Expats in the UAE: understanding the new tax residency rules

The United Arab Emirates (UAE) has long enjoyed a reputation as a tax-efficient destination for both individuals and businesses. Its strategic location, flourishing economy and favourable tax policy have attracted expatriates from all over the world. However, until recently, some expats have had their new UAE tax residency challenged by their country of origin. It was suggested that they had not truly moved their life and were not spending enough time there. In the absence of any clear rules, it was very difficult for expats in the UAE to prove their tax residence in the country or to benefit from the advantages linked to double taxation agreements.

In a bid to accommodate its large population of expats, modernise its tax system and align itself with international standards, the Cabinet of the UAE issued decision no. 85 in September 2022. This provides a new national definition and criteria for tax residency that align with recognised international standards in this area.

The new rules, which came into force on 1 March 2023, bring welcome clarification for individuals and legal entities regarding their UAE tax-residency status. They also facilitate the introduction of corporate income tax in June 2023.

UAE tax residency for individuals

The new ministerial rules define three main scenarios in which an individual can be considered a tax resident of the UAE:

1. The physical presence for at least 90 days or more in a consecutive 12-month period of a UAE national, UAE resident and nationals of any Gulf Cooperation Council (GCC) member, where the individual:

I. has a permanent place of residence in the UAE, or

II. is in employment or runs a business in the UAE.

2. A physical presence in the UAE for a period of 183 days in a consecutive 12-month period.

3. An individual that has their primary residence and financial interests in the UAE.

We see that although the number of days spent in the UAE remains important, it is no longer the sole criterion. The determination of tax residency for expats in the UAE is now based on a full evaluation of an individual's situation, with the aim of ensuring that people who have substantial links to the country and who engage in economic activities there are recognised as tax residents.

Read also: Five questions for expats moving to or living in the UAE | Lombard Odier

UAE tax residency for legal entities

A legal entity will be considered a tax resident of the UAE if either of the following applies:

The legal entity is incorporated, formed or recognised in accordance with the applicable UAE legislation.

The legal entity is considered a UAE tax resident in accordance with the new tax law provisions in force in the UAE.

Under the new corporate income tax act, a legal entity is considered a UAE tax resident if it was incorporated, formed or recognised under the applicable law in the UAE, or is effectively managed and controlled from the UAE.

UAE tax residence under double taxation agreements (DTAs)

DTAs are bilateral agreements entered into by two countries to avoid the double taxation of income and to promote cross-border trade and investment. These agreements generally provide rules for determining the tax residence of individuals and legal entities, as well as rules concerning how the two countries allocate taxation rights on certain forms of income.

It should be noted that the UAE has signed DTAs with more than 130 countries.