Introduction – Chapter 4 Taxable Person and Corporate Tax Base under UAE’s Corporate Tax Law
The quintessence of a taxation regime is to determine its applicability. It is important to determine who is a Taxable Person under the UAE Corporate Tax Law because Corporate Tax is to be paid by a person recognised as a Taxable Person. If a person is not a Taxable Person, then the provisions of the UAE CT Law will not apply to it.
A person on whom the provisions of the UAE CT Law are applicable and who is liable to pay Corporate Tax under the law is referred to as a Taxable Person. Corporate Tax will be levied on the Taxable Person as per the rates determined under Article 3 of the UAE CT law . A Taxable Person can be:
- A Resident or
- A Non-Resident
In addition, the Cabinet can also determine a particular category of businesses that can be subjected to Corporate Tax under the UAE CT law.
Who is a Resident?
A company incorporated in the UAE such as LLCs, FZ-LLCs, PSCs, etc. will be considered as Residents. Furthermore, a Person conducting Business Activities in the territory of UAE shall also be considered a Resident under the UAE CT law. .
A Resident can be:
- Natural Person: A natural person who is performing a business or activity in the UAE
- Juridical Person: A juridical person shall include Persons
- which is incorporated, recognised or established under the applicable law of the State, including a Free Zone Person
- which is incorporated, recognised or established under the applicable law of the of a foreign jurisdiction but it is managed and controlled in UAE
- The Cabinet can determine any other such Persons
Determining ‘Effectively Managed and Controlled’ under the UAE CT Law
In order to determine the jurisdiction in which a Juridical Person is effectively managed and controlled, the place where strategic decisions are taken by key decision makers, such as the board of directors of a corporate entity, will be taken into account along with other mitigating facts and circumstances.
Who is a Non-Resident?
Under the UAE CT Law, a juridical person shall be considered a Non-Resident person if it is incorporated or established in a foreign jurisdiction and is effectively managed and controlled outside the territory of UAE.
A Non-Resident Person will also be subject to Corporate Tax in UAE even though it is not incorporated in the UAE or is not controlled or managed in UAE.
For the purposes of determining Corporate Tax liability of a Non-Resident under the UAE CT Law, a Non-Resident, is said to be a Person who is not a Resident and has:
- Under Article 14, a permanent establishment or PE in UAE
- Under Article 13, derived UAE Sourced Income (which is subject to a withholding tax of 0%)
- As issued by the Cabinet’s decision, a nexus or connection in UAE
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The Corporate Tax Base of a State refers to the revenue or assets on which the Federal Tax Authority can impose Corporate Tax under the UAE CT Law. The Corporate Tax Base in UAE is determined as per the ‘Residential Status’ of a Person under Article 12 of the Law.:
Juridical Resident: A juridical Resident will be taxed on the Taxable Income derived from UAE or outside UAE.
Natural Resident: A natural Person who is a Resident, will be taxed on his Taxable Income which he derives from UAE or outside UAE but only in relation to the business or business activity undertaken by the natural person in the UAE.
For Non-Resident: A Non-Resident’s Taxable Income shall include income derived from the from: will have its Corporate Base as follows:
- its PE; the Taxable Income that is attributable to the PE in the UAE
- Its State sourced Income, the Taxable Income not attributable to PE in the UAE
- Its Business nexus or connection to the UAE; The Taxable Income which is attributable to the nexus of the Non-Resident in the UAE as per the Cabinet’s decision
Article 13: State Sourced Income under UAE Corporate Tax Law What is the meaning of State Sourced income?
Any income earned via the below mentioned means will be considered as State Sourced income :
- Income derived from a Resident
- Income derived from a Non-Resident wherein the income received is paid or can be attributed to a PE of the Non-Resident established in the UAE
- Income derived or accrued from the performed activities, invested capital, assets, rights used or services performed in the UAE
The list provided is not exhaustive in nature and the Minister can specify conditions for UAE sourced income.
Income sourced from the UAE will be liable to Corporate Tax under the UAE Corporate Tax Law.
What shall be considered as State-sourced Income?
The Minister can specify the conditions or limitations for determining the State Sourced income. Though, generally, the State Sourced income will include income from:
- The goods sold in the UAE ;
- The services utilized or rendered or benefitted in the UAE;
- Contract that is entirely or partly performed or benefitted in the UAE;
- Immovable and movable property in the UAE;
- Shares or capital disposed off of the Resident;
- The use or right to use or grant of permission to use of the intangible or intellectual property in the State;
- Interest only if the:
- Loan is assured for immovable or movable property in UAE; or
- The borrower is a Resident; or,
- The borrower is a Government Entity;
- Insurance or reinsurance premium only if:
- Asset insured is in the UAE; or,
- Activity that is insured is undertaken in the UAE; or,
- Insured person is a Resident.
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I. When is a Non-Resident said to have a PE in the UAE?
A Non-Resident Person is said to have a Permanent Establishment in the UAE if:
- The place where he has a fixed or permanent place out of which business is undertaken by the Non-Resident in the State; or,
- The place where a Person habitually exercises authority to conduct business on behalf of a Non-Resident in the State; or,
- Where the Non-Resident can establish a nexus in any other form in the State as per the decision by the Cabinet.
If a PE is established for a foreign entity, then it will be liable for Corporate Tax under UAE Corporate Tax Law.
II. Fixed or Permanent Place in the UAE
What is the meaning of Fixed or Permanent Place to establish PE of a Non-Resident?
If the Non-Resident Person has a fixed or permanent place in UAE, it will constitute as PE of the Non-Resident.
The provision enumerates what is be considered as a fixed or permanent place and some of it is:
- A branch,
- An office,
- A factory,
- A workshop,
- A land, building or other property
- A structure or an installation for exploring:
- Renewable Natural Resources
- Non-Renewable Natural Resources
- A place of management, where the decisions essential for the conduct of business are made
- A mine, an oil well or a gas well
- A quarry, or any place of extraction of natural resources like:
- Structures used for extraction
- A building site or place of assembly or a construction project or installation or supervisory activities but only if:
- The site, activities or projects, separately or together, are going on for more than six (6) months
- The activities can be conducted by the Related Parties of the Non-Resident as well
These are only inclusive in nature and other places as per the facts and circumstances can also constitute as fixed or permanent place of a Non-Resident in UAE.
A Fixed or Permanent Place will not be considered a PE if it is solely used for certain purposes:
- The UAE CT Law provides that if a Permanent Place is used solely for conducting certain activities (enlisted below), such place for Corporate Tax purposes shall not be considered a PE.If the place is only used for storing, displaying or delivering the goods; or
- It is used for keeping the goods the only purpose of it is processing by another person; or
- If the place is used only to purchase goods or merchandise or collecting information for Non-Resident; or
- If it is used only for conducting any activity of preparatory or auxiliary nature; or
- A combination of the these activities but the overall activity is only preparatory or auxiliary in nature.
Exceptions: A Fixed Place or Permanent Place will constitute a PE even if solely used for Certain Purposes
If a fixed or permanent place in the UAE is maintained solely for purposes like storing, collecting information, auxiliary nature, etc., I.e., for the purposes mentioned above, it will still be considered as a PE of the Non-Resident if the Non-Resident or its Related Party carries on the business at the same fixed place or any other place in the UAE and fulfils all of these conditions:
- PE is constituted: If the same place constitutes as PE or the other place in UAE constitutes as PE of the Non-Resident or the Related Parties
- Overall Activity is not Preparatory or Auxiliary: The overall activity of the Non-Resident and its Related Party in the same place or other place in UAE is ‘not’ preparatory or auxiliary in nature but a ‘cohesive business operation’, if the activities were not fragmented to two places.
III. Habitually Exercising Authority on behalf of the Non-Resident- ‘Dependent Agent Test’
A person is habitually exercising authority to conduct business on behalf of Non-Resident, if the person is habitually:
- Concludes the Contract: On behalf of the Non-Resident, the person habitually concludes the contract, or
- Negotiates the Contract: For contracts concluded by the Non-Resident, the person habitually negotiates the contract without the need for material modification be the Non-Resident
But the dependent agent clause will not apply to a person who undertakes the business as an independent agent and acts for a Non-Resident in the ordinary course of the business. The independent agent exemption is as follows:
- Investment Manager Exemption – Independent Agent – Article 15 of the UAE Corporate Tax Law
When acting on behalf of a Non-Resident, an Investment Manager is regarded as an independent agent if all the following conditions are fulfilled:
- Investment or Brokerage Business: The Investment Manager undertakes the business of investment management or brokerage services
- Regulatory Oversight: The Investment Manager is subject to regulatory oversight of the Competent Authority in UAE
- Ordinary Course of Business: The Investment Manager carries transactions in ordinary course of business
- Independent Capacity: The Investment Manager acts in independent capacity in relation to the transactions
- Compensation on Arm’s Length Principle: While transacting with Non-Resident, he gets due compensation for the services and transacts on the basis of arm’s length principle
- No other transaction on Non-Resident’s behalf: For the same Tax Period, he is not subject to any other transaction or income on behalf of Non-Resident for Corporate Tax
- The Cabinet can prescribe any other such conditions
IV. Imposition of conditions by Minister for Non-Creation of PE by mere presence of Natural Person
Certain conditions can be imposed by the Minister, even if the natural person has presence in the UAE, it will not create PE for Non-Resident. This is when:
- The presence is because of a temporary or exceptional situation; or
- If the natural person employed by the Non-Resident and:
- The Non-Resident does not obtain State Sourced Income and
- The activities undertaken by the natural person are not the “core-income generating activities” of the Non-Resident or Related Parties
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An Unincorporated Partnership is one whereby the relationship between two or more persons is established through a contract as per the applicable law. The difference between an Unincorporated Partnership and an Incorporated Partnership is that the Unincorporated Partnership doesn’t have distinct and separate legal identity from its members or partners.
The Incorporated Partnerships like LLPs are treated as ‘juridical persons’ (Refer to, Taxable Person and Resident Person) and taxed accordingly for Corporate Tax under UAE Corporate Tax Law.
The Unincorporated Partnership is not subject to Corporate Tax on its own right and it works on the ‘transparency’ principle where partners are subjected to Corporate Tax on their share of income.
Partners treated as individual Taxable Person:
The Unincorporated Partnership will not be considered as a Taxable Person in its own right. If an application is not made, then the person conducting the business of the Unincorporated Partnership, i.e., the partners of the Unincorporated Partnership, will be taxed as individual Taxable Persons.
How will the Partner of the Unincorporated Partnership be treated?
A partner will be treated as:
- Conducting the business of the Partnership
- Holding assets of the Partnership,
- Party to arrangements where the Partnership is a party
- Having intention, status and purpose for the Unincorporated Partnership.
Allocation of Assets, Income, Liabilities and Expenditure of the Unincorporated Partnership:
The assets, income, liabilities and expenditure of the Partnership will be allocated as per:
- The distributive share of each partner, or
- As prescribed by the Federal Tax Authority when distributive share cannot be identified.
What will be included in the Taxable Income of a Partner in an Unincorporated Partnership?
The following will be included in the Taxable Income of a partner in the Unincorporated Partnership:
- Expenditure directly related to business: The expenditure or expenses that are directly incurred by the partner while conducting the business activity of the Partnership
- Interest Expenditure: Any Interest Expenditure which is incurred related to the contributions made by the partner to the Capital Account of the Partnership
Interest Paid to the Partner will not be considered as Deductible Expenditure: The interest paid to the partner on the Capital Account by the Unincorporated Partnership will be considered as allocation of income. It will not be a Deductible Expenditure for calculating the Taxable Income of the partner in the Unincorporated Partnership.
Treatment of Foreign Tax by an Unincorporated Partnership:
To calculate the Corporate Tax Payable of a partner in the Unincorporated Partnership, foreign tax liability of the Unincorporated Partnership will be:
- Allocated as Foreign Tax Credit
- To each partner in their respective distributive share in the Unincorporated Partnership.
Application by Partners to treat the Unincorporated Partnership as a Taxable Person:
An application may be made by the partners to the Federal Tax Authority to treat the Unincorporated Partnership as a Taxable Person.
What will happen when the Application is approved? When the application is approved by the Federal Tax Authority, this will happen:
- Non-applicability of conditions of Partners as Taxable Person will not apply: The conditions related to the partners as Taxable Person will not apply to the partners for the business conducted,
- Jointly and Severally Liable: The partners will be liable jointly and severally for the Corporate Tax Payable by the Unincorporated Partnership and;
- Partner acting on behalf of UP: A partner will be appointed who is responsible for the obligations and proceedings on behalf of the Unincorporated Partnership.
Effective Date of Treating Unincorporated Partnership as Taxable Person: After approval of the application by the Federal Tax Authority, the Unincorporated partnership will be taxable from:
- The Tax Period when application is made, or
- Future Tax Period, or
- Any other date as described by the Federal Tax Authority.
For treating Foreign Partnership as an Unincorporated Partnership under the UAE Corporate Tax Law
A Foreign Partnership will be treated as an Unincorporated Partnership all of the following conditions are satisfied by it:
- It is not subjected to tax in foreign jurisdiction and
- If each partner is individually taxed in their respective distributive shares when the income is accrued or received by the Foreign Partnership
- The Minister may prescribe any other condition
What is a Family Foundation? A Family Foundation is a foundation, trust or a similar entity that satisfies allthe conditions mentioned under Article 17 of the UAE CT Law.
Conditions to Treat Family Foundation as Unincorporated Partnership:
After making an application, a Family Foundation can be treated as an Unincorporated Partnership if it satisfies certain conditions:
- Purpose of the Establishment: It was incorporated for the benefit of identifiable natural person or for a Public Benefit Entity or both;
- Principle Activity: The principal activity is related to receiving, investing, holding, disbursing of assets and funds of investment or savings
- Activity not to be conducted: It the foundation:
- It doesn’t conduct business activity as per Article 11 clause 6 (Minister can specify certain category of business to be subject to Corporate Tax), or
- Its Asset are not directly held by founder, settlor or any beneficiaries
- Not for Corporate Tax Avoidance: The purpose is not to avoid Corporate Tax
- The Minister can prescribe any other conditions
Effective Date of Treating Family Foundation as Unincorporated Partnership: If the application is approved, the treatment of Family Foundation as an Unincorporated Partnership will be from:
- The Tax Period when the application was made, or
- The future Tax Period, or
- As is prescribed by the Authority.
Request for additional Information by the Federal Tax Authority: The Authority may also request additional information or records to ensure that the Family Foundation complies with the conditions.