Juridical person incorporated or formed in the UAE

A juridical person can be incorporated or established under different legal forms.

In the UAE, juridical persons include Limited Liability Companies (LLCs), Private Shareholding Companies (PSCs) with one single interest holder, Public or Private Joint Stock Companies (PJSCs), foundations or trusts that have been established under the UAE “mainland” legislation.

Civil companies incorporated or established in the UAE are also considered to be juridical persons.^[8]

Furthermore, companies that are labelled as “offshore companies”, which are incorporated in the UAE are also considered to be juridical persons.

According to Federal Law No. 5 of 1985, a juridical person has:

• a separate financial liability from any other person, and

• legal capacity within the limits laid down by law or establishing document, and

• the right to bring legal proceedings, and

• a separate place of residence.^[9]

However, whether a person is juridical will ultimately be assessed based on the establishment law of each entity.

A UAE branch of a UAE juridical person is seen as an extension of its head office and, therefore, not considered a separate juridical person from its head office.^[10]

Similarly, a UAE branch of a foreign juridical person is an extension of its parent or head office and is not considered a separate legal entity from the parent or head office. A UAE branch of a foreign company cannot be considered a Resident Person in its own right. Instead, the foreign company with a UAE branch has a UAE Permanent Establishment, and is considered as a Non-Resident Person for Corporate Tax purposes.^[11]

Free Zones

Free Zones in the UAE have been set up to encourage investment and facilitate trade. These Free Zones offer businesses highly efficient infrastructure and distinct services that facilitate smooth workflows.

The Corporate Tax rules for a juridical person also apply to a Free Zone Person. Therefore, if a juridical person is incorporated or formed in a Free Zone in the UAE, the juridical person is also a Resident Person for Corporate Tax purposes.^[12]

For the purposes of applying the Free Zone regime for Corporate Tax purposes, a branch of a foreign company established or registered in a Free Zone is considered the head office with the foreign parent being considered as a foreign branch. However, for tax residency purposes, where a branch of a foreign company (that is tax resident outside of the UAE) is established in a UAE Free Zone, the foreign company is considered to be a Non-Resident Person for Corporate Tax purposes.

Exempt Persons

An Exempt Person for Corporate Tax purposes is not considered a Resident Person subject to Corporate Tax, unless that Person conducts a Business or Business Activity that is outside the scope of their exempted activity.

This only applies to Government Entities,^[13]Government Controlled Entities,^[14]Persons engaged in an Extractive Business, ^[15]or a Non-Extractive Natural Resource Business.^[16]

In these instances, the Business or Business Activity of the Exempt Person that is not its exempted activity is treated as an independent Business that is subject to Corporate Tax.^[17]

Effective management and control

Determining residency for Corporate Tax purposes solely on the basis of place of incorporation does not always reflect the economic reality of where the business operates. Accordingly, for a juridical person incorporated or formed outside the UAE, the determination of residence for Corporate Tax purposes takes into account where the juridical person is effectively managed and controlled.^[18]This is in line with many tax regimes in other countries that apply similar concepts such as “central management and control” or “place of effective management” rules to determine tax residency.

If a juridical person is not incorporated in the UAE but is effectively managed and controlled in the UAE, it is considered a Resident Person for Corporate Tax purposes.^[19]This is assessed for each particular case based on its specific facts and circumstances.

The consequence of a non-UAE incorporated company being effectively managed and controlled in the UAE, and therefore a Resident Person, is that the company is subject to Corporate Tax on its profits sourced from both the UAE and from abroad, in the same way as a company that is incorporated under the laws of the UAE.^[20]

The place of effective management and control is understood as the place where “key management and commercial decisions” that are necessary for the conduct of the juridical person's Business as a whole are, in substance, made.

The key management and commercial decisions that are necessary for the conduct of Business may include, but are not limited to, the following activities:

• setting the general policies, for example, investment policies and operational policies,

• determining the strategic direction of the company's operations,

• deciding the type of transactions that the company can enter into, for example, mergers, acquisitions and purchase or sale of significant assets,

• appointing c-suite and other senior executives and granting them authority to manage or carry out the day-to-day operations of the company,

• directly or indirectly overseeing the persons appointed to manage or carry out the day-to-day business of the company, or

• handling key finance matters such as the determination of how profits are used and declaration of dividends.

Broadly, effective management and control relates to where the strategic level of control (as opposed to day-to-day management) is conducted. This is in line with the commentary on the OECD Model Tax Convention (“OECD Commentary”).

The following are not considered to be key management and commercial decisions, and, therefore, do not constitute effective management and control:

• formal finalisation or approval of decisions made by others,

• mere implementation of decisions made by others,

• day-to-day conduct and management of a company's activities and operations, or

• legal and administration matters such as keeping a share register or undertaking minimum acts necessary to maintain a company's registration.

A juridical person can have multiple places of management, but only has one place of effective management and control at any one time. Therefore, if a juridical person's key management and commercial decisions affecting its Business as a whole are made in multiple locations, the place of effective management and control will be the location where those decisions are regularly and predominantly made.

The place of effective management and control test is one of substance over form and all relevant facts and circumstances must be examined on a case-by-case basis. This analysis can be broadly done in two steps:

• Step 1: Identifying the persons who make the key management and commercial decisions.

• Step 2: Determining the place where the key management and commercial decisions are in substance made.

Criteria for identifying person who make key management and commercial decisions

When determining who makes the key management and commercial decisions necessary for the conduct of a juridical person's Business, it is necessary to consider the Persons who substantially make those decisions and not those who merely formalise or approve the decisions made by others.

This analysis should consider the following key factors:

• who has the legal power or authority to make the key management and commercial decisions of the juridical person?

• do the persons with the legal power to make the key management and commercial decision in fact exercise this power?

• if the persons with the legal power to make the key management and commercial decisions do not exercise this power, who does?

  Three tests to identify the Person (or Persons) who make key management and commercial decisions are considered below:

• the board of directors' test,

• the delegation of authority test, and

• the shareholders activity test.

Where key management and commercial decisions are made

Once the person (or persons) who exercise effective management and control are identified, the next step is to identify the location of the person (or persons) when making the key management and commercial decisions. The place of domicile and/or residence of such persons may be taken into consideration but is not necessarily the determining factor. All relevant facts and circumstances must be evaluated on a case- by-case basis in determining the place of effective management and control of a juridical person.

The following factors should be considered:

1. The place where board meetings are physically held. This is a significant indication of the place of effective management and control only if the board of directors retains and exercises its authority to govern the juridical person and does, in substance, makes the key management and commercial decisions during board meetings. Otherwise, consideration should be given to the place where such decisions are made.

2. Board meetings may be held wholly virtually, or there may be a physical meeting location where some directors attend physically while others attend virtually. Consequently, the physical location of the board meeting may not be determinative of the place of effective management and control, but rather, the physical location where the directors with the overriding decision-making powers join from.

3. If the board of directors have other meetings outside the board meeting to make key management and commercial decisions, consideration should be given to such meetings, for example, who participates, what decisions are made during such meetings, and where such meetings take place.

4. In some cases, key management and commercial decisions are made via written resolutions or by email that are circulated on behalf of decision makers that are in different physical locations. The particular facts and circumstances of where the persons ultimately making the decisions are located may determine the place of effective management and control.

5. Minutes or other documents recording where the key management and commercial decisions are made, may be relevant. Board minutes can provide evidence of the decisions made, the persons who made the decisions and the place where the decisions were made. Certain details in the board minutes such as why the decisions were made and whether alternatives were considered or rejected can be valuable evidence of the exercise of effective management and control. Other evidence, however, may also be relied upon. This may include papers circulated to board members in advance of meetings, emails, statements

   or other correspondence showing the board's deliberations and the role played by each director in the decision-making process.

6. If the effective management and control is exercised by Persons other than the board of directors, implicitly or by delegation of authority to, for example, shareholders, senior management, executive committees, etc., the place of effective management and control may be the location where those with delegated authority make the key management and commercial decisions.

7. The nature of the Business may determine where key management and commercial decisions are made in practice.

Generally, legal, administrative and operational factors such as the place of incorporation, the location of the registered office, the location where the shareholder register is kept, the place where accounting records are kept and the place where the day-to-day operations of the Business are carried out, do not have relevance in determining the place of effective management and control.

Additionally, even when the key management and commercial decisions are made in the UAE, a place of effective management and control may not be created where:

1. Key management and commercial decisions are made in the UAE on an occasional or one-off basis. This will depend on how significant the decisions are and whether there is a regular pattern of the key decisions being made in the UAE.

2. The presence of the Person (or Persons) making the key management and commercial decisions in the UAE is as a result of temporary and exceptional circumstances. This may include, but is not limited to, the following:

   • adoption of public health measures by competent authorities in the UAE, or in another relevant jurisdiction, or by the World Health Organisation,

   • imposition of travel restrictions by competent authorities in the UAE, or in another relevant jurisdiction,

   • imposition of legal sanctions on a person preventing them from leaving the UAE,

   • acts of war, or the occurrence of terrorist attacks,

   • natural disasters or force majeure beyond reasonable control, or

   • an emergency health condition affecting a person or their relatives (up to the fourth degree, including by way of adoption or guardianship).

In circumstances where a juridical person's key management and commercial decisions are made in more than one place, the relevant facts and circumstances should be examined to identify the place where effective management and control is made as a matter of substance.

If the factors listed above are inconclusive in determining the place of effective management and control, the place in which the juridical person has the strongest economic nexus may be considered. This is determined by examining various factors such as where the juridical person has most of its employees and assets, carries on most of its activities, derives most of its revenues or where the senior management functions are carried on.

Income subject to Corporate Tax

A juridical person that is a Resident Person is subject to Corporate Tax on their Taxable Income, which can be derived from both within and from outside the UAE.^[22]This means that a juridical person that is a Resident Person is taxed on all income earned, irrespective of whether the income is sourced in the UAE or a foreign country.

Income from foreign sources received by a juridical Resident Person

Where a juridical person that is a Resident Person has a Foreign Permanent Establishment, the juridical person can make an election to exclude the income and expenditure derived by the Foreign Permanent Establishment in calculating its Taxable Income, if certain conditions are satisfied.^[23]

A Foreign Permanent Establishment refers to a fixed place of Business, such as an overseas branch, office or factory, or a dependent agent who habitually exercises an authority to conduct a Business or Business Activity on behalf of a Resident Person overseas.

In addition, certain income received from foreign companies is exempt from Corporate Tax if the Resident Person holds a Participating Interest in the foreign company.^[24]A Participating Interest is an interest in a juridical person that meets all the conditions of Article 23(2) of the Corporate Tax Law.

If the conditions for a Participating Interest are met, the following income will be exempt from Corporate Tax:

• Dividends and other distributions derived from a Participating Interest in a foreign juridical person that is not a Resident Person,^[25]

• gains or losses on the transfer, sale, or other disposition of the whole or part of the Participating Interest,^[26]

• foreign exchange gains or losses in relation to a Participating Interest,^[27]and

• impairment gains or losses in relation to a Participating Interest.^[28]

Furthermore, a Foreign Tax Credit may be available for tax paid in foreign jurisdictions on income that is also subject to UAE Corporate Tax.^[29]The available Foreign Tax Credit reduces the Corporate Tax Payable in the UAE by the value of foreign taxes paid on the relevant income, up to the UAE Corporate Tax liability. This relief is unilateral and does not take into consideration any double taxation relief available under an applicable DTA or any other reciprocal relief from a foreign taxing jurisdiction.

Juridical person incorporated or otherwise formed or recognised in the UAE

A juridical person can be established under different legal forms, such as:

• companies such as Limited Liability Company, Private Shareholding Company, Public and Private Joint Stock Company,

• civil companies,

• foundations,^[37]

• trusts established under Federal Law No. 31 of 2023.^[38]

The UAE tax residency rules for a juridical person equally apply to persons established and operating in Free Zones. Therefore, if a juridical person is incorporated or

otherwise formed in a Free Zone in the UAE, this juridical person is a UAE Tax Resident and able to apply for a Tax Residency Certificate.

Juridical persons otherwise considered a Tax Resident under other UAE Tax Laws

A juridical person will be UAE Tax Resident if considered as a resident for tax purposes.^[39] This includes the Corporate Tax Law.

Under the Corporate Tax Law, a juridical person that is not incorporated in the UAE may still be considered to be a Resident Person if it is effectively managed and controlled in the UAE.^[40]

Tax residency of foreign companies with UAE branches

A UAE branch of a juridical person is an extension of its parent or head office and is not considered a separate legal entity in its own right. Therefore, a UAE branch of a foreign company (that is incorporated, and effectively managed and controlled, in a foreign jurisdiction) is not considered to be a Tax Resident Person.^[41]Instead, the foreign company is considered to be a Non-Resident Person.

If, however, the foreign company (that is incorporated in a foreign jurisdiction) is effectively managed and controlled in the UAE, the foreign company (along with its branches) is considered to be a Resident Person for the purposes of the Corporate Tax Law^[42]and, therefore, Tax Resident in the UAE.^[43]

Tax residency of Exempt Persons

The tax residency status of an Exempt Person is determined by reference to the type of Exempt Person in question. Exempt Persons include four categories of persons:

Category 1: Automatically Exempt Persons

This applies to Government Entities.^[44]The Business or Business Activity of this type of Exempt Person that is not its exempted activity is treated as an independent Business subject to Corporate Tax.^[45]A Government Entity, despite being an Exempt Person, is established in the UAE and, therefore, considered as a Tax Resident.^[46]

Category 2: Exempt if they notify the Ministry of Finance, and meet the relevant conditions

This applies to Persons engaged in an Extractive Business^[47]or a Non-Extractive Natural Resource Business.^[48]The Business or Business Activity of these Exempt Persons that are not based on exempted activity is treated as an independent Business subject to Corporate Tax. ^[49]This type of Exempt Person is either incorporated or otherwise formed or recognised in the UAE and, therefore, considered as a Tax Resident.^[50]

Category 3: Exempt Persons if listed in a Cabinet Decision and subject to meeting relevant conditions

This applies to Government Controlled Entities ^[51]and Qualifying Public Benefit Entities.^[52]They will be either incorporated or otherwise formed or recognised in the UAE and, therefore, considered as a Tax Resident.^[53]

Category 4: Exempt Persons upon application to, and approval by, the FTA

This applies to public and private pensions and social security funds,^[54]Qualifying Investment Funds,^[55]and UAE incorporated juridical persons that are wholly owned and controlled by specific Exempt Persons.^[56]These Exempt Persons will be either incorporated or otherwise formed or recognised in the UAE and, therefore, considered as a Tax Resident.^[57]

183-days+ test

If a natural person was physically present in the UAE for 183 days or more in the relevant continuous 12-month period, they are considered a UAE Tax Resident for such a 12-month period.^[59]It does not matter what activity, if any, is undertaken by the natural person during those 183 days.

The term “day” means a calendar day, and the term “month” means a calendar month for the purposes of meeting the physical presence test.^[60]Being physically present refers to being within the state borders of the UAE.

90-days+ test

If a natural person was physically present in the UAE for fewer than 183 days in the relevant continuous 12-month period, they may still be considered a UAE Tax Resident if they were present in the UAE for at least 90 days and also meet both of the following conditions:^[64]

• they have a legal right to reside in the UAE by virtue of being a national of the UAE or another GCC Member State, or holding a valid Residence Permit in the UAE, and

• they also have a “Permanent Place of Residence” in the UAE or carry on employment or a Business in the UAE.

The meaning and determination of what constitutes a “day” for the purposes of the 90- day test is the same as in the 183-day test.

Exceptional circumstances leading to a physical presence

There are occasions in which natural persons will be physically present in the UAE for reasons beyond their control. An exceptional circumstance is an event occurring while the natural person is already in the UAE, which prevents them from leaving the UAE as originally planned. The exceptional circumstance must be an event beyond the natural person's control that they could not reasonably have predicted or prevented.^[74]

Examples of exceptional circumstances may include, but are not limited to:

• local or national emergencies, for example, natural disasters, closing of borders, war or civil unrest,

• personal emergencies, for example, a sudden or critical illness or injury to the natural person.

As a result, a natural person may inadvertently be a UAE Tax Resident. When calculating the number of days that a natural person has spent in the UAE, the days they stayed in the UAE due to exceptional circumstances shall be disregarded.^[75]

Usual or primary place of residence and centre of financial and personal interests test

A natural person will be considered a Tax Resident in the UAE if both their usual or primary place of residence and the centre of their financial and personal interests are in the UAE.^[76]Both of these conditions must be simultaneously satisfied in order for a natural person to be considered a UAE Tax Resident.

Tax residence of Government Entities under Double Taxation Agreements

Government Entities are automatically considered Exempt Persons for Corporate Tax purposes. Additionally, Government Controlled Entities are Exempt Persons in relation to income from their Mandated Activities.

In the context of DTAs, Government Entities and Government Controlled Entities are generally considered as UAE tax resident and should accordingly be eligible to avail benefits under the DTAs, wherever relevant. However, if the relevant DTA defines Government for the purposes of the DTA, this shall prevail.

Tax residence of Exempt Persons under Double Taxation Agreements

If an Exempt Person is considered a tax resident under the provisions of the DTA, it can benefit from its provisions. Some DTAs have specific rules for juridical persons that are commonly exempt from Corporate Tax such as Government Entities, public benefit entities and pension funds. Where a DTA's criteria is based on being liable to tax, Exempt Persons will be able to benefit from its provisions, as they are all considered liable to tax in the UAE.

Double Taxation Agreements tie-breaker rules for juridical persons

DTAs adopt various approaches to solve dual residence situations for juridical persons. These are generally summarised as follows:

• the place of effective management criteria,

• the Mutual Agreement Procedure, and

• other criteria, such as where the head office is located or where the juridical person is incorporated.

Double Taxation Agreement tie-breaker rules for natural persons

Where a natural person satisfies the criteria to be considered tax resident in both the UAE and in another jurisdiction under the relevant DTA, the tie-breaker rules in the DTA would allocate the residence of the natural person to either the UAE or to the other country.

The tie-breaker rules typically consider:

1. In which country is the natural person's permanent home located?

2. If the natural person has a permanent home in both countries, where is the natural person's “centre of vital interests”?

3. If the natural person does not have a permanent home in either country, or if the location of the natural person's centre of vital interests cannot be determined, where is the natural person's “habitual abode”?

4. If the natural person has their habitual abode in both jurisdictions or in neither of them, of which jurisdiction is the natural person a “national”?

Where the tie-breaker rules do not resolve the dual residency status of the natural person, the competent authorities under the relevant DTA may consult with each other and agree the natural person's tax residency status.^[84]Determining the tax residency for a natural person is heavily dependent on facts and circumstances for each specific case.

Non-resident under the Double Taxation Agreement

Where the natural person is considered resident in a foreign country covered by a DTA between the UAE and that foreign country, the provisions of the applicable DTA has an impact on his or her tax residency status.

This may depend on the nature of the income derived in the UAE by the natural person. Any income that falls under the “Business Profits” article of the relevant DTA (generally, set out in the provision equivalent to Article 7 of the OECD Model Tax Convention) would generally remain taxable in the UAE if the non-resident natural person has a Permanent Establishment in the UAE.^[85]In this case, the natural person is subject to Corporate Tax on the income attributable to the Permanent Establishment in the UAE.

Generally, the application of the DTA is only relevant where the total Turnover from the Businesses or Business Activities conducted in the UAE exceeds AED 1 million in a Gregorian calendar year, which is the triggering criteria for a natural person to be subject to Corporate Tax.

Where a non-resident natural person does not conduct a Business or Business Activity in the UAE, he or she may be subject to Corporate Tax on State Sourced Income. However, this is currently via a Withholding Tax rate of 0%.

Documentation required to apply for a Tax Residency Certificate for purposes other than the application of a Double Taxation Agreement

Documentation required to apply for a Tax Residency Certificate for Double Taxation Agreement purposes^[88]