Inayat-ur-Rahman, Business Editor

The residency concept is the key factor to determine whether business profits will be taxable under UAE corporate tax regime (CT regime). The legal person incorporated in the UAE like limited liability companies, private shareholding companies, public joint stock companies, and other entities will be considered a “resident” person for the CT regime. Foreign companies, which are effectively managed and controlled in the UAE, will be subject to the CT regime.

This was revealed by  Arslan Mushtaq, Partner Tax at athGADLANG, during an exclusive interview with Gulf Today.

“Natural persons including sole establishments, proprietorships and individual partners in an unincorporated partnership engaged in commercial activity in the UAE will be subject to the CT regime. The legal persons will be taxable for their worldwide income and natural person for their income earned from their commercial activity in the UAE under the CT regime.”

“The non-resident person will be subject to the CT regime for their taxable income from a permanent establishment (PE)  in the UAE and income sourced in the UAE. The PE concept in the CT regime is designed based on the OECD Model Tax Convention where Article 5 outlines the internationally recognized principles for determining what constitutes a PE.  This will help foreign companies to use the extensive OECD Commentary on Article 5 to evaluate whether they have a PE in the UAE.” Mushtaq added.

“A foreign business will trigger a PE in the UAE  if it has a fixed place in the UAE from which the business is carried out wholly or partly. Typically, a place of management, a branch, an office, a factory, a workshop, real property, and a building site where activities are carried on for over 6 (six) months are considered a fixed place.”

“Also, installations, mines, oil or gas wells, quarries, and structures used in the exploration of natural resources will be considered PE.  However, activities carried out through the “fixed place” which are of preparatory or auxiliary nature including storing, displaying, or delivering goods or keeping goods stock for the sole purpose of making them available to another person for processing will not constitute a PE in the UAE.” Mushtaq concluded.

“A foreign business may also trigger a PE under a “dependent agent” in the absence of a fixed place of business in the UAE,” said Rashid Ghulam Akbar, FTA Agent at athGADLANG. “Typically, the dependent agent test will be applicable where a business traveller or UAE-based persons acting on behalf of the foreign business has the authority to conclude contracts in the name of the foreign business and without the material intervention of the foreign company.” Akbar added.

“The freezones have robustly supported the UAE economy by attracting Foreign Direct Investment and offering ease of doing business. The CT regime has outlined the businesses operating in the freezones will be subject to the CT regime and meet the compliance obligation like registering and filing the CT return. However, the CT regime will honor the 0% tax incentive if freezone businesses maintain adequate substance and comply with all regulatory requirements. The freezone business can benefit from a 0% CT rate on income earned from transactions with businesses located outside of the UAE, income from trading with businesses located in the same or any other freezone, and income from certain regulated financial services from foreign markets.”

“The freezone business with a branch in the mainland UAE will be subject to a 9% CT rate for income earned from the mainland and a 0% CT rate on its other income. However, a freezone business without a branch in the mainland can benefit from a 0% CT rate for passive income like interest and royalties, dividends, and capital gains from shares of a mainland company. The passive income will be within the scope of withholding tax at 0%. Importantly, a Freezone business will disqualify from the 0% CT rate if it has any other mainland sourced income other than passive income.”

“From a VAT perspective, freezone businesses based in a designated zone can benefit from the 0% CT rate on income from the sale of goods to UAE mainland businesses that are the importer of record of those goods.”

“The 0% CT rate will apply to transactions between freezone business and its group companies located in mainland UAE but payments made to the freezone business will not be a deductible expense to ensure the CT neutrality of such transactions.”

“Freezone businesses should start a high-level impact assessment to evaluate their business models, legal structures, and the economic substance requirements to avail of the 0% CT rate benefit.” Akbar concluded.