Types of Income Tax Residence in the UAE

What are the classifications of income tax residence in the UAE?

While we gave an overview of the Emirati tax system and the initial requirements of becoming a tax resident in the UAE in the first part of this series, we’re now going to move onto the more technical components of successful international tax planning in the UAE. 

To do so, we will examine the different types of income tax residence available, and the advantages of each, depending on the specific circumstances of the person or persons seeking to create a base in the UAE. 

Income Tax Residence in the UAE

As a general rule, and in addition to the tax benefits on offer in the United Arab Emirates concerning income sourced from the jurisdiction, obtaining a tax residency certificate in the UAE provides advantages concerning income arising in other countries. The UAE has an extensive network of double-taxation agreements: 139 at the last count, according to Ministry of Finance figures, although agreements with Monaco, Cote d’Ivoire and the Co-operative Republic of Guyana are yet to enter into force. 

This point is crucial because the vast majority of treaties rely on the concept of residence to be eligible to receive benefits under the agreement, as will be discussed in more detail below. A tax residency certificate in the UAE comes in handy to prove residency either for corporate or personal purposes. Until recently, the UAE has had no domestic legal definition of income tax residence for businesses and individuals. On 3 September 2022, Cabinet Resolution No.(85) of 2022 was issued, laying out the rules determining tax residency in the UAE. The resolution will come into force on 1 March 2023. 

Types of Income Tax Residence

Certificate of Status of Business/Businessperson

This type of tax residency is most appropriate for those looking to set up a business in the UAE, employing one of several corporate formats. A detailed description of the various company formats available in the United Arab Emirates is beyond the scope of this article and it is an area where input from an expert advisor is likely to be invaluable, as there are many different factors to consider. For example, it depends on the planned location of the company (i.e. in a free zone or elsewhere in the region), the proposed business activity and intended ‘audience’ for those activities. Some activities are more suited to specific designated hubs that provide dedicated infrastructure suited to their purposes. There are also some restrictions on what business activities you can carry out and where you can exercise them. In many instances, a UAE resident must be appointed as the main shareholder, although this stipulation is not as difficult as it sounds.

In terms of tax benefits for entities looking to obtain this type of certificate, the advantages of holding a tax residency certificate in the UAE can extend to the imposition of VAT where the firm trades internationally, offering proof of tax residence to obtain refunds for VAT paid outside of the UAE. A business tax certificate can also be useful in terms of distributing dividends at beneficial tax treaty-stipulated rates, and adds an extra layer of regulatory certainty should the entity require banking services elsewhere in the world. All parties can rest assured that the bulk of the administrative and compliance leg-work should happen in the UAE. 

Under the new Cabinet Resolution No.(85) of 2022, a business is considered a tax resident in the UAE where one of the following conditions is met: 

• The entity is established, formed or recognized in the UAE, excluding a UAE branch registered by a foreign entity.
• The entity is considered a tax resident under the (applicable) tax law of the UAE.

It is worth noting here that only onshore free zone companies and local companies are permitted to apply for income tax residence as a legal person (or on behalf of their directors). Conversely, the offshore company format is not a suitable vehicle for becoming a tax resident in the UAE. If you would like to set up an offshore entity, then you would have to apply for a tax exemption certificate.

Tax Domicile Certificate

In contrast to a Certificate of Status of Business/Businessperson, a Tax Domicile Certificate for individual use (TDC) is a tax residency certificate for individuals seeking to locate their affairs in the UAE. Like the former, however, natural persons are defined as tax residents under Article 4 of the new Cabinet Resolution No.(85) of 2022:

• The individual’s usual or principal place of residence is in the UAE, and the centre of their financial and personal interests are in the UAE or other conditions and criteria provided in a specific decision (to be) issued by the UAE MoF.
• The individual has been physically present in the UAE for a period of 183 days or more in a consecutive 12-month period.
• The individual has been physically present in the UAE for a period of 90 days or more over a consecutive 12-month period and is a UAE citizen, UAE resident or GCC national who either (i) has a permanent place of residence in the UAE or (ii) carries out a job or business in the UAE.

The benefits of obtaining a Tax Domicile Certificate for individual use are various. While the UAE does not have any withholding taxes on distributions, proof of residence in the jurisdiction for tax purposes could allow the individual to benefit from lower tax rates on income or dividend distributions (or even from an absence of tax on such income) generated in another country, under the terms of a double-taxation avoidance agreement. Income tax residence in the UAE could also be useful in case of privacy concerns arising from increasing tax information needs globally, as pertinent information can often be exchanged with the authorities in the UAE, rather than with those in the taxpayer’s country of origin.

How a Service Provider Can Help with Issuing a Tax Domicile Certificate

As we have seen in this series, the United Arab Emirates, with Dubai leading the pack, makes it easy to relocate and do business in the jurisdiction, as well as offering an attractive tax environment for both individuals and companies. So, how can a local service provider help you, and why should you consider their services, given the above? 

There is just no substitute for local knowledge, especially about regulatory and compliance matters concerning banking and other activities. With the rules in this area regarding tax information exchange, the combating of money laundering activity and other regulatory requirements, a businessperson operating in an environment that is not their ‘home turf’ would do well to team up with a well-connected provider versed in the region’s rules, regulations and customs.

And as previously stated, where other factors (besides the length of stay in the UAE), such as the location of income, property, and other ties elsewhere, come into play, an expert service provider can talk you through the requirements and stipulations you must adhere to for obtaining a tax residency certificate in the UAE, along with carrying out all dealings with the relevant government departments, financial service providers and regulatory authorities.

In terms of convenience, also, the advantages of outsourcing administrative and other duties (both initial and ongoing) to knowledgeable professionals cannot be underestimated; there is no price too high for peace of mind, and there is no room for guess-work when one’s livelihood and family life are potentially at stake. 

If you are interested in learning more about income tax residence in the UAE and non-domicile tax rules, the Europe Emirates Group’s fiduciary services will help guide you through your UAE tax residency journey. Contact us to see what we can do for you. 

Written by
Adrian Oton

CEO, Europe Emirates Group