The Importance of Tax Residency

UAE's decision on 'tax residency' comes into effect

The UAE Ministry of Finance made a decision on tax residency for individuals residing in the UAE. The ministry clarified that an individual's 'usual place of residence' for tax purposes will be considered if they normally or habitually reside in the UAE. This clarification was a critical component of Ministerial Decision No. 27 of 2023, which pertains to the implementation of certain provisions of Cabinet Decision No. 85 of 2022 relating to tax residency determination.

A recent decision clarified Cabinet Decision No. 85 of 2022 on tax residency for natural and legal persons, which was issued in September 2022. The decision specifically states that an individual's UAE-based employment, personal connections, economic relationships, or other affiliations will establish their 'center of financial and personal interest' in the UAE.

Furthermore, the resolution states that any days spent physically present in the UAE will count towards meeting the 183-day or 90-day thresholds. The decision also emphasizes that individuals do not have to own their "permanent place of residence," but it must be available to them at all times.

The UAE cabinet decision No. 85 of 2022, outlines local definitions and regulations for determining whether an individual or organization is a tax resident in the UAE.

What is Tax Residency?

Tax residency refers to the determination of a person's status as a resident of a particular country for the purposes of taxation. The concept of tax residency is important because it determines the extent to which a person is subject to taxation in a particular country.

In general, tax residency is determined based on the number of days a person spends in a particular country during a tax year. Each country has its own rules for determining tax residency, but in most cases, a person will be considered a tax resident if they spend more than a certain number of days in the country.

For example, in the United States, a person is considered a tax resident if they meet the "substantial presence test," which is based on the number of days the person has been physically present in the country over a three-year period. Under this test, a person is considered a tax resident if they are physically present in the United States for at least 31 days during the current year and the sum of the days present in the current year, plus one-third of the days present in the first preceding year, plus one-sixth of the days present in the second preceding year, is at least 183 days.

In addition to the substantial presence test, there are other factors that can be taken into account when determining tax residency, such as the person's immigration status, the location of their permanent home, and the location of their business or employment.

Once a person is determined to be a tax resident of a particular country, they are generally subject to taxation on their worldwide income. This means that they must report and pay taxes on all of their income, regardless of where it was earned.

Tax residency is an important concept in international taxation, and it is used to determine the extent to which a person is subject to taxation in a particular country. Each country has its own rules for determining tax residency, but in general, it is based on the number of days a person spends in the country during a tax year. Once a person is determined to be a tax resident, they are generally subject to taxation on their worldwide income.

Why Tax Residency is Important?

Tax residency refers to the country or jurisdiction where an individual or business is considered a resident for tax purposes. Tax residency is crucial for a number of reasons, including determining an individual's tax liability and ensuring compliance with tax laws.

Here are some reasons why tax residency is important:

• Tax liability: Your tax residency determines where you are required to pay taxes. Each country has its own tax laws and rates, and understanding your tax obligations is essential to avoid penalties and fines. Failure to pay taxes or submit tax returns can result in legal action, including fines and even imprisonment.
• Double taxation: Double taxation occurs when the same income is taxed twice, once in the country where it was earned and again in the country where the individual is resident for tax purposes. To avoid double taxation, countries often have tax treaties in place to determine which country has the right to tax a particular income.
• Tax credits: Tax credits are a mechanism to reduce the tax liability of individuals and businesses. Tax treaties between countries may also provide for tax credits to be given for taxes paid in another country. Understanding your tax residency and the tax laws of your country is important to ensure that you receive all the tax credits and deductions you are entitled to.
• Avoiding tax evasion: Tax evasion occurs when individuals or businesses intentionally avoid paying taxes or fail to report income to the tax authorities. Tax residency is an essential tool to combat tax evasion because it allows tax authorities to track the income and assets of individuals and businesses and ensure that they are paying the correct amount of tax.
• Compliance: Compliance with tax laws is essential to avoid penalties and legal action. Understanding your tax residency and the tax laws of your country is important to ensure that you are compliant with all the necessary requirements. This includes submitting accurate tax returns on time, paying taxes when due, and maintaining proper records.

In conclusion, tax residency is important because it determines your tax liability, helps you avoid double taxation, ensures you receive all the tax credits and deductions you are entitled to, combats tax evasion, and helps ensure compliance with tax laws. It is essential to understand your tax residency and the tax laws of your country to avoid penalties, fines, and legal action.