[Opinion] Changing Indian Tax Residency in light of UAE’s new Corporate Tax Law

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 (NROR) 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.

Click Here To Read The Full Article