Overview
Each Double Taxation Avoidance Agreement (DTAA) sets its own rules and criteria to determine when juridical and natural persons qualify as tax residents in the countries that are parties to the agreement. These criteria may differ from those used under domestic laws to define UAE tax residency or a Resident Person under the Corporate Tax Law. Consequently, tax residency determinations must be made on a case-by-case basis, considering the specific provisions of the relevant DTAA.
A DTAA in effect in the UAE takes precedence over domestic tax regulations, including the Corporate Tax Law and Cabinet Decision No. 85 of 2022. As a result, qualifying as a Resident Person under the Corporate Tax Law does not automatically mean that the entity or individual is a tax resident in the UAE for DTAA purposes. DTAAs include provisions that allocate tax residency status for juridical persons, which may designate the UAE or another jurisdiction as the primary taxing authority based on the facts and circumstances of each case. The list of DTAAs signed by the UAE is available on the Ministry of Finance’s website.
Tax Residency for Juridical Persons under DTAAs
Each DTAA provides specific definitions of tax residency for juridical persons. Generally, a juridical person seeking to apply a DTAA must fulfil one or more conditions such as being liable to tax, having a legal connection (e.g., incorporation), an economic connection (e.g., effective management or substantial presence), or a combination thereof. If a juridical person qualifies as a UAE tax resident under an applicable DTAA, it may apply for a Tax Residency Certificate to benefit from the provisions of the agreement.
Need proof of status? Learn how to obtain a Tax Residency Certificate in the UAE for DTAA relief.
Tax Residency for Government Entities under DTAAs
For Corporate Tax purposes, Government Entities are automatically classified as Exempt Persons, and Government-Controlled Entities enjoy similar exemptions concerning income derived from their mandated activities. Under DTAAs, these entities are typically regarded as UAE tax residents and can access DTAA benefits, unless a specific DTAA includes a definition of Government that overrides this classification.
Tax Residency for Exempt Persons under DTAAs
An Exempt Person that qualifies as a tax resident under a DTAA may benefit from its provisions. Some DTAAs include specific provisions for entities generally exempt from Corporate Tax, such as Government Entities, public benefit entities, and pension funds. If a DTAA bases tax residency on liability to tax, Exempt Persons may still benefit, as they are deemed liable to tax in the UAE.
Resolving Dual Tax Residency for Juridical Persons
DTAs establish mechanisms to resolve cases where a juridical person qualifies as a tax resident in multiple jurisdictions. These tie-breaker rules generally rely on:
- The place of effective management,
- The Mutual Agreement Procedure (MAP), or
- Other criteria, such as the location of the head office or the place of incorporation.
Place of Effective Management (POEM)
According to the pre-2017 OECD Model Tax Convention, a company with dual tax residency is considered a tax resident in the country where its effective management and control take place. The OECD defines the place of effective management as the location where key business and commercial decisions are made. While an entity may have multiple management locations, it can have only one place of effective management at any given time.
Example: A limited liability company, incorporated in Country S, conducts all its board meetings in the UAE, where all key management and commercial decisions occur. Under Country S’s laws, the company is considered a tax resident there due to its incorporation. However, under UAE tax laws, it qualifies as a tax resident in the UAE based on effective management. If a DTAA exists between Country S and the UAE, its tie-breaker provisions will allocate tax residency to the jurisdiction where effective management takes place—in this case, the UAE.
See how UAE Corporate Tax provisions interact with treaty residency rules.
Mutual Agreement Procedure (MAP)
Following the 2017 OECD Model Tax Convention, many DTAAs incorporate MAP to resolve dual residency conflicts. Under MAP, tax authorities from both jurisdictions collaborate to determine the appropriate tax residency status.
Additional Tie-Breaker Criteria
Many UAE DTAAs utilize alternative criteria, such as the place of incorporation or the head office’s location, to resolve dual residency disputes.
Tax Residency for Natural Persons under DTAAs
A natural person’s classification as a Resident Person for Corporate Tax purposes is separate from their tax residency under a DTAA. A natural person is considered a UAE tax resident for DTAA purposes if they meet the residency criteria outlined in the relevant DTAA. The UAE’s DTAA network aims to prevent double taxation by specifying each country’s taxing rights or providing tax relief mechanisms.
DTAAs define tax residency rules differently, typically requiring individuals to demonstrate liability to tax, citizenship or nationality, physical presence, domicile, or habitual residence in the relevant jurisdiction. If a DTAA refers to residency under UAE law, the criteria outlined in Cabinet Decision No. 85 of 2022 apply.
Resolving Dual Residency for Natural Persons
When a natural person qualifies as a tax resident in both the UAE and another jurisdiction under a DTAA, tie-breaker provisions determine which country has primary taxing rights. The assessment considers:
- The location of the person’s permanent home,
- If both countries qualify, where the individual’s center of vital interests lies,
- If unresolved, the country of habitual abode,
- If still undetermined, the person’s nationality.
Where the tie-breaker rules fail to resolve residency, tax authorities of both jurisdictions may negotiate a resolution.
Permanent Home Test
A permanent home is a dwelling continuously available for the individual’s use, such as a house, apartment, or furnished room. Ownership is not required; rental or other forms of occupation qualify, provided the home is regularly used. A temporary residence, such as accommodations for travel or education, does not satisfy this test.
If an individual maintains multiple residences, determining which home is permanent depends on whether it is intended for long-term use.
Centre of Vital Interests Test
The centre of vital interests is the country where an individual has the closest personal and economic ties. This requires a holistic evaluation of family and social relationships, employment, business activities, political and cultural engagements, and property management. The depth of these connections influences the determination.
Habitual Abode Test
If residency cannot be determined through the previous tests, habitual abode is examined. This considers the frequency, duration, and purpose of an individual’s stays in each country over an extended period.
Nationality Test
When previous criteria fail to resolve dual residency, the person’s nationality determines tax residency. If nationality does not apply, tax authorities may consult to resolve the issue.
Conclusion
Determining tax residency under DTAAs involves analysing specific treaty provisions alongside domestic laws. Juridical and natural persons should carefully assess their residency status, considering the applicable tie-breaker rules and other relevant factors to ensure compliance and maximize treaty benefits.
Review the full UAE Corporate Tax Law to understand domestic vs DTAA precedence.
BCL Globiz’s Role in UAE DTAAs & Tax Residency
BCL Globiz provides expert guidance on navigating UAE DTAAs and tax residency rules. We help businesses and individuals assess their tax residency status, resolve dual residency conflicts, and secure TRC. Our team ensures compliance with UAE and international tax frameworks, maximizing treaty benefits while mitigating risks.
For more details reach out to our expert at rakesh@bclglobiz.com and visit www.bcl.ae today.