There are more questions about what it means to be a “tax resident” when one does not pay taxes on their individual income while residing in the UAE after guidelines for the “tax residency” status of residents in the UAE were set by the Ministry of Finance on Wednesday.
Residents of the UAE should be aware that they are frequently required to pay income tax where they are a “tax resident,” or where they have a permanent address. Yet what is sometimes forgotten is that even if you have no income and are not obligated to pay any income tax, this is still true.
But in order to fully understand this and go into the explanation provided, it is essential to go through what the phrase “tax residency” means to the average reader and how it differs from getting tax residence through real estate investment or through any other means.
What legally makes you a tax resident?
Almost every major country uses the rule of thumb that a person must keep a place of residence in the nation and be “present” for at least 183 days (or half of the tax year) to qualify as a resident for tax purposes.
The vast majority of people on the planet have the same tax residence as they have in their native nation. their birthplace, current residence, and place of employment. And the tax residence won’t change as long as the last two variables stay the same.
A person is considered to be a tax resident in the UAE if their regular or principal residence, which also serves as the hub of their financial and personal interests, is there, or if they have physically lived there for at least 183 days in a 12-month period.
As per the previously stated rules, you will also be a tax resident if you are a UAE citizen, expatriate resident, or GCC national who either holds a permanent residence or conducts business in the UAE, and you have been physically present in the UAE for a period of 90 days or more.
Now, what was clarified by the UAE MoF?
The Ministry of Finance published guidelines on how long a resident must be physically present in the UAE to maintain such a status. The guidelines also stated that the resident doesn’t have to possess a “permanent residence,” but that one must be made available to them for legal and tax purposes.
Many UAE residents who frequently travel for work, sometimes for longer than a month, will find this to be a much-needed update.
With this most recent clarification, it was made plain that regardless of whether you spend a full day or just a portion of the day in the UAE, it will be seen as you being in the nation for taxes purposes.
Understanding this will make it easier for these persons to manage their stay within the necessary legal parameters, allowing them to keep their tax residence status. I genuinely believe that the government has addressed the issue promptly, and more importantly, favorably for the nation’s citizens.
Why is the above clarification relevant to me?
The clarification came in response to a resolution passed in September of last year that established the criteria for determining whether someone may be regarded as a UAE tax resident and the procedures for the granting of Tax Residency Certificates (TRCs). On Wednesday, the rule went into effect.
For qualifying governmental organizations, businesses, and people to benefit from double taxation avoidance agreements (DTAA) on income earned in countries other than your country of permanent residence, for which the UAE is a signatory, a certificate known as the TRC is granted.
(The Double Taxation Avoidance Agreement or DTAA is a tax treaty signed between any two or more countries so that taxpayers can avoid paying double taxes on their income earned from the source country as well as the residence country.)
Individuals who are determining their tax residency may apply for a TRC with the tax administration. For UAE residents intending to claim tax reduction or other benefits under the tax treaty in another nation, such a certificate is frequently a formal necessity (DTAA).
How tax residency affects a business owner?
A company should be regarded as a “tax resident” in the UAE if it is established, formed, or recognized there, with the exception of a UAE branch registered by a foreign corporation, according to a resolution that was approved late last year.
Further explanation revealed that if a corporation is effectively managed and controlled in the Emirates while being established outside the UAE, it may still be classified as a “tax resident”. Also, you may need to provide audited financial records and proof of at least a year in operation.
So, if your company venture satisfies the aforementioned requirements, your entity may be considered a “tax resident” in the UAE, and the necessary certificate may be requested in order to avoid double taxation.
Key takeaways
A “tax residence” is any area where you are obligated to pay taxes, and while the two statuses can be associated, they are distinct by definition for legal and taxation purposes. A second residence or resident visa grants you permission to physically dwell in a country.
The mere fact that you have a residence permit in a country does not automatically make you a “tax resident” of that nation. In some nations, you can even be a citizen without being a tax resident, therefore it makes no difference whether your second residence is temporary or long-term.
Yet, up until this point, this was a general norm. With regard to tax resident statuses, the UAE has instituted categorical tests of residence that will label you as a “tax resident” if any of a number of conditions are met.
Until recently, a key factor used to determine your “tax residence” status was “183 days,” which meant that if you were in the country for any period of time less than that, you wouldn’t be subject to taxes there. Now, it’s important to recognize where you have the strongest ties.
This entails not only spending time there but also making additional relationships for employment, business, and other purposes. Because of this, the most recent rule said that a person’s “work, personal, economic relationships or other connections are the strongest” at his or her place of residence.