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Press Dossier    By Date   03/01/2023 Are you out of the scope of UAE Corporate Tax Law

Khaleej Times, Tuesday, Jan 03, 2023 | Jamadi Al Thani 9, 1444

‏Are you out of the scope of UAE Corporate Tax Law

Emirates: 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 Any amount withdrawn by Mr X out of the after-tax profit of the company will be considered an appropriation of profit and dividend distribution, and it will be exempt from UAE CT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 corporate tax.

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