Khaleej Times, Tuesday, Jan 03, 2023 | Jamadi Al Thani 9, 1444
Are you out of the scope of UAE Corporate Tax Law
By taking the overview of the corporate tax (CT) law of the UAE, the persons can
be classified into taxable, exempt and out-of-scope persons. In our previous
articles, we have discussed taxable and exempt persons, and in this article, we
have covered the persons which are out of the scope of UAE CT law.
As you know, there is no personal income tax in the UAE, so the personal income
of the individuals, like income from salaries, real estate, investment in shares
or other personal income not related to the trade or business registered in the
UAE, is not subject to CT. However, if the individuals have taken the business
licence and conduct commercial activity like working as an owner of the sole
establishment, civil company etc., such businesses are liable to register for
tax, and their taxable income will be subject to CT.
For example, Mr X is working as CEO of the company and getting salaries and
bonuses from the employer. The salaries and bonuses will not be subject to CT.
Moreover, if Mr X has a leased-out property, the rental income from the property
will not be taxable. However, if Mr X is managing other properties owned by
third parties on a regular basis, then it will be assumed that Mr X is doing the
business. He is liable to register the business to undertake the commercial
activity. If he is doing this commercial activity without getting the relevant
commercial license from the respective authority, then such activity will be
considered illegal, and it may attract penalties.
Along with the job, if Mr X is a partner in the limited liability consulting
business named Y Ltd, which is registered in the UAE, then as per UAE CT law,
the worldwide income of Y Ltd will be subject to tax in the UAE. Any tax amount
paid by Y Ltd out of the UAE will be allowed by the Federal Tax Authority (FTA)
as a Foreign Tax Credit (FTC), and related FTC provisions of the UAE CT law will
be applicable. As we discussed earlier, zero per cent CT will be applicable on
the taxable income of Y Ltd up to Dh375,000, and any income above Dh375,000 will
be subject to a nine per cent tax. Any amount withdrawn by Mr X out of the
after-tax profit of the company will be considered an appropriation of profit
and dividend distribution, and it will be exempt from UAE CT under article 22(1)
of the UAE CT law.
We can consider one more example, like Ms Victoria lives in the USA. If she is
not doing any business in the UAE but earns income from a salary from UAE-based
company and/or she has property in the UAE, from where she is getting rental
income, then the income of Ms Victoria will be out of the scope of the UAE CT
law because income that Ms Victoria is earning from UAE, is her personal income
which is not subject to CT law. If Ms. Victoria is earning any UAE-sourced
income other than salary, and/or she has nexus in the UAE from which she is
generating income, then it will be assumed that she is doing commercial activity
in this UAE, and she was liable to take license to perform this activity.
This is important that it does not matter where the natural person is living.
The natural person living in the UAE or out of the UAE has the same criteria to
assess his/her taxability under the UAE CT law.
The non-resident persons who do not have a permanent establishment (PE) in the
UAE, do not earn any UAE-sourced income (other than income related to the PE)
and have no nexus in the UAE through they are earning any income will be assumed
out of the scope of the UAE CT law. For example, Z Ltd is registered in the
United Kingdom (UK), Z Ltd has no PE, no nexus in the UAE, and company is not
generating any UAE-sourced income, then Z Ltd will be assumed out of the scope
of UAE CT law.
Unincorporated partnerships, trusts that don’t have legal personality,
investment funds structured as a limited partnership, and family foundations
approved as an unincorporated partnership are treated as “transparent” for the
UAE CT law purposes, as their income is taxable in the hands of the partners.
So, such partnerships, trusts, funds and family foundations itself are not
subject to UAE CT Law.
The foreign permanent establishment (PE) of the resident person will be out of
the scope of the UAE CT law, where the resident person has made an election not
take into account the income and associated expenditure of its foreign PE in
determining its taxable income under the article 24 of the law.
Any other person who is not exempt and not taxable will be assumed out of the
scope of the UAE CT law.
Based on the above criteria, businesses and natural persons need to evaluate
their status and plan it accordingly for the smooth implementation of the