Introduction
The Ministry of Finance in the
United Arab Emirates (UAE) has introduced Cabinet Decision No. 56 of 2023 to
define the concept of Nexus for non-resident persons concerning corporate tax
purposes. This decision aims to establish the criteria that determine the
connection between non-resident individuals and the UAE, specifically
concerning taxable income derived from immovable property. By comprehending
these regulations, non-resident persons can better understand their tax
obligations in the UAE.
Defining Nexus in the UAE
Article 2 of the Cabinet
Decision outlines the conditions under which a non-resident person is
considered to have a Nexus in the UAE. One crucial aspect is earning income
from immovable property within the country. Taxable income related to immovable
property encompasses various forms, such as income from rights in rem, sales,
disposal, assignment, direct use, letting, subletting, and other forms of
exploitation.
Registration Requirement
Non-resident individuals who
possess a Nexus in the UAE are obliged to register with the relevant authority,
as stated in Article 51 of the Corporate Tax Law. This requirement ensures
compliance with tax regulations and facilitates the proper assessment of tax
liabilities.
Qualifying Income and
Activities
To provide further clarity,
the UAE has issued Cabinet Decision No. 55 of 2023, which defines Qualifying
Income, Qualifying Activities, and Excluded Activities. It is essential to
understand these distinctions to determine the tax rates applicable to Qualifying
Free Zone Persons in the UAE.
Different Tax Rates for
Qualifying Free Zone Persons
Qualifying Free Zone Persons
are subject to distinct tax rates based on the nature of their income. They
enjoy a 0% tax rate on Qualifying Income, while a 9% tax rate is applied to
Taxable Income that does not meet the criteria for Qualifying Income.
Understanding Qualifying Income
Article 3 of the Cabinet
Decision outlines various categories of Qualifying Income. However, it is
crucial to note that these income sources must not be related to domestic or
foreign permanent establishments (PE) or the ownership or exploitation of
immovable property. Qualifying Income includes revenue derived from
transactions with other Free Zone Persons, except for income derived from Excluded
Activities. It also encompasses income derived from transactions with Non-Free
Zone Persons, specifically related to Qualifying Activities that are not
Excluded Activities. Additionally, any other income can be considered
Qualifying Income if it meets the de minimis requirements outlined in Article
4.
Qualifying Activities and De
Minimis Requirements
Ministerial Decision No. 139
of 2023 provides further clarification regarding Qualifying Activities,
Excluded Activities, and the de minimis requirements. Qualifying Activities
encompass a range of operations, including manufacturing of goods or materials,
processing of goods or materials, and holding of shares and other securities,
among others.
The de minimis requirements
are considered fulfilled if the non-qualifying revenue derived by the
Qualifying Free Zone Person in a tax period does not exceed 5% of their total
revenue in that period or AED 5,000,000, whichever is lower. This provision
aims to simplify tax calculations and ease the burden for businesses operating
in the UAE.
Conclusion
The UAE's regulations
concerning non-resident persons' Nexus and Qualifying Free Zone Persons'
taxation have a significant impact on their obligations and liabilities. By
understanding these provisions and decisions, non-resident individuals can
ensure compliance and gain clarity on their personal taxation matters within
the UAE.
