المقالات القانونية / قانون الاعمال

Avoiding Double Taxation: The UAE's Legal Framework for Mitigating International Tax Liabilities

July 22, 2024

Introduction:

When the same income is accountable and taxed in two different jurisdictions a situation referred to as double taxation arises which may result in high tax burdens for individuals and businesses. To handle this issue, the UAE has established an integrated legal system with international treaties aimed at eliminating such incidents and some specific domestic regulations to this effect. In this article, we will examine the relevant legislations that aim to resolve double taxation; Cabinet Decision No. 85/2022; Ministerial Decision No. 27/2023; and Ministerial Decision No. 247/2023.

Cabinet Decision No. 85/2022: Determination of Tax Residency:

Under the Cabinet Decision No. 85/2022 explains the criteria for determining or considering an individual as a tax resident within the UAE. According to this law, there are many specific conditions referred for individuals who intend to avoid and apply for relief from double taxation; further it describes the criteria to qualify as a tax resident for the purposes of double taxation relief.

Key provisions are:

Juristic Persons: They are deemed tax residents if they have been established, formed, or recognized under the laws of UAE or acknowledged as tax residents by relevant tax laws in UAE.
Physical Persons: Will be treated as residents when his/her primary residence and financial interests are situated within the UAE or he/she remains within the UAE for some substantial periods i.e.; for instance, 183 days within a 12-month period. Those who are UAE nationals or residence permit holders who spend 90 days or more within the 12 months may be required to meet specific criteria related to residence permits or nationality may also qualify.

This cabinet decision provides the eligibility criteria for persons wishing to succeed under double taxation agreements, and thus reduce taxes imposed on income derived internationally.

Ministerial Decision No.27/2023: Explanation on detailed tax residency criteria: It elaborates on; -

Evaluation of primary residence: How to evaluate whether the UAE is the prime place where someone settles and his financial and personal interests considered including habitual presence, employment, family relationships, and management of assets.
Calculations Methods: Methods used for calculative purposes include non-consecutive days so as to establish whether someone has stayed in UAE or not, to determine the tax residency.
Exceptional Circumstances: If an individual stayed in UAE for a specified period for an emergency/temporary as a result of unintended circumstances this duration may not be considered to identify the status of someone’s tax residency.

Such guidelines are necessary for an accurate understanding of tax residency which will facilitate adherence to the double taxation agreements.

Ministerial Decision No:247/2023 deals with the issuance of Tax Residency Certificates (TRCs), a requirement for entitlement under international tax treaties.

Tax Residence Certificate applications should be requested by the individual with a specified form, as per the authority. The authority will verify the application and ensure the applicant meets all terms and conditions outlined in the relevant international agreements.

Tax Residence Certificates are necessary to benefit from international agreements that help reduce or prevent double taxation, thereby increasing the proficiency of the international business operations or helping to plan and manage finances personally.

Conclusion:

The establishment of the UAE’s tax law and its clear guidelines helps individual or business entities to protect the additional financial burden and efficiently helps to prevent or avoid the issue of double taxation.