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Overview of UAE New Corporate Tax Law:
The much awaited and talked about UAE Corporate Tax Law has finally been legislated by the United Arab Emirates (UAE), on 09 December 2022, vide Federal Decree-Law No. (47) of 2022, on the Taxation of Corporations and Businesses in UAE.
The UAE Corporate Tax Law provides the legislative basis for the introduction and implementation of a Federal Corporate Tax (“CT”) in the UAE and is effective for financial years starting on or after 1 June 2023.
UAE Corporate Tax will be levied at a headline rate of 9% on Taxable Business Income exceeding AED 375,000. Taxable Income below this threshold will be subject to a 0% rate of Corporate Tax. The Federal Decree provides for levy of UAE Corporate Tax only on business income of Natural Persons (Individuals) and Juridical Persons (UAE Incorporated Entities) and not on Salary, Interest, Dividend or Capital Gains Income.
All Taxable Persons in UAE Mainland as well as Free Zone will be required to register for Corporate Tax and obtain a Corporate Tax Registration Number. The UAE Federal Tax Authority (FTA) may also request certain Exempt Persons to register for Corporate Tax.
Taxable Persons will be required to file a Corporate Tax return for each Tax Period within 9 months from the end of the relevant period. The same deadline would generally apply for the payment of any Corporate Tax due in respect of the Tax Period for which a return is filed.
Illustrated below are Timelines of the Registration, Filing and Payment deadlines associated for Taxable Persons with a Tax Period (Financial Year) ending on 31 May or 31 December (respectively), in UAE.
Corporate Tax would generally be imposed annually, with the Corporate Tax liability calculated by the Taxable Person on a self-assessment basis. This means that the calculation and payment of Corporate Tax will be done through the filing of a Corporate Tax Return with the Federal Tax Authority by the Taxable Person.
The starting point for calculating Taxable Income will be the Taxable Person’s accounting income (i.e., net profit or loss before tax) as per their financial statements. The Taxable Person will then need to make certain adjustments to determine their Taxable Income for the relevant Tax Period. For example, adjustments to accounting income may need to be made for income that is exempt from Corporate Tax and for expenditure that is wholly or partially non-deductible for Corporate Tax purposes.
In principle, all legitimate business expenses incurred wholly and exclusively for the purposes of deriving Taxable Income will be deductible, although the timing of the deduction may vary for different types of expenses and the accounting method applied. For capital assets, expenditure would generally be recognised by way of depreciation or amortisation deductions over the economic life of the asset or benefit. Interestingly the UAE Federal Decree puts a cap of 30% of EBIDTA on the allowable Interest expenditure which can be claimed as business expenditure in respect of loans from unrelated parties. Interest on related party loans will not be allowed unless it is demonstrated that the interest rate is at arms-length price and the loan has been taken for business purpose and not for taking tax advantage.
Changing Indian Tax Residency Dynamics in Light of UAE’s New Corporate Tax Law
Now with the legislation of the new regime of UAE Corporate Tax Law, w.e.f. 1.6.2023, with its own law and parameters for determination of UAE residential status in place, the dynamics of Indian Tax Residency Tests are also bound to be affected, in an interesting and intriguing manner, some of which are discussed and analysed below.
Natural Person/ Individual: Article 1 of the UAE Federal Decree on Corporate Tax, defines ‘Resident Person’ as the Taxable person specified in Clause 3 of Article 11 of this Federal Decree. Article 11 (Clause 3) defines a Resident Person as "A natural person who conducts a Business or Business Activity in the State” (UAE). So, interestingly the only prescribed condition for UAE Residency in case of Natural Person viz. an individual, as specified in the UAE Federal Decree is the conducting of business or business activity in UAE by such an individual. The period of minimum stay of an individual in UAE has somehow not been prescribed in the Federal Decree.
Though the UAE’s Cabinet Decision 85 of 2022 does talks about the requirement of minimum stay of at least 183 days in UAE to be qualified as a UAE resident by an individual but there is no reference of such Cabinet Decision in the said Federal Decree. Thus, a suitable clarification by the concerned UAE Legislative authorities, in this regard is desirable.
Now, think of a scenario, where an Indian citizen, carrying on a business in UAE, comes on a visit to India and stays in India for more than 120 days but less than 182 days in a financial year and earns an Indian sourced income exceeding Rs 15 lakhs in a year. In current tech-times, it is quite possible. By virtue of section 6(1)(b) of the Indian Income tax Act, such a person shall be considered as Resident in India (RNOR) and his Indian sourced income shall be taxable in India at the applicable tax rate of 30% plus surcharge and cess.
However, now by virtue of this parallel definition of UAE Resident Person, contained in Clause 3 of Article 11, in the UAE Corporate Tax law, such an individual will also get qualified to become the Resident of UAE.
Since corporate tax rate of UAE is 9% only and in India it is 30%, in our example, so naturally this individual will claim that he is the UAE Resident. But Indian revenue authorities will contend him as Resident of India. So, in such conflicting cases where the person becomes resident of two countries simultaneously, the tie-breaker residency rule contained in Article 4 (Clause 3) of DTAA between India and UAE will come into picture, which provides that such an Individual will be considered as the Resident of that Country in which he/she is fulfilling the undermentioned qualifying sequential criteria viz.
(i) Country in which he/she has permanent home; if permanent home in both countries, then country in which he/she has centre of vital interests;
(ii) In case of non determination as per (i), then Country in which he/she has habitual abode;
(iii) In case of non determination as per (i) & (ii), then Country in which he/she is a National;
(iv) In case of non determination as per (i), (ii) & (iii) then as per mutual settlement between the two Countries.
Thus, in our example, if the individual is able to establish that either he/she has a permanent home only in Dubai and not in India or his/her centre of vital interest/business interest is in Dubai and not in India, then he/she will be treated as a UAE resident and then he/she can claim DTAA benefit of reduced UAE CT Rate of 9% vis-à-vis Indian tax rate of 30% plus surcharge and cess, subject to fulfilment of other prescribed conditions like TRC, Form 10F etc.
Juridical Persons/ Incorporated Entities
Clause 4 of Article 11 of UAE Federal Decree stipulates that all companies incorporated in UAE will be considered as UAE Residents. Further, foreign companies effectively managed & and controlled in UAE will also be considered as UAE Residents and subject to UAE CT of 9%.
The Indian Income Tax Act also stipulates the same conditions for determination of Residential Status for corporate entities.
Now consider a scenario, wherein a company has been incorporated in India, but its Decision Makers (Promoters) reside in UAE and take all business decisions from UAE. So, UAE Corporate Tax rate of 9% being lower than Indian Corporate tax rate of 15%/22% plus surcharge & cess, naturally such company will claim residential status of UAE as place of effective management is in UAE. But Indian tax authorities will consider the company as Indian Resident subject to higher corporate tax rate.
Now, again in this conflicting scenario, the Tie Breaker Residency Rule as per Article 4 clause (4) of DTAA will come into picture which also stipulates Place of Effective Management (POEM) as the residential status criteria, and so this company will be able to claim the residency of UAE and consequential DTAA benefit of lower CT Rate of 9%, subject to fulfilment of other prescribed conditions like TRC, Form 10F etc.
Doctrine of Deemed Residency in India
The Indian Finance Act 2020 has introduced the concept of “Deemed Residency” for Indian Citizens, by insertion of a new sub section (1A) in section 6 of the Income Tax Act.
It reads as under:
“6(1A) Notwithstanding anything contained in clause (1), an individual, being a citizen of India, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year shall be deemed to be resident in India in that previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.”
Accordingly, by virtue of insertion of this new subsection (1A) in section 6 of the Income Tax Act, by the Finance Act 2020, w.e.f. 1.4.2020, ‘stateless’ persons or individuals, having Indian citizenship, who were hitherto not liable to tax in any other tax jurisdiction on the world map, would now become tax residents in India on this deeming fiction basis, if their Indian sourced income exceeds Rs 15 lakhs in a financial year.
Further, the Finance Act 2021, has inserted a new subsection (29A) in section 2 of the Income Tax Act, to define the term ‘liable to tax’ and it reads as under:
(29A) "liable to tax", in relation to a person and with reference to a country, means that there is an income-tax liability on such person under the law of that country for the time being in force and shall include a person who has subsequently been exempted from such liability under the law of that country;]
So, with this amendment, the Indian Legislature has tried to overturn the well settled narrative and legal position shaping the interpretation of the term ‘liable to tax’ in the popularly cited judgements of the hon’ble SC in the case of ‘Azadi Bachao Andolan’ (2003) 263 ITR 706 (SC) and ‘Green Emirates Shipping’ [2006] 100 ITD 203 and ‘Mohsinally Ali Mohammed Rafik v. CIT (1995) 213 ITR 317 (AAR).
In these judgements, the term ‘liable to tax’ has been consistently held to mean ‘the sovereign right of a country to tax, including in future time-period, and not the actual liability or payment of tax. More specifically the hon’ble SC in ‘Azadi Bachao Andolan’ has held that,
“It seems clear that a person does not have to be actually paying tax to be ‘liable to tax’–otherwise a person who had deductible losses or allowances, which reduced his tax bill to zero would find himself unable to enjoy the benefits of the Convention. It also seems clear that a person who would otherwise be subject to comprehensive taxing but who enjoys a specific exemption from tax is nevertheless liable to. tax, if the exemption were repealed, or the person no longer qualified for the exemption, the person would be liable to comprehensive taxation. It is thus clear that ‘liable to tax’ connotes that a person is subject to one of the taxes mentioned in Article 2 in a Contracting State and it is immaterial whether the person actually pays the tax or not.”
Thus, relying upon these judgements, the Indian Citizens, were able to claim benefit of the DTAAs of India with zero or nil income tax levying countries like UAE, by claiming the residential status of such countries, on the basis of Tax Residency Certificates (TRCs), and thereby reducing their tax liability even on Indian sourced income to zero.
In order to overcome this tendency of treaty-shopping, these two back-to-back amendments viz. deemed residency u/s 6(1A) and insertion of definition of the term ‘liable to tax’ u/s 2(29A), were brought about in the Indian Income tax Act, so as to bring to income tax net, the Indian sourced income exceeding Rs 15 lakhs in a year, of Indian citizens, residing in India for less than 182 days, and claiming the residential status of such tax heaven countries like UAE, by mandating that such Indian citizens would be considered as deemed residents in India u/s 6(1A) and DTAA benefit would also not be available as the term ‘liable to tax’ now as per section 2(29A) of the Income Tax Act means actual tax liability and not just the sovereign right of a country to levy tax in future.
However, now with the legislation of the UAE Corporate Tax Law on 9.12.2022, the Corporate Tax shall now become leviable on the taxable business income of all UAE residents w.e.f. tax period starting from 1.6.2023 onwards, and as such, now this actual liability to pay corporate tax in UAE, will get covered within the meaning of the term ‘liable to tax’ u/s 2(29A).
Therefore, in cases where UAE residents happen to be Indian citizens earning Indian sourced income exceeding Rs 15 lakhs in a year but staying in UAE for at least 183 days, such persons can now take the India-UAE DTAA benefit of reduced UAE Corporate Tax Rate of 9% vis-à-vis the higher Indian Income tax rate of 30%, on their Indian sourced income as well, subject to the fulfilment of all other prescribed conditions like TRC, Form 10F etc.
Parting Thoughts
In my humble understanding, the newly legislated UAE Corporate Tax Law is much clearer, easy to understand and straight-forward than our Indian Income Tax Act, and so the Indian Legislature may consider referring it and take a leaf out of it, in simplifying our Income Tax Act, as well. All said and done, I can see very interesting and exciting times ahead....
For any related queries on UAE Corporate Tax Law, the author can be reached at mayankmohanka@gmail.com
This Article has also been published by Taxmann with the Citation [2022] 145 taxmann.com 349 (Article)
