UAE from the EU’s blacklist in 2019 has assisted in changing this perception.

More recently, the UAE has made further attempts to align with modern international standards by introducing corporation tax (at 9 per cent where the taxable income exceeds AED375,000) and tax residency criteria for both natural and non-natural persons. With regard to natural persons, however, the non-taxation regime prevails except for those conducting, and any foreign-source income linked to, a business or business activity in the UAE. In this case, they will be subject to corporation tax where the total turnover derived from such business or business activity exceeds AED1 million.

Although the UAE does not levy personal income tax on individuals, it remains crucial to understand the new tax residency criteria in order to benefit from the non-taxation regime and to be entitled to UAE’s double taxation convention (DTC) benefits, it having signed DTCs with 137 countries.

The operation and interplay of three separate legislative regulations ultimately determine and govern tax residency for individuals:

• Cabinet Decision No. 85/2022 (Decision 85);
• Ministerial Decision No. 27/2023 (Decision 27); and
• Ministerial Decision No. 247/2023 (Decision 247).

Criteria to qualify as tax resident

Effective from 1 March 2023, Decision 85 provides a new domestic definition and criteria for when an individual or a legal entity shall be considered a UAE tax resident.

Broadly, a natural person will be considered a UAE tax resident if:

• their usual/primary place of residence and their centre of financial and personal interests is in the UAE;
• they were physically present in the UAE for a period of 183 days or more during a consecutive 12-month period; or
• they were physically present in the UAE for a period of 90 days or more in a consecutive 12- month period and the individual is a UAE national, holds a valid residence permit in the UAE or holds the nationality of any Gulf Cooperation Council (GCC) Member State, where they:

-have a permanent place of residence in the UAE; or

-carry on an employment or a business in the UAE.

Although a natural person may meet the conditions set out above to be considered a UAE tax resident under domestic law, to the extent that person is also tax resident under the domestic law of another jurisdiction the relevant DTC should prevail.

Additionally, Decision 27 provides guidelines for implementing the main provisions determining tax residency as set out above. In particular, it notes that all days or parts of a day in which the individual was physically present in the UAE will be counted for the purposes of determining the 90- or 183-day thresholds for a continuous 12-month period.

In addition, a permanent place of residence is defined as a furnished house, apartment, room or other type of dwelling place, which must be continuously available to the individual and occupied on a regular basis with some degree of permanence and stability. However, ownership of the residence by an individual is not necessary as it can be rented or occupied to be considered a permanent place of residence.

An individual may be UAE tax resident if it is the place where they live as part of their settled routine and where they spend most of their time, as compared to other jurisdictions. The UAE must be the place where their centre of financial and personal interests is the closest, taking into account their occupation or place of business, family and social relations, and cultural or other activities. Individuals successfully establishing their UAE tax residency can then obtain a Taxation Residency Certificate, issued in accordance with Decision 247, which is a crucial advantage for those looking to apply DTCs effectively.

This certificate serves as formal proof of tax residency in the UAE, enabling individuals and businesses to potentially reduce their taxliabilities through the application of DTCs between the UAE and other countries, many of which refer to the domestic laws of the UAE for determining whether a person is a resident of the UAE for treaty purposes.

Although the UAE tax residency rules have been effective since 1 March 2023, this development is even more important in light of the abolition of the UK’s ‘non-dom’ regime, with effect from 6 April 2025, as UK tax-resident non-domiciled individuals reconsider their options, including relocation, while retaining access to treaty benefits.

Conclusion

The UAE's new approach and alignment with modern international standards represents a landmark shift. The introduction of the newrules and supporting guidance provides certainty for individuals and their advisors, in regard to their UAE tax residency position, in order to benefit from the vast treaty network and domestic tax regime.

© 2024 STEP (Society of Trust and Estate Practitioners). All rights in and relating to the STEP Journal and Trust Quarterly Review and to content online at journal.step.org are expressly reserved.

https://journal.step.org/step-journal-issue-5-2024/tax-residence-uae