With an aim to simplify and comprehensively explain corporate taxation policies, The Ministry of Finance (‘MoF’) has released an updated decision determining the specific conditions under which a foreign (non-resident) individual or company is deemed to have a tax link (nexus) in relation to the UAE under the scope of the Corporate Tax Law. As with the prior Cabinet Decision No 56 of 2023, this new decision aims to provide non-residents more definitional clarity with regard to their tax obligations and therefore, supersedes the previous cabinet decision.
The updated decision aims to rectify concerns raised with respect to the treatment of investors, especially with respect to tax resident status from Qualifying Investment Funds (QIFs) and Real Estate Investment Trusts (REITs) by the UAE. The primary change here is that some foreign investors participating in these funds will now be deemed to possess a taxable nexus in the UAE, thereby bringing them under the scope of the UAE corporate tax regime.
Key Highlights of the New Decision
Clarification of Tax Nexus for Non-Residents
With its new decision, the cabinet offered possible examples where a non-resident individual or entity would be deemed to have a tax link with the UAE (thereby extending applicability of Corporative Tax Law). These scenarios are crucial given the nondiscriminatory approach taken permissive to the investor for these non-residential sovereign entities to operate within, as it increases scope for inviting foreign investment in the UAE.
Pay attention to Qualifying Investment Funds (QIFs) and Real Estate Investment Trusts (REITs)
The revised decision brings in additional provisions for interstate juridical investors in Qualifying Investment Funds and Real Estate Investment Trusts. These investors from abroad will now be liable for corporate taxation in the UAE if certain conditions which establish a tax jurisdiction are fulfilled.
Qualifying Investment Funds (QIFs): These include funds that are within the boundaries of the law and operationally liquid as per the regulations of the fund’s financial authority in the UAE. The decision provides a safe harbor rule for the extent and timing for non resident investors as to when they would be considered to have a taxing presence in the UAE.
Real Estate Investment Trusts (REITs): Likewise, foreign participants in UAE REITs become taxable at the moment their corporate control over a specific set of activities in the country exceeds the limit which gives rise to tax nexus with the country.
Replacement of Cabinet Decision N 56 of 2023
This new decision replaces Cabinet Decision No 56 of 2023, which was the draft version of the rule outlining the tax residency criteria for corporate tax purposes in the UAE. The new decision seeks to replace the former frameworks and capture new emerging investment frameworks and structures while adhering to compliance with international taxation best practices.
Consequences for Multinational Investors
Multinational investors need to study the new sections very carefully, particularly where they do have a stake in QIFs or in REITs. Under the new decision, some investors may be liable to be subjected to taxes in UAE, depending on the level of the investment activities.
This decision by the MoF suggests that there is now an approach to make sure that non-residents who are actively involved in the investing or will receive value from the investment assets located in the UAE would fiscally contribute by paying taxes in the country.
What Are The Changes For The Multinational Investors?
In the case you are a multinational investor from outside the UAE, focusing on Qualifying Investment Funds or Real Estate Investment Trusts, it is even much more critical to follow the new policies because they may affect operations in the UAE and its qualifying activities may be interpreted to form a taxable presence in the UAE. The decision lays out sufficient criteria, and non-resident investors who are compliant with those conditions will be expected to meet the tax requirements.
The subsequent items on the impact list are:
Foreign Investors in UAE-based QIFs or REITs
Juridical Investors potentially falling under the purview of corporate tax obligations owing to their interest in these funds.
Non-resident corporations and individuals now deemed to have an adequate taxable connection to the UAE under certain prescribed conditions
Outcome: Adjusting to the new tax framework
There have been developments in the UAE tax system applicable to foreign investors and this change is also meant towards improving tax compliance and international taxation standards. Non-resident stakeholders within QIFs and REITs will have to assess the new conditions to ascertain that their actions do not create a tax nexus under the new provisions.
It is advisable that all corporates and individuals engaged in the investment landscape of the UAE obtain professional tax consulting services in order to comprehensively understand the implications of this decision in light of the UAE Corporate Tax Law.
These legal and procedural adjustments indicate that the UAE intends to actively promote itself as a transparent and competitive global financial center and Capital Hub willing to ensure participation by all legally recognized entities, residents or non-residents.
