New Guide on Tax Residence and Tax Residency Certificates Application Procedure – Juridical Persons

On 18 October 2024, the Federal Tax Authority (FTA) released a Tax Procedures Guide TPGTR1 (the “Guide”) on Tax Residents and Tax Residency Certificates (“TRC”).

The Guide outlines the criteria for determining when individuals or legal entities qualify as Resident Persons under the UAE Corporate Tax Law (the “CTL”) (as defined by Article 11(3) of the CTL), Tax Residents under UAE domestic law or Tax Residents under Double Taxation Agreements (“DTAs”) (as defined by Articles 3 and 4 of Cabinet Decision No. 85 of 2022).

Tax residency rules in the UAE

Resident Persons under the CTL

Juridical persons are Resident Persons for CTL purposes if they are incorporated or otherwise established or recognised under the applicable legislation:

1. of the UAE, irrespective of where their effective management and control is exercised, or
2. outside of the UAE but their place of effective management and control is exercised in the UAE.

With regards to entities incorporated or otherwise established or recognised under the applicable legislation of the UAE, the Guide provides additional clarity, as follows:

• UAE branches of UAE juridical persons, and UAE branches of foreign juridical persons are seen as extensions of their head offices and therefore not considered separate juridical persons from their head offices;
• for the purposes of applying the Free Zone regime (as defined in the CTL), a branch of a foreign company established or registered in a Free Zone is considered the head office, and the foreign parent is considered the foreign branch (and a Non-Resident Person for CTL purposes); and
• Exempt Persons (as defined by Article 4 of the CTL) will not be considered Resident Persons subject to Corporate Tax (“CT”) unless they engage in a Business or Business Activity (as defined by the Guide) that is not an exempt activity.

With regards to entities incorporated or otherwise established or recognised under applicable legislation outside of the UAE, the Guide sets out practical clarification for determining the place of effective management and control, which can bring foreign companies into scope of UAE CT. The Guide outlines two tests for determining the place of effective management and control:

1. The persons test, which involves identifying the persons who make the key management and commercial decisions:

• If the key decisions are made by the board of directors, this involves, amongst other factors, determining whether the board of directors does in fact make those decisions or merely “rubber stamps” decisions made by another person, whether the directors are suitably qualified to be making the decisions, and whether the board of directors act on instructions from another person.
• If the key decisions are made by the shareholders, depending on the level of action taken by a shareholder, this can amount in practice to effective management and control. For a shareholder to be considered to be exercising effective management and control, their decision must go beyond guidance or mere influence on the normal management and policy formulation of the juridical person’s activities.
• If the key decisions are made by delegated persons (i.e. persons other than the board of directors), they can exercise effective management and control from the UAE. This includes, for example, an executive committee being delegated decision making authority, or senior management acting under a delegation authority.

 2.   The location test, which involves identifying the location of key management decisions taken by the persons identified under the persons test above. This involves, among other factors, determining where board meetings are physically held, determining the location of persons making decisions via written resolutions or virtual board meetings, and identifying where shareholders or those with delegated authority make the key management and commercial decisions.

Tax Residents under Double Taxation Agreements

Each DTA has its own rules and criteria for determining when juridical persons are considered to be tax resident in the countries which are party to the DTA. For juridical persons, the tax residency test in DTAs typically requires a juridical person to either be liable to tax, have a legal (i.e. incorporation) or economic (i.e. effective management or substance) connection in the relevant country. Where a judicial person is considered to be a tax resident in the UAE under the applicable DTA, it is eligible to apply for a TRC in the UAE in order to be able to obtain the benefits of the applicable DTA.

The Guide also clarifies that Government Entities and Government Controlled Entities (as defined by the Guide) and Exempt Persons are generally classified as tax residents under DTAs. However, if a DTA offers a different definition for these categories, that definition will take precedent.