How can a Person determine whether they are a UAE Tax Resident under a Double Taxation Agreement?

Written By Akshaya Ashok, Reviewed By Reyees K P

Published on 12/11/2024

DTAs are essential tools that provide international trade and investments, avert the double-taxation of income, and prevent fiscal evasion. The United Arab Emirates has recently developed a great web of DTAs with over 100 countries to enhance cross-border economic cooperation. Tax residency is one of the most complicated yet ultimate deciding factors in relation to these agreements. Understanding tax residency provides the basis for anyone, whether individual or business, with a connection to the UAE as it goes towards avoiding double tax, optimizing tax liabilities, and complying with all the tax requirements set by the UAE. Failure on this will lead to huge penalties with fines and reputational damage will occur. Understanding UAE tax residency under DTAs becomes a necessary aspect for individuals and businesses to avoid the risks of tax, leverage tax benefits to the maximum, and ensure smooth functioning in the evolving business scenario of the UAE.

What are Double Taxation Agreements?

Double Taxation Agreements are also known as Tax Treaties that are made by two countries in order to avoid double taxation and fiscal evasion. They provide for the tax obligations as well as rights between two countries, where the income has been earned in one country but is liable for taxation in another. 

The prime objective of DTAs is to look for cooperation across borders, in economic terms, promote international trade and investment, and give more fiscal transparency. DTAs help in avoiding double taxation and fiscal evasion, which is the taxing of the same income by two countries, and people or companies take undue advantage of the differences in tax laws to evade tax. 

Some of the advantages of DTAs include: avoid double taxation, prevent fiscal evasion and ensure tax certainty, administrative burdens reduction, and enhance cooperation between tax authorities. DTAs eliminate tax obstacles, where the business environment becomes more attractive and increases foreign investments and, subsequently, contributes to economic growth.

UAE Tax Residency Criteria under DTAs

To determine tax residency in the UAE, Double Taxation Agreements (DTAs) consider the following criteria:

Definition of Tax Residency in the UAE

A tax resident in the UAE is an individual or entity that meets certain conditions, making them liable to taxation in the UAE.

Criteria for Determining Tax Residency

The UAE's tax residency criteria under DTAs include:

Physical Presence

• Spending more than 183 days in the UAE within a calendar year or
• Being present in the UAE for more than 90 days in the current year and the preceding year.

Domicile

• Having a permanent home in the UAE or
• Being a UAE national.

Centre of Vital Interests

 Having personal and economic ties to the UAE, such as:

• Family and social connections
• Business interests
• Financial assets
• Professional or occupational ties

Habitual Abode

Having a habitual abode in the UAE, meaning:

• Regularly staying in the UAE
• Maintaining a residence or other accommodations
• Conducting business or economic activities

Important Factors in Determining UAE Tax Residency

Of course, tax residency is one of the very important factors in the UAE because of its already existing favorable tax environment and DTAs. Among the factors relevant to establishing tax residency are as follows:

Period of stay in UAE

• Duration in the UAE: The period an individual spends in the UAE is one of the factors used to identify tax residence. There are two minimum conditions, relating to the duration spent as follows:
• 183 Days Rule: The individual qualifies to be a tax resident provided they spend 183 days or more in the UAE within one calendar year. This gives them a significant holding therein.
• 90 Days Rule: One can qualify to be a tax resident if one exceeds 90 days within a given year while at the same time attaining other requirements such as valid residence visa or business ties in the UAE.

Type of Visa

The type of visa possessed by a person also determines their tax residency status. Residence requirements include a valid UAE residence visa, stating legal permission to stay and work within the country. Other possibilities include employment visas or long-term residency options, such as the Golden Visa.

Ownership of Property or Assets

Ownership of property or substantial assets in the United Arab Emirates can serve as supporting evidence when a taxpayer applies for tax residency in the country. A permanent residential place, like a home or a business property, indicates an intent to remain in the UAE. In applying for a Tax Residency Certificate from the Federal Tax Authority, such proof can be submitted.

Ties with family and social networks

Family ties and other social connections are also valid reasons in the UAE. Most people have close relatives who reside in the UAE or who are actively involved in local communities. This may strengthen the case of tax residency. It emphasizes personal integration in UAE society.

Business Interests and Activities

Finally, business activity in the UAE is another key factor. Any individual who owns a business has employment contracts, or has significant economic interests in the country would most likely be classified as a tax resident. Under this criterion, an individual is considered based on his contribution to the economy and his intent to stay in the country for a long time.

UAE Tax Residency Tests under DTAs

Determining tax residency in the UAE is essential for individuals and entities to benefit from Double Taxation Agreements (DTAs). The following outlines the key aspects of tax residency tests, including tie-breaker rules, residency tests for individuals and companies, and illustrative scenarios.

Tiebreaker Tests

When an individual or entity qualifies as a tax resident in both the UAE and another country, the DTA provisions include tie-breaker rules to resolve dual residency. These rules generally consider the following factors:

• Permanent Home: The location of the individual's permanent home is assessed first. If they have a permanent home in both countries, further criteria are evaluated.
• Centre of Vital Interests: If both countries have a permanent home, the next consideration is where the individual's personal and economic interests are primarily located.
• Habitual Abode: If residency remains unresolved, the habitual abode of the individual is examined to determine where they predominantly reside.
• Nationality: As a last resort, if all previous criteria do not resolve the issue, nationality may be considered to establish tax residency.

This structured approach helps clarify which jurisdiction has taxing rights over an individual's income.

Residency Tests for Individuals and Companies

The UAE's tax residency criteria, effective from March 1, 2023, define how both individuals and companies can establish their tax residency status:

For Individuals

An individual can be considered a tax resident in the UAE under any of the following conditions:

• 183-Day Rule: During a 12-month period, the person must be physically present in the UAE for a minimum of 183 days.
• 90-Day Rule: Alternatively, an individual can qualify by being present for at least 90 days in a 12-month period if they also have a permanent home or are employed in the UAE.
• Primary Residence and Financial Interests: An individual whose primary residence and financial activities are centered in the UAE may also be considered a tax resident.

For Companies

A company is classified as a UAE tax resident if:

• It is incorporated in the UAE or has its effective management located within the country.
  This distinction allows companies to benefit from DTAs and avoid double taxation on income earned abroad.

Examples of Tax Residency Scenarios

Understanding practical scenarios can help clarify how these rules apply:

• Scenario 1: An expatriate spends 200 days in the UAE over a year while maintaining their permanent home in another country. They qualify as a tax resident under the 183-day rule but may face dual residency issues with their home country.
• Scenario 2: A business owner lives in the UAE for 100 days but has significant business operations and financial interests there. They may qualify as a tax resident under the primary residence criterion if they can demonstrate that their center of vital interests lies in the UAE.
• Scenario 3: A GCC national works in the UAE and stays for 95 days while holding a residence visa. They meet the requirements under the 90-day rule due to their employment status and may establish residency based on this criterion.

Implications of UAE Tax Residency

Establishing tax residency in the UAE carries severe implications for individuals and businesses, mostly on the obligations, benefit, and compliance nature.

Tax Obligations and Liabilities

In terms of tax obligations and liabilities, the concept of tax residency in the UAE matters to an individual or entity since it affects a number of taxes payable by such individuals or entities.

• Income Tax: The UAE will subject tax residents to tax obligations including corporate income-tax-in theory if adopted in June 2023. This means that corporate income tax will apply if all requirements set by the tax are met by companies operating in the UAE.
• Personal Income Tax: The UAE does not have a personal income tax, but there is a possibility that tax residents might be liable to taxes in their home countries as pertinent DTAs may permit taxing worldwide income.

Benefits

Tax residence offers numerous facilities:

• Access to Tax Credits and Exemptions: A tax resident is eligible for numerous tax credits and exemptions offered by pertinent DTAs. This avoids double taxation when income is earned in more than one country.
• Tax Residency Certificates: The Federal Tax Authority shall issue a tax residency certificate for an individual or an entity to claim the DTA incentives. This facilitates international businesses and individuals to carry out their business activities without any hassle and controls their finances.

Requirements of Compliance

Except for the above, tax residents have certain requirements that should be complied with.

• To file tax returns: Tax residents are required to file annual tax returns with the FTA, which must reflect income and taxes payable. It covers corporate income tax compliance by businesses.
• Record-keeping: Each taxpayer must maintain proper documentation and records, supported by evidence to justify any claims brought forward on tax returns, and for audit purposes by the FTA.

How to Determine UAE Tax Residency

Determining tax residency needs a step-by-step approach. Below is a guide for an individual and business, along with a checklist:

Step-by-Step Guide

• Categorize Days of Stay: Count the number of days spent within a 12-month period in the UAE. In doing so, be sure you meet either the 183-day rule or, in combination, the 90-day rule with other requirements.
• Validation of Visa Status: You must either hold a valid UAE residence visa or belong to any other eligible categories, for instance, you are one of the GCC nationals.
• Identification of Primary Residence: Based on the availability of property and family ties, decide which one will be the primary residence.
• Checking of Financial Interests: Identify where the economic activities like business operations and employment function.
• Consult Relevant Laws: Read Cabinet Decision No. 85 of 2022 and other like decisions taken by ministers in order to clearly stay within the ambit of the rulebook as it stands currently.

Checklist for  Individuals and Business Entities

Individuals

• Do you reside in the UAE for at least 183 days in any calendar year?
• Or, if not, do you spend at least 90 days within which you hold a valid visa and permanent residence?
• Is it your habitual home?
• Do your principal business operations take place in the United Arab Emirates?

For Businesses

• Is your business place of incorporation or organization under UAE law?
• Are your most significant management decisions made within the UAE?
• Do you carry out most of your important operation activities in the UAE?

Conclusion

The residency concept in the UAE under DTAs heavily relies on physical presence, domicile, center of vital interests, and habitual abode. Understanding these elements will help avoid double taxation, prevent fiscal evasion, and ensure compliance. Avoid severe penalties and reputational damage. talk to the UAE tax experts at Reyson Badger today. With wide exposure to UAE tax law and DTAs, Reyson Badger will have you receiving the correct determinations of tax residency as well as optimum tax planning and risk. Get in touch with Reyson Badger today and protect your tax position in the UAE so as to help make your business boom.

Written By

Akshaya Ashok

Akshaya Ashok is a content writer specializing in creating content focused on accounting and auditing. With over two years of experience, she has developed expertise in crafting professional content for the financial sector.