Legal Strategy
UAE Tax Structuring for Digital Businesses: Corporate Tax, VAT, Substance and Cross-Border Risk
19 May 2026
By electronic means
Subject: UAE and Cross-Border Tax, and Compliance Advice in relation to Ras Al Khaimah Digital Services Company Owned by Canadian Shareholders
Dear Mr. X,
I have been instructed to provide this legal opinion (the “Advice”) to you (the “Client”) for the purpose of addressing the following matters (i) the United Arab Emirates (the “UAE”) Corporate Tax and VAT treatment of the Client’s Ras Al Khaimah company, (ii) the potential international tax exposure arising from the company’s online/digital business model, foreign customer base, US-linked payment flows and US bank accounts, (iii) the personal tax residency position of the Client and his spouse as Canadian passport holders who state that they are non-residents of Canada and hold UAE residence visas, (iv) Canadian non-resident compliance considerations, (v) US banking, withholding, operational and tax nexus risks, (vi) the adequacy of the company’s UAE substance and the risk of permanent establishment or effective management being asserted in another jurisdiction, (vii) the optimization of the current corporate structure, (viii) the legal and tax considerations applicable to dividends, distributions, salaries, management fees or other profit extraction methods, (ix) cross-border reporting and compliance obligations, (x) asset protection considerations, and (xi) long-term personal residency and wealth structuring planning.
Assumptions and Disclaimers
This Advice is based on the information provided by the Client. I make reservations regarding undisclosed facts and information that may directly or indirectly impact the subject matter of this Advice.
This Advice does not constitute a guarantee of any particular legal, regulatory, or judicial outcome. Legal interpretation and enforcement may vary based on court discretion, regulatory practices, and evolving case precedent.
The analysis herein is limited to the UAE and does not account for legal provisions, enforcement mechanisms, or treaty applications in other jurisdictions. Cross-border legal matters may require independent legal opinions in relevant jurisdictions.
UAE laws and regulations, particularly those related to taxes are subject to amendments. This Advice reflects the applicable laws as of the date of issuance and does not account for subsequent changes in legislation, policy, or enforcement practices.
This Advice is for informational purposes only and does not constitute legal representation, advocacy, or formal legal defense before UAE authorities, courts, or regulatory bodies. Any legal action should be pursued with direct legal representation and specific legal strategy.
This Advice is intended solely for the Client’s use and should not be disclosed, relied upon, or distributed to third parties without my prior written consent. I accept no liability for reliance on this Advice by any party other than the Client.
As for the preparation of this Advice, I relied on the following:
1. Federal Decree-Law No. 47 of 2022 on ‘the Taxation of Corporations and Businesses’, as amended (the “Corporate Tax Law”);
2. Federal Decree-Law No. (8) of 2017 on ‘Value-Added Tax (VAT)’, as amended (the “VAT Law”);
3. Ministerial Decision No. 139 of 2023 on ‘Qualifying Activities and Excluded Activities for the Purposes of Federal Decree Law No. 47 of 2022 on the Taxation of Corporations and Businesses’;
4. Cabinet Decision No. 55 of 2023 on ‘Determining Qualifying Income for the Qualifying Free Zone Person for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses’;
5. Ministerial Decision No. 84 of 2025 on ‘Audited Financial Statements for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses’.
TABLE OF CONTENTS
2. Key Preliminary Conclusions
3. Information Reviewed and Assumptions
B. Client Background and Current Structure
1. Personal Background of the Shareholders
4. Revenue Model and Customer Base
5. Current Tax Filing Position
6. Key Documents Required to Verify the Current Structure
1. Applicability of UAE Corporate Tax
2. UAE Resident Taxable Person Status
3. Corporate Tax Base and Taxable Income
4. Applicable UAE Corporate Tax Rate
5. Free Zone/Ras Al Khaimah Position
6. Qualifying Free Zone Person Analysis
7. Financial Statements, Audit and Accounting Treatment
8. Related-Party and Connected-Person Considerations
9. Foreign Income, Foreign Permanent Establishments and Foreign Tax Credits
11. Corporate Tax Registration, Returns and Payment
12. Record Keeping and Audit Readiness
13. General Anti-Abuse Considerations
14. Preliminary UAE Corporate Tax Conclusion
1. Preliminary VAT Position Based on the Client’s Facts
2. Nature of Company’s Supplies
3. General Place of Supply Rule for Services
4. Telecommunications and Electronic Services: Use and Enjoyment
5. Export of Services and the Correct Use of “Zero-Rated” Rather than “Exempt”
8. US-based Partner Companies and VAT characterisation
9. Evidence Required to Support the VAT Position
11. Preliminary UAE VAT Conclusion
E. Canadian Personal Tax Residency Risk
2. Canadian Tax Residency is a Fact-Based Analysis
3. Primary Residential Ties to Canada
4. Secondary Residential and Economic Ties
5. UAE Immigration Residence does not Automatically Resolve Canadian Tax Residency
6. Departure from Canada and Emigrant Compliance
7. Canadian Non-Resident Tax Obligations
8. T1135 Foreign Asset Reporting
9. T1134 Foreign Affiliate Reporting
10. Canadian Corporate Residence and Central Management and Control
11. Interaction between Canadian Residency and Dividend Planning
12. Documents and Information Required from the Client
13. Preliminary Canadian Personal Tax Residency Conclusion
F. US Banking and Operational Exposure
1. Preliminary US Risk Position
5. Effectively Connected Income
6. US Withholding Tax and FDAP Income
7. W-8BEN-E, W-8ECI and US Tax Forms
8. FATCA and Chapter 4 Documentation
9. US State Sales Tax/Economic Nexus Risk
10. US Permanent Establishment/Treaty Consideration
11. US Banking and Payment Processor Compliance
12. Documents Required for US Review
13. Preliminary US Banking and Operational Exposure Conclusion
G. Permanent Establishment and Substance Analysis
2. Meaning and Importance of Permanent Establishment
3. UAE Corporate Tax Law Permanent Establishment Tests
4. Fixed Place of Business Risk Outside the UAE
5. Place of Effective Management and Control
6. Dependent Agent and US Partner Risk
7. Preparatory or Auxiliary Activities
8. Server, Cloud Infrastructure and VPN Infrastructure Risk
10. Practical Substance Indicators
11. Interaction with Foreign Permanent Establishment Exemption and Foreign Tax Credit
12. Double Tax Treaty Considerations
13. Key Risk Factors in the Current Structure
14. Recommended Substance Enhancement Measures
15. Preliminary Conclusion on Substance and Permanent Establishment Risk
H. Corporate Structuring Optimization
1. Preliminary Structuring Position
2. Confirming the Existing Ras Al Khaimah Structure
3. Free Zone Optimization: Potential Benefit and Caution
4. Excluded Activities and IP Ownership Risk
5. Single Operating Company vs Holding Company Structure
6. Participation Exemption for Foreign Subsidiaries
7. Operating Company/IP Company/Holding Company Separation
8. Related-Party and Connected-Person Structuring
9. Transfer Pricing and Documentation
10. Banking and Payment Flow Optimization
11. Personal Holding and Family Wealth Planning
12. VAT Structuring Considerations
13. Recommended Structuring Options
14. Preliminary Corporate Structuring Recommendation
15. Preliminary Conclusion on Corporate Structuring Optimization
I. Dividend and Distribution Planning
2. Meaning of Dividend/Profit Distribution under UAE Corporate Tax
3. UAE Corporate Tax Treatment of Dividends Received by UAE Companies
4. Dividends from Foreign Subsidiaries and the Participation Exemption
5. UAE Withholding Tax on Dividends and other Payments
6. Available Distribution Methods
7. Dividends vs Salaries/Management Fees
8. Equal Shareholding and Distribution Policy
9. U.S. Banking and Payment Flow Considerations for Distributions
10. VAT Considerations on Distributions and Related-Party Payments
11. Canadian Personal Tax Considerations
13. Documentation Required for Dividends
14. Preliminary Recommended Distribution Approach
15. Preliminary Conclusion on Dividend and Distribution Planning
A. Executive Summary
1. Scope of Review
This Advice has been prepared on the basis of the factual summary provided by the Client in relation to the ownership, operation, tax profile and cross-border footprint of a company registered in Ras Al Khaimah, UAE. The company is owned equally by the Client and his wife, both of whom hold Canadian passports, they are currently non-residents of Canada and hold UAE residence visas and Emirates IDs. The Client has further confirmed that the business is online/digital in nature, generates approximately USD 2,000,000 (Two million United States Dollars), has very low operating expenses, sells online cloud/storage solutions and VPN-related digital services, and has customers located outside the UAE, with revenue primarily received through US-based partner companies and deposited into US bank accounts[1].
The purpose of this Advice is therefore not limited to a narrow UAE Corporate Tax review. Rather, the client is seeking a broader legal and tax risk assessment covering the UAE company, the individual shareholder, the foreign customer base, the US payment and banking arrangements, and the long-term personal and corporate tax structuring implications. The specific matters to be addressed include international tax exposure, personal tax residency risks, Canadian non-resident compliance considerations, US banking and operational exposure, corporate structuring optimization, dividend and distribution planning, substance and permanent establishment risk, cross-border compliance obligations, asset protection and long-term residency planning[2].
From a UAE law perspective, the principal legislation considered for the purposes of this Advice includes the Corporate Tax Law together with the VAT Law. The UAE Corporate Tax Law provides the legislative basis for imposing federal tax on corporations and business profits in the UAE, and that its provisions apply to tax periods commencing on or after 1 June 2023[3].
This Advice should also consider the interaction between UAE tax law and foreign tax regimes. Under the UAE Corporate Tax Law, a UAE resident juridical person may be taxable on taxable income derived from both inside and outside the UAE. In particular, article 12 of Corporate Tax Law provides that:
“A Resident Person, which is a juridical person, is subject to Corporate Tax on its Taxable Income derived from the State or from outside the State, in accordance with the provisions of this Decree-Law.”
This is relevant because, although the company is registered in the UAE, its revenue is described as being generated from customers outside the UAE and received through US-based partner companies and US bank accounts[4].
Accordingly, the Advice should address the UAE tax position first, but should not stop there. The structure raises material cross-border questions, including whether any foreign jurisdiction may assert taxing rights by reference to the residence of the shareholders, the location of effective management, the location of customers, the location of bank accounts, the role of US partner companies, the location of servers or technical infrastructure, or the place where contracts are negotiated or concluded.
2. Key Preliminary Conclusions
Based on the facts provided, the UAE company is prima facie within the scope of the UAE Corporate Tax. The Corporate Tax Law imposes Corporate Tax on a “Taxable Person” and article 11 of Corporate Tax Law provides that:
“1. Corporate Tax shall be imposed on a Taxable Person at the rates determined under this Decree-Law.
2. For the purposes of this Decree-Law, a Taxable Person shall be either a Resident Person or a Non-Resident Person.
3. A Resident Person is any of the following Persons:
a) A juridical person that is incorporated or otherwise established or recognised under the applicable legislation of the State, including a Free Zone Person.
b) A juridical person that is incorporated or otherwise established or recognised under the applicable legislation of a foreign jurisdiction that is effectively managed and controlled in the State.
c) A natural person who conducts a Business or Business Activity in the State.
d) Any other Person as may be determined in a decision issued by the Cabinet at the suggestion of the Minister.
4. A Non-Resident Person is a Person who is not considered a Resident Person under Clause 3 of this Article and that either:
a) Has a Permanent Establishment in the State as under Article 14 of this Decree-Law.
b) Derives State Sourced Income as under Article 13 of this Decree-Law.
c) Has a nexus in the State as specified in a decision issued by the Cabinet at the suggestion of the Minister.
5. A branch in the State of a Person referred to in Clause 3 of this Article, shall be treated as one and the same Taxable Person.
6. The Cabinet shall, upon a suggestion of the Minister and in coordination with the relevant competent authorities, issue a decision specifying the categories of Business or Business Activity conducted by a resident or non-resident natural person that are subject to Corporate Tax under this Decree-Law.”
Meaning that a Taxable Person[5] may be either a Resident Person[6] or Non-Resident Person[7]. A juridical person incorporated, established or recognized under UAE legislation, including a Free Zone Person[8], is treated as a Resident Person for UAE Corporate Tax purposes. Since the Client’s company is stated to be registered in Ras Al Khaimah, UAE, the starting position is that it is a UAE resident juridical person for Corporate Tax purposes, subject to confirmation of its exact licensing authority and free zone/mainland status.
The current position described by the Client, namely that the company is registered for UAE Corporate Tax and is currently paying 9% UAE Corporate Tax, appears directionally consistent with the general UAE Corporate Tax applicable laws and regulations, subject to detailed verification of taxable income, applicable reliefs, free zone status, deductions, related-party arrangements and any foreign permanent establishment considerations. The Corporate Tax Law confirms that Corporate Tax is the tax imposed on juridical persons and business income[9]. However, the fact that the company is paying UAE Corporate Tax does not, by itself, eliminate foreign tax exposure. A foreign jurisdiction may still seek to tax the company or the shareholders if the relevant connecting factors are present.
The Client’s VAT description should be treated carefully. The Client states that the company is:
“VAT exempt / no material UAE VAT obligations due to export-oriented digital services.”
That wording may require correction in the finality of this Advice. Under the UAE VAT Law, “services”[10] are broadly defined as anything other than goods that can be supplied, and “exportation”[11] includes providing services to a person whose business establishment or fixed establishment is outside the UAE. The VAT Law also recognizes that the Authority[12] may exempt a taxable person from tax registration where that person’s supplies are zero-rated supplies only, as such article 15 of VAT Law provides that:
“1. The Authority may exempt the Taxable Person, whether registered or
unregistered, from the Tax Registration, upon their request, if their supplies
are zero-rated only.
2. If any changes to the business of the Taxable Person who is exempted from the Tax Registration occur, pursuant to Clause (1) above, and lead, or would lead, to the elimination of the reason based on which they have been exempted, they shall notify the Authority of such changes within the time limits and according to the procedures identified by the Executive Regulations of this Decree-Law.”
Therefore, for an export-oriented digital services business, the correct analysis may be one of zero-rated supplies or supplies outside the UAE VAT charge, rather than simply “VAT exempt”. This distinction is important because exempt supplies and zero-rated supplies can have materially different consequences, particularly for VAT registration, tax invoice obligations and input tax recovery.
The US banking and payment structure requires specific review. The Client states that revenue is primarily received through US-based partner companies and that funds are deposited into US bank accounts[13]. This does not automatically mean that the company is subject to US income tax. However, it creates a factual risk area that must be reviewed by reference to the character of the income, the legal role of the US partner companies, the contracting flow, whether any US person habitually concludes contracts on behalf of the UAE company, whether the company has US-located personnel, servers, agents or infrastructure and whether any US withholding or reporting documentation is required.
The Canadian position is also a central risk area. The Client and his wife are Canadian passport holders and state that they are currently non-residents of Canada[14]. That statement should not be accepted as conclusive without further factual verification. Canadian tax residency is generally a factual and legal question, and the final advice should therefore request and review information relating to their residential ties, personal presence, family location, homes, bank accounts, health coverage, driver’s licenses, investments, mailing addresses, and any continue economic or personal connections with Canada. The Advice should also consider whether the UAE company could face Canadian corporate tax exposure if its central management and control is, in substance, exercised from Canada or by persons who are tax resident in Canada.
The company’s substance and permanent establishment profile is also important. The UAE Corporate Tax Law recognizes the concept of a Permanent Establishment[15] and Foreign Permanent Establishment[16] as a place of business or other form of presence outside the UAE of a Resident Person determined by reference to criteria in article 14 of the Corporate Tax Law. Article 24 of the Corporate Tax Law further contemplates the tax treatment of income and expenditure of foreign permanent establishments of a UAE Resident Person. Accordingly, the fact that the company is UAE-incorporated is not sufficient by itself. It will be necessary to identify where the company is actually managed, where its key personnel or contractors are located, where its servers and infrastructure are hosted, how contracts are concluded, and whether any foreign representative or partner creates a taxable presence abroad.
Finally, the Client’s distribution and asset protection planning should be treated as part of the same overall structure. The Corporate Tax Law defines “Dividend”[17] broadly to include payments or distributions declared or paid in respect of shares or other rights participating in profits, including distributions from profits, retained earnings, reserves or transactions with related parties or connected persons that do not comply with the arm’s length principle. The UAE Corporate Tax Law also confirms that dividends and other profit distributions received from UAE Resident Persons are exempt from Corporate Tax in the hands of the UAE recipient company. However, this does not answer how distributions to the individual Canadian shareholders would be taxed in their personal country of tax residence. That question depends on their personal tax residency position and any applicable foreign tax rules.
3. Information Reviewed and Assumptions
This Advice is based, at this stage, on the Client’s written consultation summary[18] and the UAE tax legislation and guidance provided for review. The Client’s factual summary states that the Client and his wife both hold Canadian passports, are currently non-residents of Canada, are equal shareholders in a Ras Al Khaimah company, hold UAE residence visas and Emirates ID, do not physically reside in the UAE on a full-time basis, and typically enter the UAE approximately once per year to maintain immigration/residency requirements.
The Advice further assumes, based on the Client’s summary, that the company is registered in Ras Al Khaimah, UAE; that its annual revenue is approximately USD 2,000,000 (Two million United States Dollars); that it operates with very low expenses; that its business model is entirely online/digital; that it sells online cloud/storage solutions and VPN-related digital services; that its customers are located outside the UAE; that there are essentially no sales or business activities in the UAE domestic/local market; that revenues are primarily received through US-based partner companies; and that funds are deposited into US bank accounts.
For purposes of UAE Corporate Tax, the Advice proceeds on the assumption that the company is a juridical person incorporated or otherwise established in the UAE. This is important because article 11 of the UAE Corporate Tax Law treats a juridical person incorporated, established or recognized under UAE legislation, including a Free Zone Person, as a Resident Person for Corporate Tax Purposes. The Advice also proceeds on the assumption that the company is not an exempt person, is not a government entity, is not a government-controlled entity, is not an extractive or non-extractive natural resource business, and is not an investment fund, unless further corporate documents indicate otherwise.
For purposes of VAT, the Advice proceeds on the assumption that the company’s supplies are supplies of services rather than goods. This is consistent with the Client’s description of the business as selling online cloud/storage solutions and VPN-related digital services, and with the UAE VAT Law’s definition of services as anything other than goods that can be supplied. However, the exact VAT treatment cannot be confirmed without reviewing the contractual flow, customer location evidence, invoices, terms of service, payment flows, platform arrangements, and whether the US-based partner companies act as principals, agents, resellers or payment processors.
This Advice also assumes that the Client’s statement of Canadian non-residence is a factual position taken by the Client, not a legal conclusion independently verified for purposes of this Advice. The fact that the shareholders hold Canadian passports does not, in itself, determine Canadian tax residency. Conversely, holding UAE residence visas and Emirates IDs does not, in itself, fully determine their tax residency for Canadian, treaty or other foreign tax purposes. The Client’s statement that they do not physically reside in the UAE full-time and only enter the UAE approximately once per year is therefore material and should be assessed carefully in the personal tax residency section of the Advice.
The Advice further assumes that the company’s current 9% UAE Corporate Tax filing position is being maintained on the basis that the company is not applying a special 0% Free Zone regime or other relief. This should be confirmed. The UAE Corporate Tax Law contain special rules for Free Zone Persons, Qualifying Free Zone Persons[19], exempt income[20], foreign permanent establishments, foreign tax credits[21], small business relief[22], transfer pricing[23], tax groups[24], filing and record keeping. Each of these topics may be relevant depending on the company’s precise license, corporate status, ownership, revenue streams and internal arrangements.
4. Methodology of the Advice
The Advice should proceed in stages. First, the UAE Corporate Tax position should be analyzed, because the company is incorporated in the UAE and is already registered and filing for UAE Corporate Tax. The analysis should determine whether the company is correctly treated as a UAE resident taxable person, whether the 9% Corporate Tax position is appropriate, whether any free zone or qualifying income treatment is available or has been waived, whether any foreign income or foreign tax credit issues arise, and whether all required records and filings are being maintained.
Second, the UAE VAT position should be analyzed separately from Corporate Tax. VAT and Corporate Tax are different regimes. Under the VAT Law, VAT is levied on taxable supplies and deemed supplies carried out by a taxable person and on the importation of relevant goods, and the standard VAT rate is 5%[25]. However, the relevant question for this company is whether its digital services are treated as taxable, zero-rated, exempt or outside the UAE VAT scope, and whether VAT registration or exemption from registration is available or appropriate. The VAT Law expressly provides that a taxable person may request exemption from tax registration if its supplies are zero-rated only[26].
Third, the Advice should review personal tax residency. This is critical because the ultimate taxation of dividends or other distributions will depend primarily on where the shareholders are personally tax resident at the relevant time. The company’s UAE tax compliance does not automatically resolve the shareholders’ personal tax exposure in Canada or elsewhere.
Fourth, the Advice should review the US payment and banking arrangements. The legal character of the US-based partner companies must be understood. If they are mere payment processors, the risk profile may be different. If they are agents, resellers, distributors, contracting parties, or persons involved in concluding contracts or operating infrastructure, the risk profile may be higher.
Fifth, the Advice should consider corporate structuring, distributions, substance and asset protection together. These issues are interdependent. For example, a structure that minimizes immediate tax may still create banking, substance, permanent establishment, or asset protection weaknesses. Similarly, a structure that accumulates profits in one operating company may be simple but may expose all cash and IP to the operational risks of the VPN/cloud business.
B. Client Background and Current Structure
1. Personal Background of the Shareholders
Based on the information provided, the company is owned by two (2) individual shareholders, being the Client and his wife. Both shareholders hold Canadian passports and have represented that they are currently non-residents of Canada. They are equal shareholders in the UAE company, which means that, absent any contrary shareholders’ agreement, constitutional document or nominee arrangement, the economic ownership and control of the company appear to be divided equally between them.
The fact that both shareholders hold Canadian passports is relevant for background purposes, but it is not, by itself, determinative of their tax residency. Tax residency is generally assessed by reference to domestic tax rules and, where applicable, double tax treaty tie-breaker provisions. Accordingly, the Client’s statement that he and his wife are Canadian non-residents should be treated as a factual position that requires verification, rather than a final legal conclusion. This is particularly important because the company’s dividend and distribution planning, and the shareholders’ exposure to Canadian taxation, depend heavily on whether they are properly treated as non-residents of Canada at the relevant time.
The Client and his wife also hold valid UAE residence visas and Emirates IDs. However, the Client has confirmed that they do not physically reside in the UAE on a full-time basis and that they typically enter the UAE approximately once per year to maintain immigration/residency requirements. This distinction is important. UAE immigration residency, UAE tax residency, and foreign tax residency are separate concepts. Holding a UAE residence visa and Emirates ID may assist in establishing a UAE connection, but it does not automatically prove that the individuals are tax resident in the UAE for all domestic or treaty purposes, nor does it automatically prevent another jurisdiction from asserting tax residency if that jurisdiction’s domestic rules are met.
For purposes of this Advice, it is therefore necessary to distinguish between (i) citizenship/passport status, (ii) immigration residence, (iii) personal tax residence, and (iv) the place from which the company is actually managed and controlled. The current facts show a Canadian personal background, UAE immigration status, limited physical presence in the UAE, and ownership of a UAE company. That combination requires careful analysis because it may be acceptable from a UAE company formation perspective, but may still create tax residency, effective management, substance, or permanent establishment questions in other jurisdictions.
2. Corporate Structure
The company is described as a UAE-based company registered in Ras Al Khaimah, UAE, with two shareholders: the Client and his wife. The company reportedly generates approximately USD 2,000,000 (Two million United States Dollars) in annual revenue, has very low operating expenses, and operates an entirely online/digital business model[27].
From a UAE Corporate Tax perspective, the fact that the company is registered in the UAE is significant. Article 11 of the Corporate Tax Law provides that Corporate Tax is imposed on Taxable Person, and that a Taxable Person may be either a Resident Person or a Non-Resident Person. Article 11 further provides that a juridical person incorporated, established or recognized under the applicable legislation of the UAE, including a Free Zone Person, is a Resident Person for UAE Corporate Tax purposes.
Accordingly, if the company is legally incorporated or registered in Ras Al Khaimah under UAE mainland or free zone legislation, the starting position is that the company is a UAE Resident Person for Corporate Tax purposes. This remains subject to confirmation of its exact legal form, licensing authority, place of incorporation, and whether it is a Ras Al Khaimah mainland entity or a Ras Al Khaimah free zone entity. This distinction may be relevant because the UAE Corporate Tax Law recognizes “Free Zone Persons” and “Qualifying Free Zone Persons” as separate concepts. The Corporate Tax Law defines a Free Zone Person as a juridical person incorporated, established or otherwise registered in a Free Zone, including a branch of a non-resident person registered in a Free Zone, and defines Qualifying Free Zone Person as a Free Zone Person that meets the conditions of article 18 of the Corporate Tax Law[28].
The Client’s current tax position is that the company is registered for UAE Corporate Tax, currently pays UAE Corporate Tax at 9%, and files UAE tax returns accordingly. This suggests that the company is being treated as an ordinary taxable UAE resident company, rather than as a company relying on a 0% free zone qualifying income regime. This should be verified by reviewing the company’s trade license, corporate tax registration, financial statements, tax return filings and any position taken in respect of free zone status or qualifying income.
3. Business Activity
The company’s business is described as entirely online/digital. It sells online cloud/storage solutions and VPN-related digital services. These activities are relevant for both UAE Corporate Tax and UAE VAT purposes.
For UAE Corporate Tax purposes, the Corporate Tax Law defines “Business”[29] broadly as any activity conducted regularly, on an ongoing and independent basis by any person and in any location, including commercial, professional, service, and other activities related to the use of tangible or intangible properties. It also defined “Business Activity”[30] as any transaction or activity, or series of transactions or activities, conducted by a person in the course of its business. On the basis of the Client’s description, the company’s activities clearly appear to constitute a business activity rather than passive investment activity.
For UAE VAT purposes, the VAT Law defines services broadly as anything other than goods that can be supplied. On the facts provided, the company appears to supply services rather than tangible goods. In particular, online cloud/storage services and VPN-related digital services would generally be analyzed as services for VAT purposes, subject to a more detailed review of the precise contractual and technical arrangement. This classification is important because the VAT treatment of digital services depends on the nature of the service, the customer’s location, the place of supply, use and enjoyment, invoicing, and whether the services qualify as exports or are otherwise treated as outside the UAE VAT charge.
The VPN-related element also requires broader legal and regulatory review. VPN and cloud/storage businesses can involve additional compliance considerations relating to cybersecurity, data protection, sanctions, acceptable use, unlawful content, intellectual property, payment processing, and customer screening. Although those matters are not purely tax issues, they may become relevant to banking risk, payment processor risk, US exposure, and asset protection.
4. Revenue Model and Customer Base
The Client has indicated that the company’s customers are located outside the UAE and that essentially no sales or business activity occurs within the UAE domestic market. Revenue is primarily received through US-based partner companies and funds are deposited into US bank accounts.
This revenue model is central to the Advice. First, the absence of material UAE domestic customers may be relevant to the VAT analysis, particularly in determining whether the services are supplied to non-UAE recipients, whether the services qualify as exported services, and whether the Client’s description of the VAT position as “exempt” is technically accurate. Under the VAT Law, “exportation” includes providing services to a person whose business establishment or fixed establishment is outside the UAE. However, the VAT Law also contains specific rules for telecommunications and electronic services, under which the place of supply may be inside or outside the UAE depending on where the services are used and enjoyed, regardless of the place of contract or payment[31].
The fact that revenues are received through US-based partner companies and deposited into US bank accounts raises separate questions of US tax nexus, withholding, reporting, banking compliance and operational exposure. The mere use of a US bank account does not necessarily mean that the company is carrying on a US trade or business. However, the role of the US partner companies must be reviewed carefully. If they are only payment processors, the risk profile may be materially different from a situation where they act as agents, resellers, distributors, contracting parties, or persons habitually involved in negotiating or concluding customer contracts for the UAE company.
The customer base and payment flow must be aligned with the legal documentation. The Advice should therefore review customer terms and conditions, reseller or partner agreements, payment processor documentation, invoices, bank statements, customer location evidence, and any tax forms provided to or requested by US counterparties. In particular, it will be necessary to understand whether the customer contracts are concluded directly between customers and the UAE company, between customers and the US partner companies, or through an agency/reseller structure.
5. Current Tax Filing Position
The Client has stated that the company is registered for UAE Corporate Tax, currently pays 9% UAE Corporate Tax, treats itself as VAT exempt or as having no material UAE VAT obligations due to export-oriented digital services, and submits UAE tax filing accordingly.
The Corporate Tax position appears broadly consistent with the general framework applicable to a UAE resident company, subject to a detailed verification of the tax base, taxable income, deductible expenses, related-party arrangements, foreign income and any available relief. Article 12 of the Corporate Tax Law provides that a Resident Person that is a juridical person is subject to UAE Corporate Tax on taxable income derived from the UAE or from outside the UAE. This is important because the company’s foreign customer base does not, by itself, remove the income from the UAE Corporate Tax base where the company is a UAE resident juridical person.
The VAT position requires more careful wording. The Client’s use of the word “exempt” may not be technically correct unless the company is making exempt supplies under the VAT Law. In an export-oriented digital services context, the more relevant question is whether the supplies are zero-rated, outside the UAE VAT scope, or subject to UAE VAT depending on place of supply and use/enjoyment rules. This distinction is important because exempt supplies and zero-rated supplies are not the same. Exempt supplies may restrict input tax recovery, whereas zero-rated taxable supplies may preserve input tax recovery subject to the usual conditions.
The company’s low operating expenses are also relevant. While low expenses are commercially possible in a digital business, they may raise practical questions in a substance and transfer pricing review. For example, if substantial revenue is generated by a UAE company but the main development, management, customer acquisition, contracting, technical infrastructure, or strategic decision-making occurs outside the UAE, a foreign tax authority may examine whether profits have been correctly attributed to the UAE entity. The Corporate Tax Law provides that in the context of effective management and control, that the location where key management and commercial decisions are made is a key factor, and that the location of controlling shareholders, delegated decision-makers, board members or executive management may be relevant depending on the facts[32].
6. Key Documents Required to Verify the Current Structure
For purposes of completing the
Advice, the factual background should be verified by reviewing the underlying
documents. In particular, the following documents should be requested from the
Client (i) the company’s trade license, (ii) certificate of
incorporation or registration,
(iii) constitutional documents, (iv) shareholder register, (v)
details of the licensing authority, (vi) confirmation of whether the
entity is mainland or free zone, (vii) corporate tax registration
certificate, (viii) submitted UAE Corporate Tax returns, (ix) financial
statements, (x) VAT registration or exemption records, (xi)
invoices, (xii) US partner agreements, (xiii) customer terms and
conditions, (xiv) bank account documentation, (xv) payment
processor agreements, (xvi) hosting/server arrangements, and (xvii)
board/shareholder resolutions.
It will also be necessary to request personal residency information for both shareholders, including (i) their day-count history, (ii) countries of physical presence, (iii) Canadian departure filings, (iv) Canadian residential ties, (v) non-resident confirmations (if any), (vi) UAE visa documents, (vii) Emirates IDs, (viii) UAE entry/exit pattern, (ix) tax residency certificates (if any), and (x) any declarations made to banks or tax authorities regarding personal tax residence.
Accordingly, this section should be treated as a description of the current structure based on the Client’s provided facts, and not as final confirmation that the structure is tax-compliant in all relevant jurisdictions. The final conclusions will depend on the documentary review and the jurisdiction-specific tax analysis addressed in the following sections.
C. UAE Corporate Tax Position
1. Applicability of UAE Corporate Tax
The starting point is that the company is incorporated/registered in Ras Al Khaimah, UAE, and is therefore prima facie within the scope of UAE Corporate Tax. The Client has confirmed that the company is registered for UAE Corporate Tax, currently pays UAE Corporate Tax at the rate of 9%, and submits UAE tax filings accordingly. The company’s business is described as an online/digital business generating approximately USD 2,000,000 (Two million United States Dollars) annually from the sale of online/storage solutions and VPN-related digital services to customers located outside the UAE.
The Corporate Tax Law defines “Corporate Tax” as the tax imposed on juridical persons and business income and defines “Business” broadly as any activity conducted regularly, on an ongoing and independent basis by any person and in any location, including commercial, professional, service, and activities relating to tangible or intangible property. On the facts provided, the company’s activities clearly constitute a business activity for UAE Corporate Tax purposes.
The Corporate Tax Law provides that persons subject to Corporate Tax are known as “Taxable Persons” and that Taxable Persons are either Resident Persons or Non-Resident Persons under article 11 of the Corporate Tax Law. In broad terms, Corporate Tax applies to juridical persons incorporated in the UAE, foreign juridical persons effectively managed and controlled in the UAE, non-resident juridical persons with a UAE permanent establishment, non-residents deriving UAE-sourced income, non-resident juridical persons with a UAE nexus through immovable property, and certain natural persons conducting UAE business activities[33].
Accordingly, the company’s current registration for UAE Corporate Tax appears correct in principle. The more important question is not whether the company is within the UAE Corporate Tax regime, but whether the company is applying the correct UAE Corporate Tax treatment, whether it is paying tax at the correct rate, whether any free zone treatment may be available or has been waived, whether its taxable income has been correctly calculated, and whether the company has sufficient documentation, financial statements, and substance to support its position.
2. UAE Resident Taxable Person Status
Article 11 of the UAE Corporate Tax Law provides that Corporate Tax is imposed on a Taxable Person, and that a Taxable Person is either a Resident Person or a Non-Resident Person. A Resident Person includes a juridical person incorporated, established or recognized under the applicable legislation of the UAE, including a Free Zone Person. A Resident Person also includes a foreign juridical person that is effectively managed and controlled in the UAE.
It further explains that UAE entities with separate legal personality, including limited liability companies and other UAE mainland or free zone entities, are treated as juridical persons for these purposes[34].
On that basis, if the company is legally incorporated or otherwise registered in Ras Al Khaimah under UAE law, the company should be treated as a UAE Resident Person for Corporate Tax purposes. This conclusion should, however, be verified by reviewing the company’s trade license, certificate of incorporation or registration, memorandum and articles of association, and licensing authority documentation. It is also necessary to confirm whether the company is incorporated in Ras Al Khaimah mainland or within a Ras Al Khaimah free zone, because that distinction affects whether the company may potentially be treated as a Free Zone Person and whether any Qualifying Free Zone Person analysis is relevant.
It should also be noted that the UAE Corporate Tax residence analysis does not, by itself, determine whether any foreign jurisdiction may also seek to tax the company. The UAE may treat the company as a UAE Resident Person because it is incorporated in the UAE, but another jurisdiction may still assert corporate residence, effective management, permanent establishment, withholding, or source-based taxation depending on its own domestic laws and any applicable double tax treaty. This is particularly relevant here because the shareholders are Canadian passport holders, the business is operated online, customers are outside the UAE, revenue is primarily received through US-based partner companies, and funds are deposited into US bank accounts.
3. Corporate Tax Base and Taxable Income
Article 12 of the Corporate Tax Law provides that a Resident Person which is a juridical person is subject to Corporate Tax on its taxable income derived from the UAE or from outside the UAE. This is particularly important for the company because the Client has indicated that the company’s customers are located outside the UAE and that essentially no sales or business activity occurs within the UAE domestic/local market.
The fact that the company’s customers are outside the UAE does not mean that the income is outside the UAE Corporate Tax regime. If the company is a UAE Resident Person, its taxable income may include income derived from both UAE and foreign sources, subject to the exemptions, deductions, reliefs, credits, and other adjustments available under the Corporate Tax Law.
Article 20 of the Corporate Tax Law provides that:
“1. The Taxable Income of each Taxable Person shall be determined separately, on the basis of adequate, standalone financial statements prepared for financial reporting purposes in accordance with accounting standards accepted in the State.
2. The Taxable Income for a Tax Period shall be the Accounting Income for that period, and to the extent applicable, adjusted for the following:
a) Any unrealised gain or loss under Clause 3 of this Article.
b) Exempt Income as specified in Chapter Seven of this Decree-Law.
c) Reliefs as specified in Chapter Eight of this Decree-Law.
d) Deductions as specified in Chapter Nine of this Decree-Law.
e) Transactions with Related Parties and Connected Persons as specified in Chapter Ten of this Decree-Law.
f) Tax Loss relief as specified in Chapter Eleven of this Decree-Law.
g) Any incentives or special reliefs for a Qualifying Business Activity as specified in a decision issued by the Cabinet at the suggestion of the Minister.
h) Any income or expenditure that has not otherwise been taken into account in determining the Taxable Income under the provisions of this Decree-Law as may be specified in a decision issued by the Cabinet at the suggestion of the Minister.
i) Any other adjustments as may be specified by the Minister.
[…]”
Accordingly, the company’s UAE Corporate Tax liability should not be calculated simply by applying 9% to gross receipts. The taxable base must be calculated from accounting income, then adjusted in accordance with the Corporate Tax Law. Given that the company reportedly has approximately USD 2,000,000 (Two million United States Dollars) in annual revenue and very low operating expenses, it will be important to verify whether the company has properly accounted for all deductible expenses, whether any related-party or connected-person payments have been made, whether any income is exempt, whether any foreign tax credit is available, and whether any foreign permanent establishment income or foreign tax exposure has been considered.
4. Applicable UAE Corporate Tax Rate
The Client has stated that the company is currently paying UAE Corporate Tax at 9%. This appears broadly consistent with the general UAE Corporate Tax position for ordinary taxable income above the applicable 0% threshold. However, the exact position should be verified by reference to the company’s taxable income, legal status, and whether any free zone regime has been claimed or is available.
The Corporate Tax Law explains that Corporate Tax rates differ depending on whether the taxable person is subject to the general regime or the Qualifying Free Zone Person regime. For Qualifying Free Zone Persons, Qualifying Income[35] is subject to Corporate Tax at 0%, while taxable income that is not Qualifying Income is subject 9%[36]. The Corporate Tax Law further states that, unlike ordinary taxable persons, Qualifying Free Zone Persons are not entitled to the 0% rate on their first AED 375,000 (Three hundred and seventy-five thousand United Arab Emirates Dirhams) of taxable income that is not Qualifying Income[37].
Therefore, the company’s 9% filing position may be correct if it is not a Qualifying Free Zone Person, if it has elected to be taxed under the general Corporate Tax regime, if its income is not Qualifying Income, or if it is a mainland/non-free zone entity. However, if the company is registered in a Ras Al Khaimah free zone, it may be necessary to analyze whether it could qualify, or could have qualified, for the 0% Free Zone regime. That analysis would require a review of the company’s trade license, activities, customers, related-party transactions, free zone substance, audited financial statements, and whether it has elected to be taxed under the general Corporate Tax rules.
5. Free Zone/Ras Al Khaimah Position
The Client has stated that the company is registered in Ras Al Khaimah, UAE. Ras Al Khaimah includes both mainland and free zone licensing options. Accordingly, the first factual step is to confirm whether the company is registered as a Ras Al Khaimah mainland company or as a free zone company, for example through a Ras Al Khaimah free zone licensing authority.
This distinction is important because the Corporate Tax Law defines a “Free Zone Person” as a juridical person incorporated, established or otherwise registered in a Free Zone, including a branch of a non-resident person registered in a Free Zone. It also defines a “Qualifying Free Zone Person” as a Free Zone Person that meets the conditions of article 18 and is subject to Corporate Tax under article 3(2) of the Corporate Tax Law[38].
The Corporate Tax Law further explains that a Free Zone Person may be considered a Qualifying Free Zone Person and may be eligible for a 0% Corporate Tax rate on its Qualifying Income if certain conditions are met. These include deriving Qualifying Income, maintaining adequate substance in the UAE, satisfying the de minimis requirement, not electing to be subject to Corporate Tax at the general rates, complying with transfer pricing rules and documentation requirements, and preparing and maintaining audited financial statements for Corporate Tax purposes[39].
Accordingly, if the company is a mainland Ras Al Khaimah entity, the ordinary UAE Corporate Tax regime is likely to apply, subject to the usual rules on taxable income, deductions, exemptions, reliefs and credits. If the company is a Ras Al Khaimah free zone entity, a further review is required to determine whether it is a Free Zone Person only, a Qualifying Free Zone Person, or a Free Zone Person that is subject to the general 9% regime due to election, failure to meet conditions, or non-qualifying income.
6. Qualifying Free Zone Person Analysis
If the company is incorporated or registered in Ras Al Khaimah free zone, the Qualifying Free Zone Person regime should be analyzed. The benefit of that regime is potentially significant because Qualifying Income may be taxed at 0%, while non-qualifying taxable income is taxed at 9%[40].
However, the regime is conditional and should not be assumed to apply merely because a company is located in a free zone. The Corporate Tax Law provides that a Free Zone Person must meet several conditions to be treated as Qualifying Free Zone Person, including maintaining adequate substance in the UAE, deriving Qualifying Income, satisfying the de minimis requirement, not electing into the general Corporate Tax regime, complying with transfer pricing rules and documentation requirements, and preparing and maintaining audited financial statements.
The adequate substance requirement is particularly relevant to this Client. The Corporate Tax Law provides that core income-generating activities must be performed within the free zone, either by the Free Zone Person itself or through an outsourced related party or third party located in a free zone, with adequate supervision over outsourced activities[41]. The entity or outsourced party must be able to demonstrate adequate staff and assets and must incur adequate operating expenditure within the free zone. The Corporate Tax Law further notes that adequate substance is determined on a case-by-case basis, including by reference to qualified full-time employees, operating expenditure, physical assets, the nature and level of activities performed, the Qualifying Income earned, and other relevant facts and circumstances[42].
This may be a risk area because the Client has stated that the company has very low operating expenses, operates entirely online, and that the shareholders do not physically reside in the UAE on a full-time basis and typically enter the UAE approximately once per year to maintain immigration/residency requirements. Low substance does not automatically mean that the company is non-compliant, but it requires careful review. If the company seeks to rely on the free zone regime, it must be able to evidence that the relevant core income-generating activities, management, supervision, resources, records and operating expenditure are sufficient in the UAE/relevant free zone.
The de minimis requirement is also important. The Corporate Tax Law provides that, for a Free Zone Person to be a Qualifying Free Zone Person, non-qualifying revenue in a tax period must not exceed the lower of AED 5,000,000 (Five million United Arab Emirates Dirhams) and 5% of total revenue[43]. Therefore, even if the company has substantial foreign customers and limited UAE domestic/local sales, its income must still be reviewed against the qualifying income rules, excluded activities, customer categories, and non-qualifying revenue.
Article 19 of the Corporate Tax Law provides that:
“1. A Qualifying Free Zone Person can make an election to be subject to
Corporate Tax at the rates specified under Clause 1 of Article 3 of this
Decree-Law.
2. The election under Clause 1 of this Article shall be effective from either of:
a) The commencement of the Tax Period in which the election is made.
b) The commencement of the Tax Period following the Tax Period in which the election was made.”
As such, if the company is currently paying 9% Corporate Tax, it should be confirmed whether it is doing so because it is not eligible for the free zone regime, because its income is not Qualifying Income, because it has made an election to be taxed under the general regime, or simply because the free zone analysis has not yet been performed.
7. Financial Statements, Audit and Accounting Treatment
Article 20 of the Corporate Tax Law requires taxable income to be determined separately for each taxable person on the basis of adequate standalone financial statements prepare for financial reporting purposes in accordance with accounting standards accepted in the UAE.
The Corporate Tax Law defines “Financial Statements”[44] as a complete set of statements under the applicable accounting standards, including, without limitation, income statement, other comprehensive income, balance sheet, statement of changes in equity and cash flow statement. For a company generating approximately USD 2,000,000 (Two million United States Dollars) in annual revenue with low operating expenses, maintaining clear and complete financial records is especially important because the profit margin may be high and therefore more likely to attract scrutiny in the event of an FTA review or foreign tax authority review.
Whether audited financial statements are required depends on the company’s exact status and the applicable UAE Corporate Tax decisions. As a general matter, the Corporate Tax Law makes clear that audited financial statements are required for Qualifying Free Zone Person purposes, and that preparing and maintaining audited financial statements is one of the conditions relevant to the free zone Corporate Tax regime[45]. Therefore, if the company is a Free Zone Person and seeks to benefit from the 0% Qualifying Free Zone Person regime, audited financial statements should be treated as a central compliance requirement.
Separately, if the company is not relying on the Qualifying Free Zone Person regime and is simply paying 9% Corporate Tax as an ordinary taxable person, the audit requirement must be checked by reference to the current applicable ministerial decision and the company’s revenue threshold, licensing authority rules, and corporate law obligations. Based on the facts provided, the annual revenue is approximately USD 2,000,000 (Two million United States Dollars), which is materially below AED 50,000,000 (Fifty million United Arab Emirates Dirhams), but the exact AED equivalent and applicable legal threshold should be confirmed at the time the final Advice is issued[46].
8. Related-Party and Connected-Person Considerations
The company is owned equally by the Client and his wife. This ownership structure may give rise to related-party and connected-person considerations, particularly if the company pays salaries, management fees, director fees, shareholder loans, service fees, royalties, IP license fees, or other amounts to the shareholders, companies owned by them, or other related persons.
Article 20 of the Corporate Tax Law expressly includes adjustments for transactions with Related Parties and Connected Persons in determining taxable income. The Corporate Tax Law also identifies transactions between Related Parties and Connected Persons, and transfer pricing rules, as a separate component of determining taxable income[47].
Accordingly, the company should ensure that any payments to the shareholders, related companies, directors, family members, or affiliated service providers are commercially supportable, properly documented, and arm’s length. This is particularly relevant because the company is described as having very low expenses. If substantial amounts are later extracted from the company through management fees, consulting fees, royalties or similar arrangements, those arrangements may need to be supported by written agreements, invoices, evidence of services rendered, and transfer pricing documentation where applicable.
9. Foreign Income, Foreign Permanent Establishments and Foreign Tax Credits
The company’s customers are located outside the UAE, revenue is received through US-based partner companies, and funds are deposited into US bank accounts. From a UAE Corporate Tax perspective, foreign-source income earned by a UAE resident juridical person may still form part of taxable income under article 12, subject to applicable exemptions, reliefs and credits.
If the company is taxed abroad on the same income, the UAE Corporate Tax Law may allow a foreign tax credit, subject to the conditions and limitations in article 47.
Article 47 of the Corporate Tax Law provides that:
“1. Corporate Tax due under Article 3 of this Decree-Law can be reduced by
the amount of Foreign Tax Credit for the relevant Tax Period.
2. The Foreign Tax Credit under this Decree-Law cannot exceed the amount of Corporate Tax due on the relevant income.
3. Any unutilised Foreign Tax Credit as a result of Clause 2 of this Article cannot be carried forward or carried back.
4. A Taxable Person shall maintain all necessary records for the purposes of claiming a Foreign Tax Credit.”
Accordingly Corporate Tax due may be reduced by the amount of foreign tax credit for the relevant tax period, but that the credit cannot exceed the amount of UAE Corporate Tax due on the relevant income, and that unutilized foreign tax credit cannot be carried forward or carried back. It also requires the taxable person to maintain all necessary records for claiming the foreign tax credit.
The foreign permanent establishment rules may also become relevant if the company has a place of business or other taxable presence outside the UAE. The Corporate Tax Law defines a Foreign Permanent Establishment as a place of business or other form of presence outside the UAE of a Resident Person determined by reference to article 14 of the Corporate Tax Law. The Corporate Tax Law also contains rules under which a Resident Person may elect not to take into account the income and associated expenditure of its Foreign Permanent Establishments in determining taxable income, subject to conditions including that the foreign permanent establishment is subject to corporate tax or similar tax in the foreign jurisdiction at a rate not less than the UAE 9% rate[48].
This is relevant because the company’s US payment flows, US-based partner companies, possible foreign infrastructure, and foreign management or operational presence may trigger foreign tax issues. The UAE Corporate Tax analysis should therefore be coordinated with the US, Canadian and any other foreign tax analysis, rather than reviewed in isolation.
10. UAE Withholding Tax
The Corporate Tax Law provides that at the time of enacting the Corporate Tax Law, the UAE withholding tax rate was 0%, and that, as the rate is currently 0%, no tax currently needs to be withheld[49]. This is helpful for payments made from the UAE to non-residents, including dividends, interest, royalties or service payments, subject to the UAE law position and any future change in withholding tax rate.
However, the absence of UAE withholding tax does not mean that there is no foreign withholding tax risk. In particular, payments made by US-based partner companies to the UAE company may still need to be analyzed from a US withholding tax perspective depending on the legal character of the payments. For example, service fees, software license fees, royalties, cloud service payments and reseller revenue may be treated differently under foreign tax rules. That issue is addressed separately in the US banking and operational exposure section.
11. Corporate Tax Registration, Returns and Payment
The Client has stated that the company is registered for UAE Corporate Tax and submits UAE tax filings accordingly. This should be verified by reviewing the company’s Corporate Tax registration certificate, Tax Registration Number, tax return submissions, payment confirmations, financial statements, and any correspondence with the Federal Tax Authority (the “FTA”).
Article 48 of the Corporate Tax Law provides that:
“A Taxable Person must settle the Corporate Tax Payable under this Decree-Law within (9) nine months from the end of the relevant Tax Period, or by such other date as determined by the Authority.”
Therefore, the company should maintain a clear annual compliance calendar covering financial year-end, accounting close, tax return preparation, corporate tax filing, tax payment, and support record retention.
The company should also ensure that its accounting treatment aligns with the UAE Corporate Tax Law. Article 20 requires taxable income to be determined on the basis of adequate standalone financial statements, with the required statutory adjustments. For a cross-border digital business, particular attention should be given to revenue recognition, foreign currency conversion, payment processor fees, bank charges, refunds, chargebacks, intercompany charges, software development costs, IP costs, cloud hosting expenses, contractor payments, and any shareholder-related payments.
12. Record Keeping and Audit Readiness
The company should be audit-ready from both a UAE tax perspective and a cross-border tax perspective. Even if the company is compliant in principle, the risk is not only the legal rule but the ability to prove the factual and accounting position if questioned.
The Corporate Tax Law identifies record keeping as a key component of Corporate Tax administration and also explains that financial statements, tax returns, applications, elections, clarifications, assessments, record keeping, and the general anti-abuse rule form part of the Corporate Tax administration framework[50]. Article 47 of the Corporate Tax Law expressly requires the taxable person to maintain all necessary records for claiming a foreign tax credit.
Accordingly, the company should maintain, at minimum, the following records (i) trade license and constitutional documents, (ii) accounting ledgers, (iii) financial statements, (iv) corporate tax registration and returns, (v) bank statements, (vi) invoices, (vii) customer contracts, (viii) payment processor statements, (ix) US partner agreements, (x) proof of customer location, (xi) records of refunds and chargeback, (xii) board resolutions, (xiii) shareholders resolutions, (xiv) dividend declarations, (xv) related-party agreements, (xvi) transfer pricing support, (xvii) foreign tax forms, (xviii) correspondence with banks, and (xix) evidence of where management and commercial decisions are taken.
13. General Anti-Abuse Considerations
Article 50 of the Corporate Tax Law contains the UAE general anti-abuse rule. It applies where, having regard to all relevant circumstances, it can reasonably be concluded that a transaction or arrangement, or any part of it, is not for a valid commercial or other non-fiscal reason reflecting economic reality, and that the main purpose or one of the main purposes is to obtain a Corporate Tax advantage inconsistent with the intention or purpose of the Corporate Tax Law. A Corporate Tax advantage includes, among other things, avoiding or reducing Corporate Tax payable, deferring tax payment, increasing a refund, or avoiding an obligation to deduct or account for Corporate Tax.
This rule is important for any future restructuring, free zone planning, IP migration, dividend planning, or movement of profits between related entities. Any restructuring should therefore be supported by commercial reasons, proper documentation, substance, and consistency with the actual conduct of the business. In particular, it would be risky to create a structure that formally locates profit in the UAE while the key value-generating activities, decision-making, personnel, customer contracting, and infrastructure are materially located elsewhere without appropriate transfer pricing and substance support.
For the present company, the main anti-abuse concern is not that the structure is inherently abusive. The concern is evidentiary and factual: the company is UAE-registered and pays 9% Corporate Tax, but it has foreign customers, US-linked revenue flows, very low expenses, and shareholders who do not live in the UAE full-time. The company should therefore document the commercial rationale for the UAE structure, maintain proper UAE records, ensure that management and control are properly evidenced, and avoid artificial profit extraction or restructuring steps that are not aligned with economic reality.
14. Preliminary UAE Corporate Tax Conclusion
Based on the information currently provided, the company appears to be correctly treated as being within the UAE Corporate Tax regime. If it is incorporated or registered in Ras Al Khaimah under UAE law, it should generally be treated as a UAE Resident Person for Corporate Tax purposes, and article 12 would subject it to Corporate Tax on taxable income derived from the UAE and from outside the UAE.
The current 9% UAE Corporate Tax filing position appears plausible, particularly if the company is not a Qualifying Free Zone Person or has not elected/qualified for the 0% free zone regime. However, this should not be confirmed without reviewing the company’s trade license, free zone/mainland status, financial statements, Corporate Tax filings, revenue streams, related-party arrangements, and whether any free zone regime could apply. The fact that the company’s customers are outside the UAE does not, by itself, remove the income from the UAE Corporate Tax base.
The key UAE Corporate Tax action items are therefore to (i) confirm the company’s exact legal and licensing status, (ii) verify its Resident Person treatment, (iii) confirm whether it is mainland, Free Zone Person, or potentially a Qualifying Free Zone Person, (iv) review whether the 9% rate has been correctly applied, (v) verify taxable income calculations under article 20 of the Corporate Tax Law, (vi) review related-party and connected-person payments, (vii) assess foreign permanent establishment and foreign tax credit issued, and (viii) ensure full record keeping and anti-abuse compliance.
D. UAE VAT Position
1. Preliminary VAT Position Based on the Client’s Facts
The Client has stated that the company is “VAT exempt/no material UAE VAT obligations due to export-oriented digital services”. The Client has also stated that the company sells online cloud/storage solutions and VPN-related digital services, that its customers are located outside the UAE, that essentially no sales or business activity occurs within the UAE domestic/local market, and that revenue is primarily received through US-based partner companies and deposited into US bank accounts.
This VAT position requires careful review and, in particular, the terminology should be corrected. Under UAE VAT law, “exempt” supplies and “zero-rated” supplies are not the same. A supply may be outside the UAE VAT charge, zero-rated, exempt, or subject to VAT at the standard rate, depending on the nature of the supply, the place of supply, the customer’s location, and any special VAT rules applicable to the relevant service. Therefore, the company should not simply describe its position as “VAT exempt” without confirming whether the services are legally exempt, zero-rated, outside the scope of UAE VAT, or taxable at 5%.
This distinction is important because exempt supplies generally do not allow input VAT recovery, whereas zero-rated supplies are taxable supplies charged at 0% and may allow input VAT recovery, subject to the normal VAT rules and supporting evidence. Accordingly, if the company is supplying digital services to customers outside the UAE, the more likely analysis may be zero-rating/export of services or special place-of-supply treatment for electronic services, rather than exemption. The final conclusion should be confirmed only after reviewing customer contracts, invoices, terms of service, payment processor records, customer location evidence, and the legal role of the US-based partner companies.
2. Nature of Company’s Supplies
The UAE VAT Law defines VAT as a tax levied on the importation and supply of good and services at every stage of production and distribution, including deemed supplies[51]. It defines “Goods”[52] as tangible property, including real property, water and all types of energy, and defines “Services”[53] as anything other than Goods which can be supplied.
On the facts provided, the company’s business appears to involve the supply of services rather than goods. Online cloud/storage solutions and VPN-related digital services are not tangible goods; they are access-based, digital, electronic, technical or subscription-style services. Therefore, for UAE VAT purposes, the relevant analysis is the VAT treatment of services, and more specifically the treatment of electronic/digital services, rather than the VAT treatment of goods.
The classification of the services should be reviewed in detail because the UAE VAT Law contains a specific place-of-supply rule for telecommunications and electronic services. Article 31 of VAT Law provides that the place of supply of telecommunications and electronic services stated in the Executive Regulations is inside the UAE if such services are used and enjoyed in the UAE, to the extent of such use and enjoyment, and outside the UAE if such services are used and enjoyed outside the UAE, to the extent of such use and enjoyment. It also provides that actual use and enjoyment is determined by where the services are used, regardless of the place of contract or payment.
This is particularly relevant because the company receives revenue through US-based partner companies and US bank accounts. The place of payment or contracting route is not necessarily determinative for VAT purposes if the supply falls within the electronic services rule. The key question may instead be where the services are actually used and enjoyed.
3. General Place of Supply Rule for Services
Article 29 of the UAE VAT Law provides that:
“The place of supply of services shall be the place of residence of the
supplier.”
If this general rule applies without modification, a UAE-established supplier would normally be treated as making a supply in the UAE.
However, this general rule is subject to exceptions. Article 30 sets out special place-of-supply cases, including situations where the recipient has a place of residence in an Applying State[54] and is registered for tax purposes there, where the recipient is carrying on business and has a place of residence in the UAE and the supplier is not UAE-resident, and where the services relate to goods, real property, transport, restaurants, hotels, cultural, artistic, sporting or educational services[55].
In addition, article 31 of the VAT Law provides that:
“1. The place of supply of telecommunications and electronic services stated in the Executive Regulations of this Decree-Law shall be as follows:
a. Inside the State, if such services are used and enjoyed therein, to the extent of such use and enjoyment.
b. Outside the State, if such services are used and enjoyed outside the State, to the extent of such use and enjoyment.
2. The actual use and enjoyment of telecommunications and electronic services shall be where such services are used regardless of the place of contract or payment.”
This article contains specific rule for telecommunciations and electronic services. Therefore, for this company, the VAT analysis should not stop at article 29. Since the company supplies online cloud/storage and VPN-related digital services, the special rule for telecommunciations and eletronic services may be directly relevant. The company must therefore identify whether its services fall within the category of telecommunications or electronic services under the Executive Regulations and then determine where those services are used and enjoyed.
4. Telecommunications and Electronic Services: Use and Enjoyment
The company’s services are described as online cloud/storage solutions and VPN-related digital services. These services are likely to be analyzed, at least potentially, under the VAT rules applicable to electronic services. Article 31 of the VAT Law provides that the place of supply of telecommunciations and electronic services is inside the UAE if the services are used and enjoyed in the UAE, and outside the UAE if they are used and enjoyed outside the UAE. The provision further states that actual use and enjoyment is determined by where the services are used, regardless of the place of contract or payment.
This rule is very important for the Client’s structure. The Client has stated that the company’s customers are located outside the UAE and that essentially no sales or business activity occurs within the UAE domestic/local market. If, as a matter of fact, the relevant services are used and enjoyed outside the UAE, then the place of supply may be outside the UAE to the extent of that use and enjoyment. This would support the Client’s general understanding that there are no material UAE VAT charges on foreign customer revenue.
However, the conclusion depends on evidence. For a digital business, the company should be able to suppor the customer location and use/enjoyment position through documents and data, including billing address, IP address, account registration country, customer tax residence/business establishment, payment method country, contractual counterparty, user access data, and any declarations made by customers. Where VPN services are involved, special care is required because IP address evidence may be distorted by the nature of the service itself. Threfore, the company should not rely on a single data point only.
The company should also separate B2B and B2C customers. Where the customer is a business, the customer’s business establishment, fixed establishment and tax registration may be relevant. Where the customer is an individual consumer, evidence of residence, use and enjoyment may be more difficult. The final Advice should therefore distinguish between business customers, individual customers, resellers, partners, and payment intermediaries.
5. Export of Services and the Correct Use of “Zero-Rated” Rather than “Exempt”
The VAT Law defines “Exportation” as taking goods outside the UAE or providing services to a person whose business establishment or fixed establishment is outside the UAE. This definition is relevant because the Client describes the company’s services as export-oriented digital services supplied to customers outside the UAE.
However, the company should be careful in describing its VAT treatment. If the services qualify as exported services, the treatment may be zero-rate rather than exempt. This distinction matters because “Exempted Supply”[56] is separately defined as supply of goods or services for consideration during the course of business wihtin the UAE which is not taxed and in respect of which input tax may not be refunded except as provided under the VAT Law. By contrast, zero-rated supplies are taxable supplies charged at a VAT rate of 0%, and the VAT Law separately contemplates a taxpayer whose supplies are zero-rated only being exempted from VAT registration upon application[57].
Accordingly, the Client’s wording tha the company is “VAT exempt” should be corrected unless the company is genuinely making exempt supplies under the VAT Law. For an online services company supplying non-UAE customers, the likely question is whether the relevant services are zero-rated exports, outside the plcae of supply in the UAE, or taxable because they are used and enjoyed in the UAE. The term “VAT exempt” should not be used loosely because it may create incorrect assumptions regarding input tax recovery, registration, invoicing, and compliance.
6. VAT Registration Position
The VAT Law contains registration rules that must be separately considered. Article 19 of the VAT Law provides that:
“For the purpose of determining whether a person exceeds the Mandatory Registration Threshold and the Voluntary Registration Threshold, the total value of the following shall be calculated:
1. The value of taxable goods and services.
2. The value of relevant goods and relevant services received by the person if not calculated under Clause (1) of this Article.
3. The value of the whole or relevant part of taxable supplies belonging to such person if he acquires, in whole or in part, a business of a person who has made such supplies.
4. The value of taxable supplies made by related parties according to the cases defined by the Executive Regulations of this Decree-Law.”
Meaning that, for purposes of determinig whether a person exceeds the mandatory or voluntary registration threshold, the total value of taxable goods and services, certain relevant goods and services, acquired taxable supplies, and certain taxable supplies made by related parties must be calculated.
The company reportedly generates approximately USD 2,000,000 (Two million United States Dollars) in annual revenue. This amount is materially above the usual VAT registration thresholds, but the exact VAT registration consequence depends on whether the company’s supplies are taxable supplies, zero-rated supplies, outside-scope supplies, or exempt supplies. If the company makes taxable supplies, including zero-rated taxable supplies, the registration analysis must be performed carefully.
Article 15 of the VAT Law provides that the FTA may exempt a taxable person, whether registered or unregistered, from tax registration upon request if that person’s supplies are zero-rated only. It further provides that if changes occur in the business that remove the basis for the exemption, the taxable person must notify the Authority, and the Authority may collect due tax and adminstrative fines if it finds that the person was not entitled to the exemption.
Therefore, if the company’s supplies are genuinely zero-rate only, it may be possible to seek or maintain an exemption from VAT registration. However, this should be formally documented and should not be assumed. If the company has any UAE taxable supplies at 5%, any non-zero-rated supplies, or any supplies that do not meet the zero-rating conditions, the exemption from registration may not be available or may cease to apply.
7. Input VAT Recovery
The VAT treatment adopted by the company affects input VAT recovery. If the company treats its supplies as exempt, input VAT recovery may be restricted because exempt supplies are not taxed and input tax may not be refundable except as provided under the VAT Law. The VAT Law’s definition of “Exempted Supply” expressly refers to the input tax position.
If, however, the company’s supplies are zero-rated taxable supplies, the company may be in a better position to recover input VAT on business expenses, subject to the normal VAT recovery rules and provided it is VAT registered or otherwise entitled to refund under the applicable procedures. This distinction may not have a large financial impact if the company has very low operating expenses, but it remains legally important.
The company should therefore review its expense base and determine whether any UAE input VAT is being incurred on hosting, professional services, office rent, local contractors, software tools, marketing, payment processing, accounting, legal, licensing or other UAE costs. If the company incurs little UAE input VAT, the practical recovery issue may be limited. However, the legal classification of supplies should still be corrected to avoid inaccurate filings or statements to banks, auditors or tax authorities.
8. US-based Partner Companies and VAT characterisation
The Client states that revenue is primarily received through US-based partner companies. This is one of the most important VAT factual points. The VAT treatment may differ depending on whether the US-based companies are payment processors, agents, resellers, distributors, marketplaces, contracting counterparties, or principals buying and reselling the services.
The VAT Law contains rules on agents. Article 9 of the VAT Law provides that:
“1. Where goods and services are supplied by an agent acting on behalf of a principal, the supply shall be deemed to be made by the principal and for his benefit.
2. Where goods and services are supplied through an agent acting in his own name, the supply shall be treated as a direct supply by the agent and for his benefit.”
This means that the legal role of the US partner company is not merely a commercial detail; it may affect who is treated as making the supply for VAT purposes. If the US company acts only as a payment processor, the UAE company may remain the supplier to the end customer. If the US company contracts with the end customer in its own name and resells the service, the UAE company may instead be supplying services to the US company. If the US company acts as an agent on behalf of the UAE company, the UAE company may still be treated as making the supply to the customer. The agreements must therefore be reviewed carefully.
9. Evidence Required to Support the VAT Position
The company should maintain clear evidence supporting the VAT treatment applied to each category of revenue. For a digital services business, this is particularly important because customer location, use and enjoyment, payment location and contracting location may not all point to the same country.
At minimum, the company should retain the following documents and data (i) customer terms and conditions, (ii) invoices, (iii) customer billing addresses, (iv) customer country declarations, (v) IP address logs at account creation and use where reliable, (vi) payment menthod country, (vii) bank and payment processor statements, (viii) US partner agreements, (ix) reseller/agency/marketplace agreements, (x) tax forms exchanged with counterparties, (xi) evidence of customer business establishment or fixed establishment for B2B customers, and (xii) evidence that services are used and enjoyed outside the UAE where the company relies on article 31 of the VAT Law.
The company should also implement a VAT classification matrix. This should classify customers and revenue streams by category, including (i) UAE customers, (ii) non-UAE business customers, (iii) non-UAE individual customers, (iv) US partner-company revenue, (v) reseller revenue, (vi) direct subscription revenue, (vii) cloud/storage revenue, (viii) VPN revenue, (ix) refunds/chargebacks, and (x) any ancillary services. Each category should then be mapped against the applicable VAT treatment and supporting evidence.
10. VAT Risk Areas
The principal VAT risk is not necessarily that the company must charge UAE VAT on all revenue. Rather, the risk is that the company may be using imprecise terminology and may not have sufficient evidence to support the treatment adopted. The Client’s statement that the company is “VAT exempt” should be revisited because exempt and zero-rated treatment are legally distinct.
A second risk is use and enjoyment. If any customers use and enjoy the digital services in the UAE, article 31 may cause the place of supply to be inside the UAE to that extent. This may be relevant if the company has UAE-based users, UAE-based business customers, UAE access, UAE acccounts, or if the digital services are used by persons physically located in the UAE.
A third risk is the US partner-company structure. If the US companies are not merely payment intermediaries but are resellers, agents or principals, the VAT analysis may change. Article 9 of the VAT Law requires the role of an agent or principal to be considered when determining who is treated as making the supply.
A fourth risk is registration. If the company’s supplies are zero-rate only, article 15 may allow an exemption from VAT registration upon request, but that exemption is conditional and may be lost if the business changes. The FTA may collect tax and administrative fines if it determines that the taxable person was not entitled to the exemption[58].
11. Preliminary UAE VAT Conclusion
Based on the facts provided, the company’s business appears to involve supplies of services, likely including electronic/digital services. The fact that customers are located outside the UAE and that there is no material UAE domesitc/local business supports the Client’s general view that there may be no material UAE VAT charge on the company’s main revenue streams. However, the legal analysis should be framed carefully.
The company should not describe its position simply as “VAT exempt” unless its supplies are genuinely exempt supplies under the VAT Law. The more appropriate analysis is likely to be whether the services are zero-rated exports of services, outside the UAE place of supply due to actual use and enjoyment outside the UAE, or taxable in the UAE where services are used and enjoyed in the UAE. Article 31 is particularly relevant because it provides specific place-of-supply rule for telecommunications and electronic services based on actual use and enjoyment, regardless of the place of contract or payment.
Accoridngly, the company should undertake a VAT review covering the exact nature of the services, whether they fall within telecommunications or electornic services, the customer location and use/enjoyment evidence, whether supplies are made directly to end customers or to US partner companies, whether the US companies act as agents, resellers, principals or payment processors, whether the company is correctly registered, exempted from registration, or required to register, whether invoices and records support the adopted VAT treatment, and whether any input VAT recovery position has been correctly applied.
E. Canadian Personal Tax Residency Risk
1. Preliminary Position
The Client has confirmed that he and his wife both hold Canadian passports, are currently non-residents of Canada, and are equal shareholders in the Ras Al Khaimah company. The Client has also confirmed that both spouses hold UAE residence visas and Emirates IDs, but do not physically reside in the UAE on a full-time basis and typically enter the UAE approximately once per year to maintain immigration/residency requirements.
This creates an important distinction between citizenship, immigration residence, and tax residence. Canadian citizenship or passport status does not, by itself, make an individual tax resident in Canada. Conversely, holding a UAE residence visa and Emirates ID does not, by itself, conclusively establish that the individual is not tax resident in Canada or elsewhere. The relevant question is whether, on the facts, the Client and his wife have effectively ceased Canadian tax residence and whether they have avoided re-establishing Canadian tax residence through residential ties, habitual presence, economic connections, or management and control of business activities.
The Canada Revenue Agency (the “CRA”) states that determining an individual’s residence status requires consideration of all relevant facts, including residential ties with Canada and the length of time, purpose, intent and continuity of stays in Canada and abroad[59]. Accordingly, the Client’s statement that he and his wife are Canadian non-residents should be treated as a factual position to be verified, rather than a final legal conclusion.
2. Canadian Tax Residency is a Fact-Based Analysis
Canadian personal tax residency is not determined solely by passport, company ownership, or the existence of a foreign residence visa. The CRA’s published guidance provides that all relevant facts must be considered, including residential ties with Canada and the nature of the person’s stay inside and outside Canada[60].
In practical terms, this means that the analysis must consider whether the Client and his wife have severed or maintained significant Canadian residential ties. The CRA identifies significant residential ties as including, in particular, a home in Canada, a spouse or common-law partner in Canada, and dependents in Canada[61]. Secondary ties may also be relevant, including Canadian bank accounts, credit cards, driver’s license, health insurance, personal property, mailing address, memberships, and other social or economic connections[62].
This is important because a person may live or travel outside Canada and still be considered a factual resident of Canada if they maintain significant residential ties in Canada. CRA guidance on factual residents states that an individual may remain a factual resident of Canada for income tax purposes if they keep significant residential ties in Canada while living or travelling outside Canada.
3. Primary Residential Ties to Canada
The first and most important factual inquiry is whether the Client and his wife maintains any primary residential ties to Canada. These should include, in particular:
a. Whether either spouse owns, lease, occupies or has available a home in Canada;
b. Whether either spouse’s spouse, common-law partner, children or dependents live in Canada;
c. Whether either spouse regularly returns to Canada and, if so, for how long and for what purpose;
d. Whether either spouse maintains a Canadian mailing address, personal belongings, vehicles, health coverage, driver’s license, or other ordinary incidents of Canadian residence; and
e. Whether either spouse has represented to Canadian authorities, banks, brokers, insurers, or other institutions that he or she remains resident in Canada.
The CRA expressly identifies a home in Canada, a spouse or common-law partner in Canada, and dependents in Canada as significant residential ties. If any of these ties remain, the risk of Canadian tax residency increases materially.
On the current facts, the Client has not provided sufficient detail on whether he and his wife retain a home, family, dependents, bank accounts, health cards, provincial documents, investments, or other ties in Canada. Therefore, this Advice cannot conclusively confirm Canadian non-resident status. The correct position is that the Client’s claimed non-resident status should be tested against the full factual matrix.
4. Secondary Residential and Economic Ties
Even if the Client and his wife no longer maintain a home, spouse, or dependents in Canada, secondary ties may still be relevant. These may include Canadian bank accounts, credit cards, investment accounts, registered accounts, private health insurance, provincial health coverage, driver’s license, professional membership, Canadian telephone numbers, Canadian mailing addresses, personal property, vehicles, storage units, or ongoing involvement in Canadian companies or business activities.
Secondary ties are usually less important than primary ties, but a combination of secondary ties can support a finding that the individual remains resident in Canada, especially where there is no clear tax residence elsewhere. In this case, the facts indicate that the Client and his wife hold UAE residence visas and Emirates IDs, but also that they do not live in the UAE full-time and only enter the UAE approximately once per year. That may create a question as to where they are in fact habitually resident and where their personal and economic center of life is located.
The analysis should therefore not be limited to “Canada versus UAE”. If the Client and his wife are not physically resident in the UAE, it is necessary to identify where they actually live during the year, where they spend the majority of their time, where their family and personal life is based, and where they manage the business. If they are resident in a third country, that jurisdiction may also have tax residency rules and may be relevant for treaty purposes.
5. UAE Immigration Residence does not Automatically Resolve Canadian Tax Residency
The Client and his wife hold UAE residence visas and Emirates IDs. This is helpful from an immigration and banking perspective and may assist in establishing a connection to the UAE. However, UAE immigration residence is not the same as tax residence for Canadian purposes.
The key point is that Canadian tax residency is determined under Canadian law and applicable treaty principle. The CRA will not necessarily accept UAE residence visas as conclusive proof that the Client and his wife are non-residents of Canada. The CRA will look at the full factual situation, including residential ties, physical presence, intention, and continuity of life inside and outside Canada[63].
The fact that the Client and his wife typically enter the UAE only once per year to maintain immigration/residency requirements is a potential risk factor. It may make it harder to argue that the UAE is their real center of life, unless they are genuinely tax resident elsewhere and have clearly severed Canadian ties. For Canadian non-residency purposes, the Client should be prepared to evidence not only that he left Canada, but also where he and his wife actually relocated and how their Canadian ties were severed.
6. Departure from Canada and Emigrant Compliance
If the Client and his wife previously ceased to be Canadian tax residents, it is necessary to verify whether they completed the required Canadian departure steps. The CRA’s guidance for individuals leaving Canada provides that when a person becomes an emigrant for income tax purposes, there may be tax consequences including filing requirements, possible deemed disposition of property, and ongoing non-resident withholding on certain Canadian-source income[64].
In particular, Canadian departure tax rules may apply where a person is deemed to dispose of certain property when ceasing Canadian residence. CRA guidance confirms that a person may elect to defer payment of tax relating to the deemed disposition of property and refers to Form T1244 for deferral[65]. CRA From T1243 is used where a person ceased to be resident in Canada and was deemed to have disposed of certain types of property when leaving Canada[66].
Accordingly, the Client should confirm whether, at the time of departure from Canada, he and his wife:
a. Filed final Canadian resident tax returns showing the date of departure;
b. Reported any deemed disposition/departure tax where applicable;
c. Filed any required departure-related forms;
d. Notified Canadian financial institutions of non-resident status;
e. Updated withholding tax treatment for Canadian-source income; and
f. Ceased provincial health coverage or other residence-linked benefits, where appropriate.
Failure to properly complete departure compliance may not automatically mean that the Client remains Canadian tax resident, but it may create audit exposure, filing risk, penalties, or difficulty proving the non-resident position.
7. Canadian Non-Resident Tax Obligations
Even if the Client and his wife are properly treated as non-residents of Canada, they may still have Canadian tax obligations if they receive Canadian-source income. CRA guidance states that if a person receives certain types of income from Canada after leaving, the Canadian payer may have to withhold non-resident tax and remit it to the CRA, and the withheld tax is usually the final Canadian tax obligation on that income, subject to possible elections such as section 217[67].
The Client should therefore confirm whether either spouse receives any Canadian-source income, including dividends from Canadian corporations, rental income from Canadian real estate, pensions, RRSP[68]/RRIF[69] payments, employment income, director fees, interest, royalties, capital gains from taxable Canadian property, or other Canadian-source payments.
If the Client and his wife have no Canadian-source income and have properly ceased Canadian residence, their ongoing Canadian personal filing obligations may be limited. However, this should be confirmed by a Canadian tax advisory based on their full income profile.
8. T1135 Foreign Asset Reporting
From T1135, Foreign Income Verification Statement[70], is generally relevant to Canadian resident taxpayers who own specified foreign property above the applicable threshold. CRA guidance states that Form T1135 has a two-tier reporting structure for specified foreign property, including simplified reporting for taxpayers who held specified foreign property with a total cost of more than CAD 100,000 (One hundred thousand Canadian Dollars) but less than CAD 250,000 (Two hundred and fifty thousand Canadian Dollars) during the year. CRA guidance also states that Form T1135 must be filed by the due date of the taxpayer’s income tax return, even if an income tax return is not required to be filed[71].
On the current facts, if the Client and his wife are genuinely non-residents of Canada, T1135 filing may not be required for years in which they are not Canadian resident taxpayers. However, if the CRA determines that they remained Canadian tax residents, or if they become Canadian tax residents again, their shares in the UAE company, foreign bank accounts, and other specified foreign property may trigger Canadian foreign reporting obligations.
This is a material risk because the Client and his wife own a UAE company generating approximately USD 2,000,000 (Two million United States Dollars) annually, and the business uses US bank accounts. If Canadian residence exists, these assets and interests would need to be reviewed for Canadian foreign reporting purposes.
9. T1134 Foreign Affiliate Reporting
If the Client and his wife are Canadian tax residents, their ownership of the UAE company may also raise foreign affiliate reporting questions. CRA guidance states that Form T1134 consists of a summary and supplements, and that a separate supplement must be filed for each foreign affiliate that is at any time in the year either a controlled foreign affiliate or non-controlled foreign affiliate[72]. CRA guidance also states that Form T1134 must be filed if the non-resident corporation or trust is either a foreign affiliate or controlled foreign affiliate at any time during the reporting taxpayer’s tax year[73].
This is relevant because the Client and his wife appear to own 100% of the UAE company between them, in equal 50/50 shares. If they are Canadian tax residents, the UAE company may need to be analyzed under Canada’s foreign affiliate and controlled foreign affiliate rules, including possible T1134 reporting and any foreign accrual property income considerations. This issue is outside the scope of UAE law and should be confirmed by Canadian tax counsel.
If they are genuinely non-residents of Canada, T1134 obligations may not apply to them personally for non-resident years. However, the point remains highly relevant because a challenge to their non-resident status could retroactively create foreign affiliate reporting exposure.
10. Canadian Corporate Residence and Central Management and Control
The Client’s Canadian tax risk is not limited to personal residency. There may also be a corporate-level Canadian tax risk if the UAE company is effectively managed and controlled from Canada or by Canadian tax-resident persons.
The company is incorporated in Ras Al Khaimah, UAE, and is therefore generally a UAE resident juridical person for UAE Corporate Tax purposes. Under UAE Corporate Tax Law, a juridical person incorporated, established or recognized under UAE legislation is treated as a UAE Resident Person for Corporate Tax purposes. However, another jurisdiction may apply its own corporate residence rules. The CRA’s guidance on corporate residency explains that a corporation’s residence can be relevant for Canadian tax purposes and discusses corporate emigration and departure tax where a corporation ceases to be resident in Canada and takes up residence in another jurisdiction[74].
Accordingly, if strategic decision-making, board-level control, key contracts, treasury, management, or business operations are in substance carried out from Canada, Canada may seek to assert taxing rights over the company or its income. This risk would be higher if the Client or his wife are actually Canadian tax residents, if they spend significant time in Canada while managing the UAE company, or if the company’s records, directors, employees, or decision-making processes are connected to Canada.
To mitigate this risk, the company should ensure that board decisions, strategic management, banking decisions, contract approvals, accounting records, and key commercial decisions are made and documented outside Canada, ideally in the UAE or another clearly identified jurisdiction consistent with the intended tax residency position.
11. Interaction between Canadian Residency and Dividend Planning
Dividend and distribution planning cannot be finalized without first confirming the shareholders’ personal tax residence. If the Client and his wife are genuinely non-residents of Canada, dividends from the UAE company may not be taxable in Canada unless there is some Canadian-source connection or other specific Canadian rule. However, if either spouse is Canadian tax resident, dividends from the UAE company may be taxable in Canada and may also trigger foreign reporting obligations.
This is particularly important because the Client has asked for advice on dividend/distribution planning. The UAE tax position alone is not sufficient. The absence of UAE withholding tax or the company’s payment of UAE Corporate Tax does not determine the personal tax treatment of dividends in Canada or any other country of personal residence.
The final Advice should therefore recommend that no major dividends or profit distributions be made until the personal tax residency position is confirmed and the Canadian tax consequences are reviewed by Canadian tax counsel.
12. Documents and Information Required from the Client
To assess the Canadian personal tax residency risk properly, the following information should be requested form each spouse (i) date of departure from Canada and last Canadian resident tax return filed, (ii) copies of any Canadian departure returns and departure tax forms, (iii) confirmation of whether CRA was notified of non-resident status, (iv) list of days spent in Canada in each year since departure, (v) list of countries where each spouse physically resided during each year, (vi) details of any home owned, leased, or available in Canada, (vii) details of any spouse, children, dependents, or close family in Canada, (viii) Canadian bank accounts, credit cards, brokerage accounts, RRSPs, TFSAs, pensions or insurance, (ix) Canadian driver’s licenses, health cards, provincial registrations or memberships, (x) Canadian mailing addresses, phone numbers, vehicles, storage, or personal property, (xi) any Canadian-source income after departure, (xii) any Canadian tax filings made after departure, (xiii) copies of UAE residence visas, Emirates IDs, UAE entry/exit records and any UAE tax residency certificate, (xiv) tax residence declarations provided to banks, brokers, payment processors and tax authorities, and (xv) any advice previously obtained from Canadian tax advisors.
Without this information, it is not possible to give a final conclusion on Canadian tax residency or Canadian non-resident compliance.
13. Preliminary Canadian Personal Tax Residency Conclusion
Based on the information provided, the Client and his wife state that they are Canadian non-residents, but this must be verified. The key risk is that they hold Canadian passports, own a profitable UAE company, do not physically reside in the UAE full-time, and only enter the UAE approximately once per year to maintain immigration/residency requirements. These facts do not automatically make them Canadian tax residents, but they do require careful analysis of where they actually live, where their center of vital interests is located, and whether they maintain significant Canadian residential ties.
The primary Canadian risk is personal tax residency. If either spouse is treated as Canadian tax resident, Canada may tax worldwide income and may require foreign reporting in respect of the UAE company and related foreign assets. Secondary risks included departure tax compliance, non-resident withholding on Canadian-source income, T1135 foreign asset reporting, T1134 foreign affiliate reporting, and possible Canadian corporate residence or management-and-control arguments if the UAE company is in substance managed from Canada.
Accordingly, the Client should not rely solely on Canadian passport status, UAE residence visas, or self-declared non-residence. The appropriate next step is to undertake a detailed Canadian residency review and, where necessary, obtain confirmation from Canadian tax counsel before implementing dividend distributions, restructuring, or long-term residency planning.
F. US Banking and Operational Exposure
1. Preliminary US Risk Position
The Client has stated that the company’s customers are located outside the UAE, that essentially no sales or business activity occurs within the UAE domestic/local market, that revenue is primarily received through US-based partner companies, and that funds are deposited into US bank accounts.
This creates a separate US tax and compliance risk area. The mere fact that a UAE company receives funds into a US bank account does not, by itself, automatically mean that the UAE company is subject to US federal income tax on all of its income. However, the use of US-based partner companies and US bank accounts requires careful review because US tax exposure may arise through several possible routes, includes US-source income, withholding tax, effectively connected income, US trade or business, dependent agents, US-based infrastructure, US sales tax nexus, FATCA/Chapter 4 documentation, and US banking compliance.
The key factual question is therefore not only where the money is received, but why it is received in the United States, who receives it, who contracts with the customers, what legal role the US partner companies perform, whether any US person acts on behalf of the UAE company, and whether any part of the revenue is properly characterized as US-source income.
2. US Bank Accounts
The fact that the company funds are deposited into US bank accounts is a relevant US connection, but it should not be overstated. A US bank account may create US reporting, banking, compliance, KYC, FATCA, and documentation obligations, but it does not necessarily mean that the UAE company is carrying on a US trade or business.
That said, US banks and US payment intermediaries will generally require the foreign company to document its foreign status, beneficial ownership, tax classification, FATCA status, and the character of payments received. The IRS states that Form W-8BEN-E is used by foreign entities to document their status for Chapter 3[75] and Chapter 4[76] purposes, as well as for certain other US tax provisions[77]. The IRS also describes Form W-8BEN-E as the form used by foreign entities to document their status for US withholding and reporting purposes[78].
Accordingly, the company should ensure that any W-8BEN-E forms provided to US banks, payment processors, platforms, or counterparties are accurate and consistent with the company’s actual legal and tax position. In particular, the company should ensure that the form correctly identifies the UAE entity, its country of incorporation, its Chapter 3 status, its Chapter 4/FATCA status, its beneficial owner status, and whether any treaty claim is being made. Incorrect US tax forms may create withholding, reporting, account restriction, or misrepresentation issues.
3. US-based Partner Companies
The Client has stated that revenue is primarily received through US-based partner companies. This is the most important US factual point. The US analysis may change materially depending on whether those US companies are:
a. Mere payment processors;
b. Merchant-of-record platforms;
c. Resellers purchasing services from the UAE company and reselling to end customers;
d. Distributors or marketing partners;
e. Agents acting on behalf of the UAE company;
f. Contracting parties with the end customers;
g. Service providers providing technical, hosting, customer support, sales, compliance, or infrastructure services; or
h. Related parties or independent third parties.
If the US company is only a payment processor, the US exposure may be primarily documentation, withholding, banking and reporting related. If the US company is a reseller or principal, the UAE company may be supplying services to the US company, and the tax analysis will depend on the legal character and source of those payments. If the US company is an agent that habitually negotiates, concludes, or plays the principal role in concluding contracts for the UAE company, the risk profile becomes more serious and may raise US trade or business and permanent establishment-style concerns.
Therefore, the agreements with the US-based partner companies must be reviewed before any final conclusion is reached.
4. US Trade or Business Risk
A foreign corporation may become exposed to US federal income tax if it is engaged in a US trade or business and earns income effectively connected with that US trade or business. The IRS explains that, generally, when a foreign person engages in a trade or business in the United States, US-source income connected with that trade or business is treated as effectively connected income and is taxable in the United States[79].
The IRS also notes that a foreign person is generally treated as engaged in a US trade or business when the foreign person performs personal services in the United States[80], and that a foreign person may also be considered engaged in a US trade or business if it is a member of a partnership that is engaged in a US trade or business[81].
For this company, the US trade or business risk should be assessed by reviewing whether any of the following exist:
a. Employees, contractors, founders, directors or sales personnel physically located in the United States;
b. US-based persons negotiating or concluding customer contracts;
c. A US office or fixed place of business;
d. US-based customer support, technical operations or management;
e. US-based servers or infrastructure that are legally or operationally attributable to the Company;
f. US agents acting with authority on behalf of the Company;
g. US partnership or joint venture arrangements; or
h. A US subsidiary or disregarded entity involved in the commercial flow.
If none of these factors are present, and the US connection is limited to bank accounts and independent payment processing/partner arrangements, the US trade or business risk may be more limited. However, this conclusion cannot be confirmed without reviewing the contractual and operational structure.
5. Effectively Connected Income
If the UAE company is considered to be engaged in a US trade or business, the next question is whether its income is effectively connected income (“ECI”). The IRS explains that, generally, when a foreign person engages in a US trade or business, all US-source income connected with the conduct of that trade or business is considered ECI and is taxable in the United States.
This matters because ECI is generally taxed differently from passive US-source income. Passive US-source income may be subject to gross-basis withholding, whereas ECI may be taxed on a net basis, with deductions potentially available, and may require US filing. The IRS separately states that, generally, if the payor is not a partnership, withholding is not required on ECI where the foreign payee provides Form W-8ECI representing that the income is effectively connected with a US trade or business and includible in gross income[82].
For this company, Form W-8ECI should not be used unless the company is actually taking the position that the relevant income is effectively connected with a US trade or business. If the company is not engaged in a US trade or business, and is instead documenting foreign beneficial owner status, Form W-8BEN-E is usually the more relevant form for entity documentation. The correct form depends on the actual facts and the legal character of the payments.
6. US Withholding Tax and FDAP Income
The US withholding tax issue is separate from the US trade or business issue. The IRS explains that “NRA withholding” generally requires 30% withholding on payments of US-source income to foreign persons, including foreign entities, and require filing of Form 1042 and Form 1042-S[83]. The IRS instructions for Form W-8BEN-E state that foreign persons are subject to US tax at a 30% rate on US-source income consisting of categories such as interest, dividends, rents, royalties, premiums, and annuities.
This is important because the company’s revenue may need to be characterized. Payments for cloud/storage services, VPN services, software access, subscription access, licenses, royalties, technical services, reseller revenue or platform revenue may be treated differently under US tax rules. If the payment is characterized as a royalty or other US-source FDAP income[84], withholding risk may arise. If the payment is properly characterized as foreign-source service income, or income from services performed outside the United States, the US withholding analysis may be different.
Accordingly, the company should not assume that all payments from US-based partner companies are free from US withholding merely because the company is a UAE entity. The legal character of the payment, the source of the income, the role of the US payer, and the available treaty position, if any, must be reviewed.
7. W-8BEN-E, W-8ECI and US Tax Forms
The company will likely be asked by US banks, payment processors, platforms or partner companies to provide a US tax form. The IRS states that Form W-8BEN-E is used by foreign entities to document their status for Chapter 3 and Chapter 4 purposes, as well as for certain other Code provisions.
Generally, if the company is a UAE entity receiving payments as a foreign beneficial owner and is not claiming that the income is effectively connected with a US trade or business, the relevant form is likely to be Form W-8BEN-E. if the company is instead engaged in a US trade or business and the income is effectively connected with that business, Form W-8ECI may be relevant. The IRS explains that Form W-8ECI is used where the foreign payee represents that the income is effectively connected with the conduct of a US trade or business and is includible in gross income.
The company should therefore review all US tax forms previously submitted. In particular, it should confirm (i) whether Form W-8BEN-E was submitted, (ii) whether any treaty benefits were claimed, (iii) whether any US TIN[85] or EIN[86] was obtained, (iv) whether any Form W-8ECI was submitted, (v) whether any US payer has withheld tax, (vi) whether any Forms 1042-S were issued, (vii) whether the company has filed, or should file, any US tax return, and (viii) whether the forms are consistent with the company’s actual operational position.
8. FATCA and Chapter 4 Documentation
The company may also be required to provide FATCA[87]/Chapter 4 documentation to US banks, payment processors, or withholding agents. FATCA is relevant because US withholding agents may be required to withhold on certain US-source payments made to foreign entities if they are unable to properly document the entity for FATCA purposes. The IRS states that US financial institutions and other US withholding agents are required to withhold 30% on certain US-source payments made to foreign entities if they are unable to document those entities for FATCA purposes[88].
The IRS also explains that FATCA generally requires certain foreign financial institutions and certain other non-financial foreign entities to report on foreign assets held by US account holders or be subject to withholding on withholdable payments.
For this company, the practical point is that the company must correctly classify itself for FATCA purposes. Depending on its activities and ownership, it may be treated as a non-financial foreign entity rather than a foreign financial institution, but this should be confirmed. The company should also confirm whether it has any US substantial owners or US indicia. Based on the facts provided, the shareholders are Canadian passport holders and not described as US persons, but this should be expressly confirmed.
9. US State Sales Tax/Economic Nexus Risk
The company’s business is digital and online, and its customers are outside the UAE. If any customers are located in the United States, US state sales tax exposure must be separately reviewed. This is not a US federal income tax issue; it is a state-by-state sales and use tax issue.
The US Supreme Court decision in South Dakota v. Wayfair, Inc. is important because it rejected the old rule that a seller needed physical presence in a state before the state could require sales tax collection[89]. Following Wayfair, US states may impose sales tax collection obligations on remote sellers based on economic nexus thresholds, such as sales volume or transaction count, depending on the state[90].
This means that if the company sells cloud, VPN, subscription, SaaS[91], digital access or other electronic services to US customers, it may need a state-by-state sales tax analysis. Some states tax digital products or SaaS; others may not tax the same services or may apply different rules. The company should therefore identify whether it has US customers, the states where those customers are located, annual revenue by state, transaction counts by state, and whether any marketplace or reseller is responsible for sales tax collection.
10. US Permanent Establishment/Treaty Consideration
The US tax exposure analysis may also depend on whether an applicable income tax treaty exists and whether the company is entitled to rely on treaty protection. Treaty protection is fact-specific and generally depends on the residence of the company, beneficial ownership, limitation-on-benefits provisions, and whether the company has a permanent establishment in the United States.
For present purposes, the company should not assume treaty protection without a specific US tax review. In particular, if the company is treated as a UAE resident company, the availability of treaty benefits, if any, should be reviewed carefully by US tax counsel. If the company is not entitled to treaty benefits, the US analysis will be driven mainly by domestic US tax rules relating to US-source income, FDAP withholding, ECI, and US trade or business.
The operational facts will be determinative. A US bank account alone is different from a US office, US employees, US agents, US servers, US contracting authority or US management presence.
11. US Banking and Payment Processor Compliance
Even where no US income tax liability ultimately arises, US banking exposure may still be significant. US banks and payment processors may review the company for tax documentation, beneficial ownership, source of funds, sanctions compliance, prohibited use, VPN-related regulatory risk, data or cybersecurity risk, chargebacks, consumer complaints, and payment-card rules.
The company’s VPN-related business may receive enhanced compliance attention because VPN services can be associated, depending on use, with privacy, cybersecurity, sanctions circumvention, prohibited content, fraud, or regulated activity concerns. This does not mean the business is unlawful, but it does mean that the company should maintain strong contractual terms, acceptable use policies, abuse reporting procedures, sanctions screening, refund and chargeback controls, and clear customer onboarding records.
The company should also avoid inconsistent statements across banks, tax forms, corporate tax filings, VAT filings and partner agreements. For example, the company should not state to one institution that it is UAE-managed and to another that it is operated from another jurisdiction, unless the distinction is accurate and properly explained.
12. Documents Required for US Review
To properly assess the US banking and operational exposure, the following documents should be requested (i) all agreements with US-based partner companies, (ii) payment processor agreements and merchant-of-record terms, (iii) US bank account opening forms and KYC submissions, (iv) all Forms W-8BEN-E, W-8ECI, W-9[92] or other US tax forms submitted, (v) any Forms 1042-S received, (vi) any US withholding notices or tax deduction records, (vii) revenue breakdown by customer jurisdiction and, if relevant, by US state, (viii) customer terms and conditions, (ix) invoices issued to US counterparties or end customers, (x) documents showing whether US partners act as agents, resellers, distributors, payment processors or principals, (xi) server/hosting/infrastructure location documents, (xii) details of any US-based employees, contractors, consultants, agents or support personnel, (xiii) any US entity, EIN, tax filing or state registration already obtained, and (xiv) bank correspondence relating to tax, FATCA, KYC, sanctions or account restrictions.
Without these documents, it is not possible to conclude whether the US exposure is low, moderate or high.
13. Preliminary US Banking and Operational Exposure Conclusion
Based on the facts provided, the company’s US exposure is not necessarily created by the mere fact that it uses US bank accounts. The more material risk arises from the US-based partner companies, the possible characterization of payments from US sources, the role of any US persons in the sales or contracting process, and whether the company has US customers, US infrastructure, US agents, or US operations.
The key US federal tax questions are whether the company receives US-source FDAP income subject to withholding, whether any income is effectively connected with a US trade or business, whether the company has filed the correct W-8 documentation, and whether any US withholding or reporting forms have been issued. The IRS generally describes NRA[93] withholding as a 30% withholding regime for US-source income paid to foreign persons, including foreign entities, and explains that foreign entities use Form W-8BEN-E to document their foreign status for withholding and reporting purposes.
In addition, if the company has US customers, US state sales tax nexus should be reviewed separately following the Wayfair decision and the state-by-state economic nexus rules.
Accordingly, the recommended position is that the company should undertake a focused US tax and banking review before making any major restructuring, distribution, or partner-flow changes. The review should be conducted with US tax counsel and should focus on payment characterization, withholding, W-8 documentation, US trade or business risk, ECI, FATCA, state sales tax, and the contractual role of the US-based partner companies.
G. Permanent Establishment and Substance Analysis
1. Preliminary Position
The Client has expressly requested advice on “substance and permanent establishment risk”. This is a central issue in the present matter because the company is registered in Ras Al Khaimah, UAE, but appears to operate a fully online/digital business, has foreign customers, receives revenue primarily through US-based partner companies, keeps funds in US bank accounts, has very low operating expenses, and is owned by two (2) Canadian passport holders who do not physically reside in the UAE full-time and only enter the UAE approximately once per year to maintain immigration/residency requirements.
The issue is therefore not only whether the company is validly incorporated in the UAE or registered for UAE Corporate Tax. The more important question is whether the company has sufficient commercial, operational, managerial and documentary substance in the UAE to support the position that it is genuinely managed and operated as a UAE business, and whether any foreign jurisdiction may assert that the company has a taxable presence, permanent establishment, effective management, source-based income, or taxable nexus outside the UAE.
For purposes of UAE Corporate Tax, the Corporate Tax Law treats juridical person incorporated or otherwise established under UAE legislation as a UAE Resident Person, and such a Resident Person is subject to UAE Corporate Tax on taxable income derived from the UAE and from outside the UAE. However, UAE Corporate Tax residence does not, by itself, prevent another jurisdiction from asserting taxing rights. A company may be UAE-incorporated, UAE-tax registered and UAE-tax paying, while still creating foreign permanent establishment or foreign corporate tax exposure if material business functions, management decisions, contracting authority, personnel, infrastructure, or agents are located abroad.
2. Meaning and Importance of Permanent Establishment
A permanent establishment is a tax concept used to determine whether a business has sufficient presence in a jurisdiction for that jurisdiction to tax the profits attributable to that presence. The Corporate Tax Law explains that the concept of Permanent Establishment[94] is used in tax regimes across the world to determine if and when a foreign juridical person has established sufficient presence in a country to warrant the direct taxation of its profits there[95]. The Corporate Tax Law further states that a country generally only has the right to tax the profits of a foreign business if that business has a permanent establishment in that country[96].
The UAE Corporate Tax Law defines a “Permanent Establishment” as a place of business or other form of presence in the UAE of a Non-Resident Person in accordance with article 14 of the Corporate Tax Law. Although that definition is framed from the UAE perspective, the same conceptual issue applies in reverse for the Client: the UAE company may need to assess whether it has a “foreign permanent establishment” in Canada, the United States or another jurisdiction under that jurisdiction’s domestic law and any applicable double tax treaty.
Accordingly, for a UAE Resident Person such as the company, it is necessary to consider whether the company’s activities outside the UAE create a Foreign Permanent Establishment[97].
3. UAE Corporate Tax Law Permanent Establishment Tests
Article 14 of the UAE Corporate Tax Law provides that a Non-Resident Person has a Permanent Establishment in the UAE where it has a fixed or permanent place in the UAE through which the business of the Non-Resident Person, or any part of it, is concluded; where a person has and habitually exercises authority to conduct a business or business activity in the UAE on behalf of the Non-Resident Person; or where it has any other form of nexus in the UAE as may be specified by Cabinet Decision.
Article 14 also contains an agency-type permanent establishment rule. A person may create a permanent establishment if that person habitually concludes contracts on behalf of the non-resident person or habitually negotiates contracts that are concluded by the non-resident person without material modification. By contrast, the rule does not apply where the person acts as an independent agent in the ordinary course of business, unless that person acts exclusively or almost exclusively for the non-resident person or is not legally or economically independent.
Although article 14 is written to determine when a foreign person has a UAE permanent establishment, the same types of factors are useful when assessing the company’s potential exposure abroad: fixed place of business, place of management, office, branch, personnel, authority to conclude contracts, dependent agents, and whether activities are merely preparatory or auxiliary.
4. Fixed Place of Business Risk Outside the UAE
The first category of risk is whether the company has a fixed place of business outside the UAE. This could include an office, branch, workspace, server facility, management location, or other fixed commercial presence in Canada, the United States, or another jurisdiction. The Corporate Tax Law’s article 14 list is illustrative because it expressly includes a place of management, branch, office, factory, workshop, land, buildings, and other real property as examples of fixed or permanent places[98].
Based on the information currently provided, the company is said to be registered in Ras Al Khaimah and to operate entirely online/digital, with no material UAE domestic sales and revenue received through US-based partner companies and US bank accounts. The Client has not yet confirmed whether the director, shareholders, employees, developers, contractors, servers, customer support teams, marketing teams, or decision-makers are physically located.
If the company has no employees, office, branch, or physical infrastructure outside the UAE, the fixed-place permanent establishment risk may be reduced. However, if the company’s real management location, staff, core developers, servers, sales operations, customer support, or commercial decision-making are located in Canada, the United States, or another country, those facts could increase the risk that such country asserts a permanent establishment or taxable nexus.
5. Place of Effective Management and Control
The place of effective management and control is particularly important in this matter. The Corporate Tax Law recognizes that cross-border activities may cause a person to be resident for Corporate Tax purposes in more than one jurisdiction and gives the example of a company incorporated in one jurisdiction but effectively managed and controlled in another[99]. The Corporate Tax Law notes that double tax treaties generally include rules to resolve dual-residence situations for juridical persons, either based on place of effective management or through mutual agreement procedures[100].
For UAE VAT purposes, the VAT Law defines a “Business Establishment”[101] as the place where the business is legally established and where important management decisions are taken of the functions of central administration are carried out. It also defines a “Fixed Establishment”[102] as any fixed places of business, other than the business establishment, through which the person conducts business on a regular or permanent basis, and which has sufficient human and technical resources necessary to enable it to supply or receive goods or services. Although these definitions are contained in the VAT Law, they are useful in understanding how UAE tax legislation treats the concepts of management location, central administration, human resources and technical resources.
In the present case, the Client and his wife do not physically reside in the UAE full-time and typically enter the UAE approximately once per year. This fact does not automatically cerate a foreign permanent establishment, but it is a substance risk. If the shareholders are also the persons making all key management and commercial decisions, and if those decisions are made from Canada or another foreign jurisdiction, that jurisdiction may argue that the company is effectively managed from there or that a taxable presence exists there.
To mitigate this risk, the company should be able to demonstrate where board decisions are made, where management meetings occur, where bank instructions are approved, where contracts are negotiated and signed, where accounting records are kept, where customer and supplier relationships are managed, and where strategic decisions are taken. If the intended position is that the company is managed from the UAE, the company must maintain evidence supporting that position.
6. Dependent Agent and US Partner Risk
The second major permanent establishment risk is dependent agent risk. Article 14 of the UAE Corporate Tax Law provides that a person may create a permanent establishment where that person habitually concludes contracts on behalf of the non-resident person or habitually negotiates contracts that are concluded by the non-resident person without the need for material modification[103].
This issue is directly relevant because the Client has stated that revenue is primarily received through US-based partner companies. It is therefore necessary to determine whether the US companies are merely payment processors, independent resellers, distributors, merchant-of-record platforms, agents, or related parties acting on behalf of the UAE company.
If the US partner companies act independently, contract in their own name, buy and resell services on their own account, and bear commercial risk, the permanent establishment risk may be lower, subject to US tax review. However, if the US partner companies habitually negotiate or conclude contracts on behalf of the UAE company, or if contracts are routinely accepted by the UAE company without material modification after being negotiated by US persons, then a US dependent agent risk may arise.
This must be reviewed by reference to the actual partner agreements and operational conduct, not only the labels used in the contract. A contract may call a party an “independent contractor”, but if in practice the party habitually concludes contracts for the company or acts almost exclusively for the company without real independence, the risk profile may be materially higher.
7. Preparatory or Auxiliary Activities
Article 14 of the UAE Corporate Tax Law provides that certain fixed or permanent places will not constitute a permanent establishment if they are used solely for limited purposes such as storing, displaying, or delivering goods, keeping stock for processing by another person, purchasing goods or collecting information, or conducting any other preparatory or auxiliary activity, provided that the overall activity is preparatory or auxiliary in nature[104].
This principle may be relevant if the company has limited foreign activities abroad, such as basic marketing, payment collection, data gathering, customer support, or administrative functions. If such activities are genuinely preparatory or auxiliary, they may not necessarily create a permanent establishment. However, the exception should be used carefully.
For a digital services business, functions such as customer acquisition, technical support, server operations, software development, contract conclusion, account management, payment processing, and infrastructure management may be core income-generating activities rather than merely preparatory or auxiliary. Therefore, if these functions are performed outside the UAE by persons or entities closely connected to the company, the company should not assume that they are automatically auxiliary.
Article 14 also contains an anti-fragmentation concept. The preparatory or auxiliary exception may not apply where the same person or a related party carries on business at the same or another place and the combined activities are not preparatory or auxiliary and together form a cohesive business operation[105]. This is relevant where business functions are split across multiple entities or jurisdictions.
8. Server, Cloud Infrastructure and VPN Infrastructure Risk
Because the company sells online cloud/storage solutions and VPN-related digital services, the location and control of technical infrastructure must be reviewed. This includes servers, cloud infrastructure, VPN nodes, storage systems, content delivery networks, data centers, development environments, customer support systems and any technical assets used to deliver the service.
The UAE Corporate Tax materials do not provide a specific rule in the uploaded documents for when servers create a foreign permanent establishment. However, the general permanent establishment analysis under article 14 focuses on fixed or permanent places, places of management, offices, branches, and locations through which business is conducted. A foreign tax authority may therefore examine whether technical infrastructure located in its jurisdiction amounts to a fixed place of business or whether it is merely third-party cloud infrastructure outside the control of the company.
The risk is generally different where the company merely uses third-party cloud providers on standard commercial terms, compared with where the company owns, leases, controls or has dedicated servers or infrastructure in a foreign jurisdiction. The risk is also different where the infrastructure is purely technical and automated, compared with where personnel in that jurisdiction operate, maintain, sell, contract, or manage the services.
Accordingly, the company should prepare an infrastructure map identifying where the servers, VPN nodes, cloud regions, storage systems and support teams are located; who owns or controls them; whether they are dedicated or shared; whether the company has physical access or control; whether contracts with customers depend on such infrastructure; and whether any foreign personnel manage those systems.
9. UAE Substance
Substance is relevant for several reasons. First, it supports the company’s UAE tax residence and UAE corporate tax position. Second, it reduces the likelihood that foreign tax authorities will argue that profits should taxed elsewhere. Third, it may be required if the company is a Free Zone Person seeking Qualifying Free Zone Person treatment. Fourth, it is important for banking, FATCA/CRS[106], treaty access, and general tax audit defense.
The Corporate Tax Law states that a Free Zone Person must maintain adequate substance in the UAE to be considered a Qualifying Free Zone Person. It also lists other requirements, including deriving Qualifying Income, satisfying the de minimis requirement, not electing to be taxed at general rates, complying with transfer pricing rules and documentation requirements, and preparing and maintaining audited financial statements[107].
Even if the company is not seeking the 0% Qualifying Free Zone Person regime and is instead paying 9% UAE Corporate Tax, substance remains important. The company’s facts include very low operating expenses and limited physical presence of the shareholders in the UAE. These facts may be commercially normal for an online business, but they should be supported by documentation showing that the UAE company is not a mere booking or shell entity.
10. Practical Substance Indicators
The company should be able to evidence at least the following UAE substance indicators, to the extent commercially feasible (i) a valid UAE license matching the actual business activities, (ii) registered office or other UAE premises suitable for the scale and nature of the business, (iii) UAE accounting records and corporate records, (iv) regular board or management meetings documented by minutes, (v) key commercial decisions approved and recorded by the UAE company, (vi) UAE bank account or banking presence, if commercially possible, even if US accounts are also used, (vii) clear contractual authority showing who may sign contracts and approve major transactions, (viii) evidence of where the directors or managers make strategic decisions, (ix) UAE-based service providers, accountants, tax agents, compliance providers or administrative support, (x) written agreements with foreign contractors, developers, infrastructure providers and US partner companies, (xi) transfer pricing support for related-party and connected-person arrangements, (xii) clear IP ownership records, and (xiii) documentation showing that the profits booked in the UAE correspond to the functions, assets and risks of the UAE company.
For a digital company, substance does not necessarily require a large office or large staff, but the company must be able to demonstrate that its UAE structure has commercial reality and that the profits allocated to the UAE entity are consistent with the functions performed, assets used and risks assumed.
11. Interaction with Foreign Permanent Establishment Exemption and Foreign Tax Credit
If the company does have a Foreign Permanent Establishment, the UAE Corporate Tax Law contains specific mechanisms that may become relevant. Article 24 of the Corporate Tax Law allows a UAE Resident Person to elect not to take into account the income and associated expenditure of its Foreign Permanent Establishment in determining its taxable income. Where this election applies, losses, positive income and associated expenditure of such Foreign Permanent Establishments, and any foreign tax credit that would otherwise have been available, are not taken into account[108].
The Corporate Tax Law further explains that this election is intended to eliminate or reduce potential international double taxation[109], but that the election applies only to Foreign Permanent Establishments subject to Corporate Tax or a similar tax in the relevant foreign country at a rate of not less than 9%[110]. It further states that a Resident Person and its Foreign Permanent Establishment must be treated as separate and independent businesses, and transactions between them must be treated as taking place at market value[111].
This is important because, if the company is found to have a taxable permanent establishment in the US, Canada or another country, the issue is not only foreign tax liability. The company must also consider how that foreign tax and foreign permanent establishment income are treated under UAE Corporate Tax. In some cases, the company may need to choose between claiming a foreign tax credit or applying the foreign permanent establishment exemption, subject to the conditions of the Corporate Tax Law.
12. Double Tax Treaty Considerations
The Corporate Tax Law states that the definition of Permanent Establishment in the UAE Corporate Tax Law generally follows the principles in Article 5 of the OECD Model Tax Convention on Income and Capital[112]. The law also notes that, in cross-border situations, double taxation may occur where different jurisdictions assert overlapping taxing rights, and that applicable tax treaties may determine whether a permanent establishment exists and which state has taxing rights[113].
The Corporate Tax Law further states that where the terms of a double taxation agreement are inconsistent with the UAE Corporate Tax Law, the terms of the double taxation agreement would prevail[114]. Therefore, if Canada, the US or another jurisdiction asserts taxing rights, the relevant treaty analysis must be reviewed separately.
For present purposes, no final treaty conclusion should be made without confirming the company’s exact tax residence, the shareholders’ tax residence, the nature of the income, the role of foreign partners, and whether the company is entitled to treaty benefits. Treaty eligibility may be affected by effective management, beneficial ownership, limitation-on-benefits provisions, substance, and whether the company is merely a conduit for income.
13. Key Risk Factors in the Current Structure
Based on the facts provided, the main substance and permanent establishment risk factors are as follows (i) the shareholders do not physically reside in the UAE full-time, (ii) the shareholders enter the UAE only approximately once per year to maintain immigration/residency requirements, (iii) the company operates entirely online/digital, (iv) the company has very low operating expenses, (v) the customer base is outside the UAE, (vi) revenue is primarily received through US-based partner companies, (vii) funds are deposited into US bank accounts, (viii) the location of management, directors, contractors, developers, servers and support functions has not yet been confirmed, and (ix) the contractual role of US partner companies has not yet been reviewed.
These factors do not automatically mean that the company has a foreign permanent establishment. However, they do mean that the company should not rely only on UAE incorporation and UAE Corporate Tax registration. The substance position should be evidenced and strengthened.
14. Recommended Substance Enhancement Measures
The company should consider implementing the following measures:
a. Hold regular board and management meetings in the UAE, or at minimum document that key decisions are taken by the UAE company in a manner consistent with the intended UAE tax position;
b. Maintain corporate records, accounting records, tax records, and board minutes in the UAE;
c. Ensure that the trade license accurately reflects the company’s actual activities;
d. Maintain a UAE office, flexi-desk, serviced office or other premises appropriate to the business scale;
e. Appoint UAE-based service providers for accounting, tax, compliance and administrative support;
f. Open and use a UAE bank account where commercially feasible, while retaining US banking only where commercially necessary;
g. Clearly document the role of all US partner companies, including whether they are principals, agents, resellers, distributors, or payment processors;
h. Ensure that foreign contractors do not have authority to bind the company unless the tax consequences are reviewed;
i. Ensure that no person in Canada, the US or any other country habitually concludes contracts on behalf of the company without proper analysis;
j. Prepare an infrastructure map showing where servers, VPN nodes, cloud regions and storage infrastructure are located;
k. Prepare a functional analysis identifying which entity or person performs development, marketing, contracting, support, infrastructure, risk management, compliance, management, and treasury functions;
l. Document IP ownership and licensing arrangements;
m. Maintain transfer pricing support for related-party and connected-person arrangements; and
n. Obtain local tax advice in any jurisdiction where management, contractors, customers, servers, or agents are materially located.
15. Preliminary Conclusion on Substance and Permanent Establishment Risk
The company’s UAE incorporation and UAE Corporate Tax filing position are important, but they do not eliminate substance and permanent establishment risk. The company is a UAE-registered digital services company with foreign customers, US-linked revenue flows, US bank accounts, low operating expenses, and shareholders who are not physically based in the UAE full-time. This makes the factual substance analysis essential.
From a UAE law perspective, article 14 of the Corporate Tax Law identifies the main permanent establishment concepts, including a fixed or permanent place of business, a place of management, an office, and a person habitually exercising authority to conduct business on behalf of another person. The same concepts should be applied by analogy when assessing whether the UAE company may have a taxable presence abroad. The highest-risk areas are likely to be the location of effective management, the role of US partner companies, the location of technical infrastructure, and whether any foreign persons negotiate or conclude contracts for the company.
Accordingly, the company should undertake a substance and permanent establishment review before any restructuring or major dividend planning is implemented. The review should map the company’s functions, assets, risks, personnel, infrastructure, contract authority, banking flows, and decision-making locations. Where weaknesses are identified, the company should strengthen UAE substance and obtain jurisdiction-specific advice in Canada, the US and any other country where material management, personnel, infrastructure, or customer-facing activities are located.
H. Corporate Structuring Optimization
1. Preliminary Structuring Position
The Client has asked for advice on “corporate structuring optimization”. The current structure is relatively simple: a UAE company registered in Ras Al Khaimah, owned equally by the Client and his wife, both Canadian passport holders who state that they are non-residents of Canada. The company generates approximately USD 2,000,000 (Two million United States Dollars) in annual revenue, has very low operating expenses, operates an entirely online/digital business model, sells cloud/storage and VPN-related digital services, serves customers outside the UAE, receives revenue primarily through US-based partner companies, and deposits funds into US bank accounts.
The key structuring question is whether the current single-company structure is still appropriate for the company’s commercial, tax, banking, regulatory, asset protection and long-term wealth planning objectives. The fact that the company is currently paying 9% UAE Corporate Tax may be acceptable and may even be preferable if the alternative structure create disproportionate complexity or foreign tax risk. However, the structure should be reviewed because the current arrangement appears to combine several different functions in one entity: operating business, customer contracting, revenue collection, IP ownership, profit accumulation, bank account holding, and shareholder distribution planning.
Corporate structuring should not be approached purely as a tax-minimization exercise. Any restructuring must be commercially justified, properly documented, supported by substance, and aligned with the actual functions, assets and risks of each entity. This is particularly important under the UAE Corporate Tax Law, which requires taxable income to take into account transactions with Related Parties[115] and Connected Persons[116], and which applies the arm’s length principle to related-party arrangements.
2. Confirming the Existing Ras Al Khaimah Structure
The first step is to confirm the company’s exact legal and licensing position in Ras Al Khaimah. Ras Al Khaimah may involve either a mainland entity or a free zone entity, and the tax analysis may differ depending on which licensing regime applies. If the company is a UAE mainland company, the ordinary UAE Corporate Tax rules are likely to apply. If the company is a Free Zone Person, the Qualifying Free Zone Person regime may need to be analyzed.
The Corporate Tax Law explains that a Free Zone Person may be eligible for a 0% Corporate Tax rate on Qualifying Income if it satisfies the relevant conditions. These conditions include deriving Qualifying Income, maintaining adequate substance in the UAE, satisfying the de minimis requirement, not electing to be taxed at the general Corporate Tax rates, complying with transfer pricing rules and documentation requirements, and preparing and maintaining audited financial statements.
This is important because the Client states that the company is currently paying 9% UAE Corporate Tax. That may be correct. However, before any restructuring is recommended, it should be confirmed whether the company is paying 9% because it is a mainland/non-free zone entity, because it does not qualify for the free zone regime, because its income is not Qualifying Income, because it has elected to be taxed at ordinary rates, or because the free zone analysis was never performed.
3. Free Zone Optimization: Potential Benefit and Caution
If the company is currently a Ras Al Khaimah free zone company, or if a migration to a free zone is being considered, the potential benefit is the 0% Corporate Tax rate on Qualifying Income. However, the free zone regime is conditional and should not be assumed to apply simply because an entity is licensed in a free zone.
Article 18 of the UAE Corporate Tax Law provides that a Qualifying Free Zone Person must maintain adequate substance in the UAE, derive Qualifying Income, not elect to be subject to ordinary Corporate Tax under article 19, comply with the arm’s length and transfer pricing documentation requirements, and meet any other prescribed conditions. If a Qualifying Free Zone Person fails to meet the conditions, it ceases to be a Qualifying Free Zone Person from the beginning of that tax period.
For the Client’s case, the free zone route may be attractive only if the company can satisfy the conditions in substance. The company has very low operating expenses, operates entirely online, serves customers outside the UAE, and the shareholders do not physically reside in the UAE full-time. Those facts do not automatically prevent free zone eligibility, but they make the adequate substance requirement important.
The Corporate Tax Law states that a Free Zone Person must have its core income-generating activities performed within the free zone, either by itself of by an outsourced related party or third party located in a free zone, with adequate supervision over outsourced activities. The entity or outsourced party must be able to demonstrate adequate staff and assets and adequate operating expenditure within the free zone. Adequate substance is assessed case by case, taking into account full-time employees, operating expenditure, physical assets, the nature and level of activities performed, Qualifying Income earned and other relevant facts and circumstances.
Accordingly, any proposal to rely on a free zone 0% regime should be treated cautiously. A structure that formally moves profits to a free zone company but does not place genuine core income-generating functions, supervision, assets or expenditure in the free zone may create tax controversy risk.
4. Excluded Activities and IP Ownership Risk
One of the key structuring issues is intellectual property. The company appears to operate a digital services business involving online cloud/storage solutions and VPN-related services. Depending on how the business is structured, the company may own or exploit software, trademarks, source code, domains, customer data, platform rights, licenses, or other intangible assets.
This matters because the Corporate Tax Law states that, for Qualifying Free Zone Person purposes, Excluded Activities[117] include the ownership or exploitation of intellectual property assets, as well as activities ancillary to excluded activities[118]. Therefore, if the company seeks to rely on the Qualifying Free Zone Person regime, IP ownership and IP exploitation must be analyzed carefully. A free zone company that earns income from exploiting intellectual property may not be able to treat that income as Qualifying Income, depending on the exact facts and the applicable Cabinet and Ministerial Decisions.
This does not mean the company should not own IP. It means the tax implications of IP ownership must be understood before restructuring. For a digital business, IP is often one of the central value drivers. Moving IP between entities, licensing IP to an operating company, or placing IP into a holding company may create UAE Corporate Tax, VAT, transfer pricing, foreign tax, withholding, and valuation issues. It may also create commercial risk if the IP-holding entity is not the same entity that contracts with customers or payment processors.
Therefore, any IP restructuring should be preceded by an IP audit. The company should identify what IP exists, who legally owns it, where it was developed, who paid for its development, whether contractors assigned their rights, where developers are located, whether trademarks or domains are registered, and whether any IP is licensed to or from US-based partner companies or other foreign parties.
5. Single Operating Company vs Holding Company Structure
The current structure appears to be a single UAE operating company owned directly by the two (2) individual shareholders. This is simple and may be appropriate at the current stage. However, it also means that operating risk, contractual risk, bank account risk, regulatory risk, IP ownership and accumulated profits may all be concentrated in one entity.
A holding company structure may be considered if the objective is to separate accumulated profits, ownership of subsidiaries, IP ownership, or long-term investment assets from the operating risk of the digital services business. For example, a holding company could own the operating company, receive dividends, hold excess cash, own investments, or hold IP, subject to tax and legal review.
From a UAE Corporate Tax perspective, the treatment of dividends is relevant. The Corporate Tax Law states that dividends received from UAE Resident Persons are exempt from Corporate Tax and gives the example of dividends from a UAE resident company being excluded when calculating taxable income. It further states that this exemption covers distribution made by a Resident Free Zone juridical person, whether qualifying or not, to another Resident Person[119].
This may make a UAE holding company commercially and tax-efficient in certain cases, particularly where it receives dividends from a UAE operating company. However, the personal tax treatment of later distributions from the holding company to the individual shareholders still depends on the shareholders’ personal tax residence. A UAE holding company will not, by itself, eliminate Canadian, US or other foreign personal tax exposure if the shareholders are tax resident in a foreign jurisdiction.
6. Participation Exemption for Foreign Subsidiaries
If the Client contemplates expansion outside the UAE, for example through foreign subsidiaries, a UAE holding company may also be relevant because the UAE Corporate Tax regime includes a participation exemption for certain foreign dividends and profit distributions.
The Corporate Tax Law states that dividends and other profit distributions received from foreign juridical persons may be exempt from UAE Corporate Tax if the recipient has a Participating Interest[120] in the foreign company[121]. The law explains that a Participating Interest generally requires, among other things, an ownership interest of %5 or more held, or intended to be held, for at least 12 months; entitlement to at least 5% of distributable profits and liquidation proceeds; and a subject-to-tax requirement in the foreign jurisdiction, generally at a rate of at least 9% or an effective equivalent[122].
This means that, if the business later creates foreign subsidiaries, a UAE holding company may be useful for receiving qualifying dividends or distributions, subject to the participation exemption conditions. However, this planning should be implemented only where there is a real commercial need for foreign subsidiaries and where the holding company has appropriate substance, governance and documentation.
7. Operating Company/IP Company/Holding Company Separation
A more sophisticated structure may involve separating the business into three functional entities, (i) an operating company that contracts with customers, manages service delivery, employees/contractors, payment processors, and commercial risk, (ii) an IP company that owns software, trademarks, domains, technical assets or licenses and licenses them to the operating company, and (iii) a holding company that owns the operating company and/or IP company and holds surplus profits or investments.
This type of structure can improve risk segregation and asset protection. However, it also increases tax, accounting, transfer pricing, VAT and compliance complexity. It should not be implemented unless there are clear commercial reasons.
For UAE Corporate Tax purposes, any transactions between these entities must satisfy the arm’s length principle if they are related parties. Article 34 of the Corporate Tax Law provides that transactions and arrangements between Related Parties must meet the arm’s length standard, meaning that the results must be consistent with results that would have been realized if independent persons had engaged in a similar transaction under similar circumstances. Article 34 also recognizes transfer pricing methods including the comparable uncontrolled price method, resale price method, cost-plus method, transactional net margin method and transaction profit split method[123].
Therefore, if an IP company licenses IP to an operating company, or a holding company charges management fees, or one group entity provides support services to another, the fees must be commercially justifiable and supported by agreements, invoices, benchmarking, and functional analysis.
8. Related-Party and Connected-Person Structuring
The Client and his wife are equal shareholders. If new companies are introduced and owned by either or both spouses, those entities and individuals will likely be related parties or connected persons for UAE Corporate Tax purposes.
The UAE Corporate Tax Law defines related-party and control concepts broadly. Article 35 of the Corporate Tax Law provides that juridical persons may be related where one directly or indirectly owns 50% or more of the other, controls the other, or where the same person directly or indirectly owns or control 50% or more of two or more juridical persons[124]. Control includes the ability to exercise 50% or more voting rights, determine 50% or more of the board, receive 50% or more of profits, or exercise significant influence over business conduct[125].
Article 36 further provides that payments or benefits to Connected Persons are deductible only to the extent they correspond with market value and are incurred wholly and exclusively for the taxable person’s business[126]. Connected Persons include an owner of the taxable person, a director or officer, or a related party of such persons.
Accordingly, if the Client intends to extract profits through salaries, director fees, management fees, consulting fees, royalty payments, shareholder loans, or service charges, those payments must be properly documented and commercially supportable. The structure should not simply shift profits from the company to the shareholders or related entities without arm’s length support.
9. Transfer Pricing and Documentation
Transfer pricing is a central consideration in any optimized structure. The Corporate Tax Law explains that transfer pricing rules are intended to ensure that the price of a transaction is not influenced by the relationship between the parties and that the internationally recognized arm’s length principle is used for transactions between Related Parties and Connected Persons. The Law also states that transfer pricing rules apply to both cross-border and domestic transactions carried out by juridical persons and individuals[127].
The law further states that the FTA may require a taxable person to disclose information regarding transactions and arrangements with Related Parties and Connected Persons together with its tax return, and that the purpose of maintaining transfer pricing information is to describe how the taxpayer determined transfer prices and why those prices are comparable to prices applied by independent parties in similar circumstances[128].
Accordingly, any restructuring involving related companies, shareholder service arrangements, IP licensing, management fees, cost sharing, intercompany loans, or foreign contractors should be designed with transfer pricing documentation from the start. This is particularly important because the company has very low operating expenses and high revenue. If profits are later reduced through related-party charges, the FTA or a foreign tax authority may ask whether those charges are arm’s length and commercially justified.
10. Banking and Payment Flow Optimization
The company currently receives revenue primarily through US-based partner companies and deposits funds into US bank accounts. This may be commercially necessary, particularly if US payment infrastructure or partner platforms are important to customer acquisition and payment collection. However, from a restructuring perspective, it creates concentration risk and US exposure.
The company should consider
whether its payment flow can be diversified or clarified. For example, the
company may consider maintaining a UAE bank account for corporate tax,
substance and governance purposes, while using US accounts only where
commercially required. It should also clarify whether US partner companies are
payment processors, resellers, principals, distributors or agents. This is
relevant not only for US tax, but also for UAE VAT, because
article 9 of the UAE VAT Law provides that where services are supplied by an
agent acting on behalf of a principal, the supply is deemed to be made by the
principal, whereas where services are supplied through an agent acting in its
own name, the supply is treated as a direct supply by the agent[129].
The structuring objective should be to ensure that legal contracts, invoices, payment flows, tax forms, accounting records and bank explanations all tell the same story. If the company says it is the supplier to customers, the agreements and invoices should support that. If a US partner is the reseller or merchant of record, the company’s tax and VAT treatment should reflect that.
11. Personal Holding and Family Wealth Planning
Because the company is owned equally by the Client and his wife, and because the Client has asked about asset protection and long-term residency planning, the personal ownership layer should also be reviewed. Direct personal ownership is simple, but it may not be optimal for long-term succession, asset protection, estate planning, matrimonial planning, creditor protection, or future investor onboarding.
The UAE Corporate Tax Law recognized a Family Foundation regime. Article 17 provides that a Family Foundation may apply to be treated as an unincorporated partnership for Corporate Tax purposes if certain conditions are met, including that it is established for the benefit of identified or identifiable natural persons or public benefit entities, that its principal activity is to receive, hold, invest, disburse, or otherwise manage assets or funds associated with savings or investment, that it does not conduct business activities that would have constituted a business if undertaken directly by the founder or beneficiaries, and that its main or principal purpose is not Corporate Tax avoidance[130].
A Family Foundation may be considered at a later stage for wealth holding or succession planning, but it should not be used as an operating vehicle for the active digital business. The Corporate Tax expressly requires that the Family Foundation’s principal activity be asset or fund holding/management and that it does not conduct business activity that would have constituted a business if carried out directly by its founder or beneficiaries.
Therefore, a possible long-term structure could involve the operating company being owned by a holding company, and the holding company shares being held through a family wealth or succession vehicle, subject to UAE, Canadian, US and personal tax advice. This should be treated as later-stage planning option, not an immediate recommendation without further analysis.
12. VAT Structuring Considerations
Any corporate restructuring may also have VAT consequences. If business assets, customer contracts, IP, rights, services, or intercompany arrangements are transferred between entities, UAE VAT treatment must be reviewed. The UAE VAT Law provides that the transfer of a business or an independent part of a business from one person to a taxable person to continue that business is not deemed a supply, subject to the conditions determined by the VAT rules[131].
This may be relevant if the company transfers business activities, IP, customer contracts or operations to a new operating company or holding structure. However, the transfer-of-business relief should not be assumed. The legal form of the transfer, the assets transferred, the recipient’s taxable status, continuity of business, and VAT documentation must be reviewed.
That VAT Law also contains related-party valuation rules. Article 36 provides that the value of supplies or importations of goods or services between Related Parties may be treated as market value where the supply value is less than market value and the recipient is not entitled to full input tax recovery[132]. Therefore, intercompany services, IP licenses, management charges, or business transfers should be priced and documented on a defensible basis.
13. Recommended Structuring Options
Based on the current facts, the following structuring options may be considered:
Option 1: Maintain the Current UAE Operating Company
This is the simplest option. The company continues to operate through the existing Ras Al Khaimah entity and pays 9% UAE Corporate Tax. This may be appropriate if the company is not eligible for the free zone regime, if the compliance burden of restructuring is not justified, of if the shareholders prefer simplicity. The priority under this option would be to strengthen UAE substance, clarify US partner arrangements, maintain proper tax documentation, and implement a formal dividend/distribution policy.
Option 2: Confirm or Optimize Free Zone Status
If the Company is already a Free Zone Person, or can be migrated to an appropriate free zone, it may explore whether any income can qualify for 0% Corporate Tax treatment. However, this option should only be pursued if the company can meet the qualifying conditions, including adequate UAE/ free zone substance, Qualifying Income, de minimis limits, transfer pricing compliance, and audited financial statements.
This option may be less attractive if the company’s income is derived from excluded activities, particularly the ownership or exploitation of intellectual property assets, or if the company cannot demonstrate sufficient substance in the free zone.
Option 3: UAE Holding Company above the Operating Company
A UAE holding company may be used to own the existing operating company and receive dividends, hold retained earnings, make investments, or separate accumulated profits from operating risk. This may be attractive because dividends from UAE Resident Persons may be exempt in the hands of another UAE Resident Person, subject to the relevant rules.
However, the personal taxation of distributions from the holding company to the shareholders must still be reviewed under Canadian, UAE, US and any other relevant personal tax residency rules.
Option 4: Separate IP Ownership from Operations
An IP company may be considered if the business has valuable software, trademarks, platform rights, source code or other intangible assets. However, this is a higher-risk and higher-complexity option. The free zone regime may treat ownership or exploitation of intellectual property assets as an excluded activity, and any IP license arrangements between related parties must be arm’s length.
This option should not be implemented without a valuation, IP ownership audit, contractor assignment review, transfer pricing study, VAT review and foreign withholding tax review.
Option 5: Family/Wealth Holding Vehicle
For long-term asset protection and succession planning, a family foundation or similar wealth vehicle may be considered. However, it should not operate the active business. Article 17 of the UAE Corporate Tax Law contemplates Family Foundations primarily for holding, investing, disbursing or managing savings, or investment assets, and not for conducting active business.
This option is more relevant after the operating structure, dividend policy and personal residency position are clarified.
14. Preliminary Corporate Structuring Recommendation
At this stage, the safest preliminary recommendation is not to restructure immediately. The company should first conduct a structured diagnostic review of its current position. That review should determine (i) whether the company is mainland or free zone, (ii) whether the current 9% Corporate Tax position is correct, (iii) whether any Qualifying Free Zone Person treatment is realistically available, (iv) whether any income involves IP ownership or exploitation, (v) where the company’s IP is legally owned and developed, (vi) whether the US partner companies are agents, resellers, principals, or payment processors, (vii) whether the company has sufficient UAE substance, (viii) whether there is any foreign permanent establishment or US tax exposure, (ix) whether related-party payments are arm’s length, and (x) where the shareholders are personally tax resident.
Only after that diagnostic review should the company decide whether to maintain the existing structure, introduce a UAE holding company, migrate or optimize free zone status, separate IP ownership, diversify banking, or implement a family wealth vehicle.
15. Preliminary Conclusion on Corporate Structuring Optimization
The current single UAE company structure may be acceptable, particularly if simplicity, compliance and payment continuity are priorities. The company is already registered for UAE Corporate Tax and paying 9%, which may reduce aggressive tax structuring concerns. However, the current structure may not be optimal from an asset protection, IP protection, banking diversification, substance or long-term wealth planning perspective.
The principal structuring opportunities are: confirming whether Ras Al Khaimah entity is mainland or free zone; assessing whether any free zone benefit is available; considering a UAE holding company to separate accumulated profits from operating risk; reviewing whether IP should remain in the operating company or be separately held; clarifying US partner and banking flows; and considering a family wealth vehicle for long-term succession and asset protection.
Any restructuring must be commercially justified and supported by substance, transfer pricing, VAT analysis and foreign tax review. The UAE Corporate Tax requires related-party transactions to be arm’s length, and the Corporate Tax Law confirms that transfer pricing rules apply to both domestic and cross-border transactions between Related Parties and Connected Persons. Therefore, the company should avoid artificial arrangements and instead adopt a structure that accurately reflects where functions are performed, where assets are held, where risks are assumed, and where management decisions are made.
I. Dividend and Distribution Planning
1. Preliminary Position
The Client has expressly requested advice on “dividend/distribution planning”. The current structure is a UAE company registered in Ras Al Khaimah, owned equally by the Client and his wife, both of whom hold Canadian passports and state that they are Canadian non-residents. The company generates approximately USD 2,000,000 (Two million United States Dollars) in annual revenue, has very low operating expenses, sells online cloud/storage and VPN-related digital services, has customers located outside the UAE, receives revenue primarily through US-based partner companies, and deposits funds into US bank accounts.
The distribution question should therefore be analyzed at two (2) levels. First, the company must determine how profits can be lawfully extracted from the UAE company under UAE Corporate Tax, VAT, accounting and corporate law principles. Second, the shareholders must determine how any dividends, salaries, management fees, loans, or other distributions will be taxed in their personal jurisdiction of tax residence. This second point is critical because the Client’s claimed Canadian non-resident position has not yet been independently verified.
The fact that the company currently pays 9% UAE Corporate Tax does not, by itself, answer the shareholder-level tax question. A UAE company may pay UAE Corporate Tax on its taxable income, but the subsequent extraction of after-tax profits to individual shareholders may still trigger personal tax consequences in Canada, the US, the UAE, or another jurisdiction depending on the shareholders’ tax residence, the source and character of the payment, and the route through which funds are paid.
2. Meaning of Dividend/Profit Distribution under UAE Corporate Tax
The UAE Corporate Tax regime adopts a broad understanding of dividends and profit distributions. The Corporate Tax Law defines a “Dividend” as any payment or distribution declared or paid on or in respect of shares or other rights participating in the profits of the issuer, provided it does not constitute a return of capital or a return on debt claims. This may include cash, securities, other property, distributions from profits, retained earnings, reserves, capital reserves, revenue reserves, or any payment or benefit that in substance constitutes a profit distribution, including arrangements with Related Parties or Connected Persons that do not comply with the arm’s length principle[133].
This broad definition is important. A distribution does not become something other than a dividend merely because it is labelled differently. If a payment is, in substance, a distribution of profits to shareholders, it may be treated as such. Conversely, if a payment is genuinely salary, management fee, reimbursement, loan repayment or interest, it must be supported by the correct legal and accounting documentation and should reflect the actual commercial arrangement.
Accordingly, any profit extraction plan should classify payments correctly from the outset. The company should avoid informal withdrawals, undocumented shareholder transfers, unexplained bank movements, personal expenses paid by the company, or “round-number” payments without supporting resolutions, invoices, employment/consultancy agreements or accounting entries.
3. UAE Corporate Tax Treatment of Dividends Received by UAE Companies
UAE Corporate Tax Law provides favorable treatment for dividends and profit distributions received by UAE corporate recipients. The Corporate Tax Law states that dividends and other profit distributions received from a UAE Resident Person are exempt from Corporate Tax, and that there are no additional conditions a taxable person must satisfy to benefit from this domestic dividend exemption. The law further explains that this reflects the distinction between payments made by a company to earn profits and distributions made out of profits already taxed under the Corporate Tax regime.
This rule is particularly relevant if the Client later introduces a UAE holding company above the current operating company. In such a structure, dividends paid by the UAE operating company to a UAE resident holding company may generally be exempt from UAE Corporate Tax in the hands of the UAE holding company, subject to the correct corporate and tax implementation. The law also confirms that the domestic dividend exemption covers distributions made by a resident Free Zone juridical person, whether qualifying or not, to another UAE Resident Person.
However, this exemption applies at the UAE corporate-recipient level. It does not automatically determine the tax treatment of dividends paid from the UAE company, or a UAE holding company, to the individual shareholders. The personal tax treatment of those dividends depends primarily on the shareholders’ personal tax residence and any applicable foreign tax rules.
4. Dividends from Foreign Subsidiaries and the Participation Exemption
If the structure is later expanded to include foreign subsidiaries, the UAE participation exemption may become relevant. The Corporate Tax Law states that dividends and other profit distributions received from foreign juridical persons may be exempt from UAE Corporate Tax if the UAE recipient has a “Participating Interest” in the foreign company. A Participating Interest generally requires, among other things, a 5% or greater ownership interest held, or intended to be held, for at least 12 months, entitlement to at least 5% of profits and liquidation proceeds, and satisfaction of a subject-to-tax requirement in the foreign jurisdiction.
This may become relevant if the UAE company or a future UAE holding company owns subsidiaries in the US, Canada, Europe or another jurisdiction. However, it is not the immediate issue under the current facts because the present structure appears to involve one UAE company owned directly by the two (2) individual shareholders.
The participation exemption should therefore be treated as a future structuring point, not as a current assumption. If foreign subsidiaries are added, the structure should be reviewed for foreign withholding tax, controlled foreign company rules, transfer pricing, economic substance, UAE participation exemption conditions, and whether the foreign entity is subject to tax at the required level.
5. UAE Withholding Tax on Dividends and other Payments
The UAE Corporate Tax Law contains a withholding tax framework, but the relevant rate is currently 0% unless another rate is specified by Cabinet decision. Article 45 provides that, certain categories of UAE State Sourced Income derived by a Non-Resident Person, where not attributable to a UAE permanent establishment, and any other income specified by the Cabinet decision, are subject to withholding tax at 0% or any other rate specified by Cabinet decision[134].
Accordingly, as a UAE law matter, dividends or other profit distributions from the UAE company to non-resident individual shareholders should not currently suffer UAE withholding tax, assuming the 0% rate remains applicable and no special rule applies. This is a positive feature of the UAE structure.
However, this should not be confused with the foreign tax position. The absence of UAE withholding tax does not mean that dividends are tax-free in the hands of the shareholders. If the Client or his wife is tax resident in Canada, the US, or another jurisdiction, that jurisdiction may tax dividends, salaries, management fees, interest or other amounts received from the UAE company. Therefore, the UAE withholding tax position is only one part of the distribution analysis.
6. Available Distribution Methods
There are several possible ways to extract value from the company. Each has different legal, tax, accounting and evidentiary consequences:
6.1 Dividends/ Profit Distributions
Dividends are the cleanest method of distributing after-tax profits to shareholders, provided that the company has sufficient distributable profits and the distribution is properly approved and documented. Dividends should generally be paid out of accounting profits/retained earnings after the company has accounted for UAE Corporate Tax and any other liabilities.
This method is usually preferable where the payment is genuinely a return on share ownership rather than remuneration for services. It is also easier to explain from a substance perspective because dividends are paid after profits are earned and taxed.
6.2 Salaries or Director/Management Remuneration
If either shareholder performs real work for the company, the company may pay salary, director fees, consultancy fees, or management remuneration. However, these payments must correspond to actual services, be commercially justified, and be documented. Under article 36 of the Corporate Tax Law, payments or benefits provided by a Taxable Person to a Connected Person are deductible only if, and to the extent that, the payment or benefit corresponds with the market value of the service or benefit provided and is incurred wholly and exclusively for the company’s business[135]. Connected Persons include an owner of the taxable person, a director or officer, and related parties of such persons.
Accordingly, if the shareholders are paid salaries or management fees, the amounts must be reasonable and supportable by reference to actual work performed. Excessive or unsupported payments may be challenged as non-deductible, recharacterized, or treated as disguised profit distributions.
6.3 Shareholder Loans
The company may also make or repay shareholder loans, provided that the loan is genuine, documented, commercially supportable and properly reflected in the accounts. If shareholders advanced funds to the company, repayments of principal may be different from dividends. However, if the company makes advances to shareholders without proper loan agreements, repayment terms, interest terms, board approval and accounting treatment, the payments may create tax, corporate law and audit concerns.
Interest payments, if any, also require analysis. The Corporate Tax Law defines “Interest” broadly to include amounts accrued or paid for the use of money or credit and other amounts economically equivalent to interest. Interest deductibility, related-party pricing and foreign tax treatment should therefore be reviewed before adopting a shareholder loan strategy.
6.4 Expense Reimbursements
The company may reimburse shareholders for expenses genuinely incurred on behalf of the company. However, reimbursements should be supported by receipts, invoices, business purpose evidence and approval records. Personal expenses should not be paid through the company unless properly treated as remuneration, dividend, loan or other taxable benefit.
6.5 Retained Earnings
The company may choose not to distribute profits immediately and instead retain earnings for business growth, reserves, investment, banking requirements, acquisitions, product development, or risk management. Given the digital and VPN-related nature of the business, retaining some profits in the business may be commercially sensible for chargebacks, regulatory risk, payment processor holds, legal expenses, cybersecurity, infrastructure costs and future expansion.
7. Dividends vs Salaries/Management Fees
The choice between dividends and salaries / management fees should be made carefully. Dividends are generally paid out of after-tax profits and are not deductible expenses of the company. Salaries, director fees or management fees may be deductible in calculating taxable income only if they are incurred wholly and exclusively for the company’s business and correspond to market value where paid to Connected Persons.
Because the Client and his wife own 100% of the company between them, any payments to them must be treated carefully. The FTA Corporate Tax General Guide explains that Connected Person rules capture a broader group than Related Parties and that payments or benefits to Connected Persons are deductible only to the extent they correspond with market value and are incurred wholly and exclusively for the taxable person’s business. The Guide gives the example that an owner’s salary may be deductible only insofar as it corresponds with market value, applying the arm’s length principle.
Accordingly, the company should not artificially reduce UAE taxable income by paying excessive management fees to the shareholders. If the shareholders are genuinely managing the business, a reasonable remuneration policy may be defensible. However, the company should maintain evidence of services performed, time spent, responsibilities, market benchmarks, board approval, and payment records.
8. Equal Shareholding and Distribution Policy
The company is owned equally by the Client and his wife. As a general corporate governance matter, dividends should therefore be declared and paid in accordance with the shareholders’ respective ownership rights, unless the constitutional documents or shareholder arrangements provide otherwise.
A formal distribution policy should be adopted. The policy should address:
a. when profits may be distributed;
b. minimum cash reserves to be retained in the Company;
c. whether distributions will be quarterly, semi-annual or annual;
d. whether UAE Corporate Tax and other liabilities must be provisioned before dividends;
e. whether U.S. partner-company funds or bank balances are subject to holds, reserves or chargebacks;
f. whether any working capital, refund, compliance or legal reserve is required;
g. whether dividends must be paid equally to both shareholders;
h. the approval process for each dividend; and
i. the documents required for each distribution.
This is particularly important because the company has high revenue and low operating expenses. Without a formal distribution policy, there is a risk that shareholder withdrawals appear informal, inconsistent or unsupported.
9. U.S. Banking and Payment Flow Considerations for Distributions
The company receives funds through U.S.-based partner companies and deposits funds into U.S. bank accounts. Before distributing profits, the company should determine whether funds held in U.S. accounts are subject to bank restrictions, payment processor reserves, withholding, reporting, chargeback obligations, contractual set-offs or compliance reviews.
If dividends are paid directly from U.S. bank accounts to the shareholders, the payment route should be documented to show that the funds belong to the UAE company and that the transfer is a corporate dividend or approved shareholder distribution. The company should avoid payments that appear to be direct U.S.-source income to the shareholders unless the legal and tax treatment is clear.
The company should also review whether any Forms 1042-S, withholding statements, W-8BEN-E forms, bank tax certifications or FATCA declarations have been issued in connection with the U.S. accounts or partner-company payments. If U.S. withholding tax is suffered on any income, Article 47 of the UAE Corporate Tax Law may allow a foreign tax credit against UAE Corporate Tax, subject to limitations and the requirement to maintain all necessary records.
10. VAT Considerations on Distributions and Related-Party Payments
Pure dividends are generally distributions of profit and should not normally be treated as consideration for a supply of goods or services. However, related-party service payments, management fees, IP licensing fees, consulting fees, cost-sharing arrangements or asset transfers may have VAT consequences.
The UAE VAT Law provides that each supply not considered a supply of goods is deemed a supply of services, including any provision of services as determined by the Executive Regulations. Therefore, if the shareholders or related entities provide services to the company and receive fees, the VAT treatment of those services must be considered separately from the dividend analysis.
The VAT Law also contains related-party market value rules. Article 36 provides that the value of supplies or importations of goods or services between Related Parties may be treated as equal to market value where the prescribed conditions are met. Accordingly, if the company pays related-party service fees, license fees or other consideration, the company should ensure that the consideration is commercially supportable and VAT treatment is correctly applied.
11. Canadian Personal Tax Considerations
The Canadian tax treatment of dividends or other distributions depends primarily on the shareholders’ personal tax residency. The Client and his wife state that they are Canadian non-residents, but this has not yet been verified. If they are genuinely non-residents of Canada, dividends from the UAE company may not be subject to Canadian tax unless another Canadian connecting factor exists. However, if either spouse is or becomes Canadian tax resident, Canada may tax worldwide income, including dividends, salaries, management fees or other distributions from the UAE Company.
This is a critical point. Dividend planning should not proceed merely on the basis of UAE tax efficiency. The company may be UAE-compliant, and there may be no UAE withholding tax, but the shareholders could still have personal tax exposure in Canada or another country if their tax residency position is not properly managed.
Accordingly, before any material distribution is made, the Client and his wife should obtain or confirm Canadian tax advice on their non-resident status, Canadian departure compliance, foreign affiliate reporting risk, and the taxation of dividends from the UAE Company if Canadian residence is challenged or re-established.
12. Timing of Distributions
Distributions should be timed carefully. The company should not distribute profits before confirming:
a. the Company’s taxable income and UAE Corporate Tax payable;
b. whether any tax payment is due within the statutory period;
c. whether there are adequate retained earnings or distributable profits;
d. whether U.S. bank accounts or partner-company balances are subject to holdbacks;
e. whether any foreign tax withholding has occurred;
f. whether there are pending refund, chargeback, customer or regulatory liabilities;
g. whether the shareholders’ personal tax residency position is clear; and
h. whether dividend resolutions and accounting entries are prepared.
Article 48 of the UAE Corporate Tax Law provides that a Taxable Person must settle Corporate Tax payable within nine months from the end of the relevant tax period, unless another date is determined by the Authority. Therefore, the Company should avoid distributing all available cash before tax liabilities are calculated and provisioned.
13. Documentation Required for Dividends
For each dividend or profit distribution, the Company should prepare and retain:
a. management accounts or annual financial statements showing available profits;
b. confirmation that UAE Corporate Tax liabilities have been calculated or provisioned;
c. board resolution recommending or approving the distribution, if required;
d. shareholder resolution approving the dividend, if required;
e. dividend voucher or distribution statement for each shareholder;
f. bank transfer records;
g. accounting entries showing the reduction of retained earnings;
h. confirmation that the dividend is paid in accordance with shareholding percentages;
i. any foreign tax forms or bank documentation required for the payment; and
j. evidence of the shareholders’ tax residence declarations at the time of payment.
This documentation is important for UAE tax, foreign tax, banking, audit, CRS/FATCA and future residency reviews.
14. Preliminary Recommended Distribution Approach
At this stage, the recommended approach is conservative:
First, the company should complete its UAE Corporate Tax computation and ensure that sufficient funds are reserved for UAE Corporate Tax, compliance costs, chargebacks, refunds, payment processor reserves and operating needs.
Second, the company should confirm whether any shareholder services are being provided and, if so, whether reasonable remuneration should be paid under properly documented employment, director or consultancy arrangements. Any such payments must comply with the Connected Person and market value requirements under Article 36 of the Corporate Tax Law.
Third, after the above steps, surplus after-tax profits may be distributed as dividends, provided that the Company has distributable profits and the shareholders’ personal tax position has been reviewed.
Fourth, material dividends should not be paid until the Client and his wife have confirmed their Canadian non-resident status and obtained foreign tax advice where necessary.
Fifth, if the company accumulates significant cash, the Client may consider introducing a UAE holding company or wealth-holding structure, but only after confirming that the restructuring is commercially justified, does not create unnecessary transfer pricing or VAT issues, and is aligned with the shareholders’ personal residency and asset protection planning.
15. Preliminary Conclusion on Dividend and Distribution Planning
The company should treat dividend and distribution planning as a combined UAE corporate tax, personal tax, foreign tax, banking and documentation exercise. From a UAE Corporate Tax perspective, dividends and profit distributions have a recognized treatment, and the UAE withholding tax rate is currently 0% under Article 45 unless another rate is specified. Dividends received by UAE corporate shareholders from UAE Resident Persons are generally exempt from Corporate Tax, which may support a future UAE holding company structure.
However, the most important risk is not UAE withholding tax. The key risk is whether the shareholders are genuinely non-residents of Canada, where they are personally tax resident, and whether payments labelled as salaries, fees or loans are commercially supportable. Payments to shareholder-owners, directors or related persons must be carefully reviewed under the UAE Connected Person rules and should correspond to market value where they are deducted by the company.
Accordingly, the recommended position is to distribute profits only through a formal, documented policy: first reserve for tax and business liabilities, then pay reasonable and documented remuneration only where services are genuinely provided, and finally distribute surplus after-tax profits as dividends in accordance with shareholding rights and after confirming the shareholders’ personal tax residency position.
Disclaimer / Scope Limitation
Please note that this Advice has been prepared on the basis of the instructions, information, and documents made available to me up to the date hereof. As instructed, my review and drafting work were discontinued before completion. Accordingly, this Advice remains incomplete, has not been finalized, and should not be treated as a comprehensive legal opinion on all matters originally contemplated or on any related issues which may require further review. I therefore reserve the right to supplement, amend, or revise the contents of this Advice should further instructions, documents, facts, or legal analysis become available or should I be instructed to complete the review.
[1] See ‘UAE_business_Lawyer_Summary’ as provided by the Client.
[2] See ‘UAE_Business_Lawyer_Summary’ as provided by the Client.
[3] See article 2.1 ‘Overview’ of Corporate Tax Guide | CTGGCT1 version September 2023.
[4] See ‘UAE_business_Lawyer_Summary’ as provided by the Client.
[5] See article 1 ‘Definitions’ of Corporate Tax Law, Taxable Person definition: “A Person subject to Corporate Tax in the State under this Decree-Law.”
[6] See article 1 ‘Definitions’ of Corporate Tax Law, Resident Person definition: “The Taxable Person specified in Clause 3 of Article 11 of this Decree-Law.”
[7] See article 1 of Corporate Tax Law, Non-Resident Person definition: “The Taxable Person specified in Clause 4 of Article 11 of this Decree-Law.”
[8] See article 1 ‘Definitions’ of Corporate Tax Law, Free Zone Person definition: “A juridical person incorporated, established or otherwise registered in a Free Zone, including a branch of a Non-Resident Person registered in a Free Zone.”
[9] See article 1 ‘Glossary’ of Corporate Tax Guide | CTGGCT1 version September 2023, Corporate Tax definition: “The tax imposed by the Corporate Tax Law on juridical persons and business income.”
[10] See article 1 ‘Definitions’ of VAT Law, Services definition: “Anything, other than Goods, which can be supplied.”
[11] See article 1 ‘Definitions’ of VAT Law, Exportation definition: “Taking Goods outside the State or providing Services to a person whose Business Establishment or Fixed Establishment is outside the State.”
[12] See article 1 ‘Definitions’ of VAT Law, Authority definition: “The Federal Tax Authority.”
[13] See ‘UAE_business_Lawyer_Summary’ as provided by the Client.
[14] See ‘UAE_business_Lawyer_Summary’ as provided by the Client.
[15] See article 1 ‘Definition’ of Corporate Tax Law, Permanent Establishment definition: “A place of Business or other form of presence in the State of a Non-Resident Person in accordance with Article 14 of this Decree-Law.”
[16] See article 1 ‘Glossary’ of Corporate Tax Guide | CTGGCT1 version September 2023, Foreign Permanent Establishment definition: “A place of Business or other form of presence outside the UAE of a Resident Person that is determined in accordance with the criteria prescribed in Article 14 of the Corporate Tax Law.”
[17] See article 1 ‘Glossary’ of Corporate Tax Guide | CTGGCT1 version September 2023, Dividend definition: “Any payments or distributions that are declared or paid on or in respect of shares or other rights participating in the profits of the issuer of such shares or rights which do not constitute a return of capital or a return on debt claims, whether such payments or distributions are in cash, securities, or other properties, and whether payable out of profits or retained earnings or from any account or legal reserve or from capital reserve or revenue. This will include any payment or benefit which in substance or effect constitutes a distribution of profits made in connection with the acquisition or redemption or cancellation of shares or termination of other ownership interests or rights or any transaction or arrangement with a Related Party or Connected Person which does not comply with Article 34 of the Corporate Tax Law.”
[18] See ‘UAE_business_Lawyer_Summary’ as provided by the Client.
[19] See article 1 ‘Definitions’ of Corporate Tax Law, Qualifying Free Zone Person definition: “A Free Zone Person that meets the conditions of Article 18 of this Decree-Law and is subject to Corporate Tax under Clause 2 of Article 3 of this Decree-Law.”
[20] See article 1 ‘Definitions’ of Corporate Tax Law, Exempt definition: “Any income exempt from Corporate Tax under this Decree-Law.”
[21] See article 47 ‘Foreign Tax Credit’ of Corporate Tax Law.
[22] See article 21 ‘Small Business Relief’ of Corporate Tax Law.
[23] See article 55 ‘Transfer Pricing Documentation’ of Corporate Tax Law.
[24] See article 1 ‘Definitions’ of Corporate Tax Law, Tax Group definition: “Two or more Taxable Persons treated as a single Taxable Person according to the conditions of Article 40 of this Decree-Law.”
[25] See article 3 ‘Rate of the Tax’ of VAT Law: “Subject to the provisions of Part VI of this Decree-Law, the standard rate of the tax to be levied on any supply or importation shall be (5%) in accordance with the provisions of Article (2) hereof based on the value of the supply or importation specified in accordance with the provisions of this Decree-Law.”
[26] See article 15 ‘Exemption from the Registration’ of VAT Law: “1. The Authority may exempt the Taxable Person, whether registered or unregistered, from the Tax Registration, upon their request, if their supplies are zero-rated only. 2. If any changes to the business of the Taxable Person who is exempted from the Tax Registration occur, pursuant to Clause (1) above, and lead, or would lead, to the elimination of the reason based on which they have been exempted, they shall notify the Authority of such changes within the time limits and according to the procedures identified by the Executive Regulations of this Decree-Law. 3. The Authority shall be entitled to collect the Due Tax and the Administrative Fines for the period of exemption if it found that the Taxable Person is not entitled to be exempted.”
[27] See ‘UAE_business_Lawyer_Summary’ as provided by the Client.
[28] See article 18 ‘Qualifying Free Zone Person’ of Corporate Tax Law: “1. A Qualifying Free Zone Person is a Free Zone Person that meets all of the following conditions: a) Maintains adequate substance in the State. b) Derives Qualifying Income as specified in a decision issued by the Cabinet at the suggestion of the Minister. c) Has not elected to be subject to Corporate Tax under Article 19 of this Decree-Law. d) Complies with Articles 34 and 55 of this Decree-Law. e) Meets any other conditions as may be prescribed by the Minister. 2. A Qualifying Free Zone Person that fails to meet any of the conditions under Clause 1 of this Article at any particular time during a Tax Period shall cease to be a Qualifying Free Zone Person from the beginning of that Tax Period. 3. Notwithstanding Clause 2 of this Article, the Minister may prescribe the conditions or circumstances under which a Person may continue to be a Qualifying Free Zone Person, or cease to be a Qualifying Free Zone Person from a different date. 4. The application of paragraph (a) of Clause 2 of Article 3 of this Decree-Law to a Qualifying Federal Decree-Law No. 47 of 2022 - Unofficial translation 22 Free Zone Person shall apply for the remainder of the tax incentive period stipulated in the applicable legislation of the Free Zone in which the Qualifying Free Zone Person is registered, which period may be extended in accordance with any conditions as may be determined in a decision issued by the Cabinet at the suggestion of the Minister, but any one period shall not exceed (50) fifty years.”
[29] See article 1 ‘Definitions’ of Corporate Tax Law, Business definition: “Any activity conducted regularly, on an ongoing and independent basis by any Person and in any location, such as industrial, commercial, agricultural, vocational, professional, service or excavation activities or any other activity related to the use of tangible or intangible properties.”
[30] See article 1 ‘Definitions’ of Corporate Tax Law, Business Activity definition: “Any transaction or activity, or series of transactions or series of activities conducted by a Person in the course of its Business.”
[31] See article 31 ‘Place of Supply of Telecommunication and Electronic Services’ of VAT Law: “The place of supply of telecommunications and electronic services stated in the Executive Regulations of this Decree-Law shall be as follows: a. Inside the State, if such services are used and enjoyed therein, to the extent of such use and enjoyment. b. Outside the State, if such services are used and enjoyed outside the State, to the extent of such use and enjoyment. The actual use and enjoyment of telecommunications and electronic services shall be where such services are used regardless of the place of contract or payment.”
[32] See article 5.3.2 ‘Effective management and control’ of Corporate Tax Guide | CTGGCT1 version September 2023: “Determining residence for Corporate Tax purposes solely on the basis of place of incorporation may not reflect the economic reality of where the business is actually managed or controlled. Accordingly, determination of residence for Corporate Tax purposes will take into account whether the juridical person incorporated or otherwise recognised in a foreign jurisdiction is effectively managed and controlled in the UAE, in line with tax regimes in other countries that apply the concepts of “central management and control” and “place of effective management” rules for this same purpose. Whether a juridical person is effectively managed and controlled in the UAE needs to be determined with regard to the specific facts and circumstances of the juridical person and its activities. A key factor is where key management and commercial decisions that are necessary for the conduct of the juridical person’s Business are in substance made. This could be the place where the highest level of decisions that are essential for the management of the juridical person are made, or where decisions that play a leading part in the management of a company from an economic and functional perspective are made. Typically, this will be where a company’s board of directors (or any equivalent body for other types of juridical persons) makes these decisions. However, depending on the specific facts and circumstances, other factors such as where the controlling shareholders make decisions, the location of another Person or body to which the board has delegated its decision-making powers, or the location where the board members or executive management of the juridical person reside may also need to be considered. It is important to note that there can only be one place of effective management and control at any one time. For a juridical person to be considered effectively managed and controlled in the UAE, it is not necessary for its board members (or equivalent) to be resident in the UAE.”
[33] See article 5.2 ‘Taxable Persons’ of Corporate Tax Guide | CTGGCT1 version September 2023: “Persons subject to Corporate Tax are known as Taxable Persons. Taxable Persons are either Resident Persons or Non-Resident Persons as defined under Article 11 of the Corporate Tax Law. In broad terms, Corporate Tax applies to: Juridical persons (such as corporations) that are incorporated in the UAE or foreign juridical persons that are effectively managed and controlled in the UAE (see Section 5.3.1); Non-resident juridical persons (foreign juridical entities) that have a Permanent Establishment in the UAE (see Section 5.4.1); Non-Resident Persons deriving State Sourced Income (see Section 5.4.3); Non-resident juridical persons that have a ‘nexus’ in the UAE by virtue of earning income from Immovable Property in the UAE (see Section 5.4.4); and Natural persons who conduct Business or Business Activities in the UAE and have a Turnover of over AED 1,000,000 per Gregorian calendar year from such Business or Business Activities (see Section 5.3.3).”
[34] See article 5.3.1 ‘Resident juridical person’ of Corporate Tax Guide | CTGGCT1 version September 2023: “Examples of juridical persons that are incorporated or otherwise established or recognised in the UAE include Joint Liability Companies, Limited Partnership Companies, Limited Liability Companies (LLCs), Public Joint Stock Companies (PJSCs), Private Joint Stock Companies (PJSCs), foundations, trusts that have been established under the UAE mainland legislation, and other entity forms that have a separate legal personality under the applicable UAE mainland legislation or Free Zone regulations. UAE branches of a domestic or foreign juridical person are regarded as an extension of their head office and, therefore, are not considered separate juridical persons.”
[35] See article 1 ‘Glossary’ of Corporate Tax Guide | CTGGCT1 version September 2023, Qualifying Income definition: “Any income derived by a Qualifying Free Zone Person that is subject to Corporate Tax at the rate specified in Article (3)(2)(a) of the Corporate Tax Law.”
[36] See article 5.5 ‘Free Zone Persons’ of Corporate Tax Guide | CTGGCT1 version September 2023: “When a Free Zone Person meets certain conditions, it will be considered as a Qualifying Free Zone Person and is eligible for a 0% Corporate Tax rate on its Qualifying Income.41 The 0% Corporate Tax rate is available to Qualifying Free Zone Persons until the expiry of the tax incentive period provided for in the legislation of the relevant Free Zone (unless renewed).[…]”
[37] See article 5.5.1 ‘Qualifying Income’ of Corporate Tax Guide | CTGGCT1 version September 2023: “Qualifying Income is the income that can benefit from the 0% Corporate Tax rate. Unlike ordinary Taxable Persons, Qualifying Free Zone Persons are not entitled to a 0% rate on their first AED 375,000 of Taxable Income that is not considered as Qualifying Income. Therefore, any Taxable Income that is not Qualifying Income will be taxed at the general rate of 9% (see Section 9.2.2).[…]”
[38] See article (3)2 ‘Corporate Tax Rate’ of Corporate Tax Law: “2. Corporate Tax shall be imposed on a Qualifying Free Zone Person at the following rates: a) 0% (zero percent) on Qualifying Income. b) 9% (nine percent) on Taxable Income that is not Qualifying Income under Article 18 of this Decree-Law and any decision issued by the Cabinet at the suggestion of the Minister in respect thereof.”
[39] See article 5.5 ‘Free Zone Persons’ of Corporate Tax Guide | CTGGCT1 version September 2023: “[…]
In order to be considered as a Qualifying Free Zone Person, a Free Zone Person must meet the following requirements: derive Qualifying Income from relevant transactions (see Section 5.5.1); maintain adequate substance in the UAE (see Section 5.5.4); satisfy the de minimis requirement (see Section 5.5.5); have not elected to be subject to Corporate Tax (see Section 5.5.6); comply with the transfer pricing rules and documentation requirements under the Corporate Tax Law; and prepare and maintain audited Financial Statements for the purposes of the Corporate Tax Law. The Minister may prescribe additional conditions to be met by a Free Zone Person in order to be considered as a Qualifying Free Zone Person.
[…]”
[40] See article 5.5.5 ‘The de minimis requirement’ of Corporate Tax Guide | CTGGCT1 version September 2023: “The de minimis requirement allows a Qualifying Free Zone Person to earn a small or incidental amount of non-qualifying Income without being disqualified from the Free Zone Corporate Tax regime.”
[41] See article 5.5.4 ‘Adequate substance requirement’ of Corporate Tax Guide | CTGGCT1 version September 2023: “To meet the adequate substance requirements, a Free Zone Person must have their core-income generating activities (e.g. the activities that are of central importance) performed within the Free Zone, these can be undertaken by the Free Zone Person or outsourced to a Related Party or third party who is located in a Free Zone. The Qualifying Free Zone Person must also have adequate supervision over any activities that are outsourced to a Free Zone Related Party or third party.”
[42] See article 5.5.4 ‘Adequate substance requirement’ of Corporate Tax Guide | CTGGCT1 version September 2023: “As businesses vary, ‘adequate substance’ is determined on a case-by-case basis, following the test criteria. This may include the number of qualified full-time employees, adequate operating expenditure and physical assets. In any case, the analysis also takes into account the nature and level of activities performed by the Qualifying Free Zone Person, the Qualifying Income earned, and any other relevant facts and circumstances.”
[43] See article 4 ‘De Minimis Requirements’ of Ministerial Decision No. 139 of 2023: “For the purposes of Article (4) of Cabinet Decision No. 55 of 2023 referred to above, the de minimis requirements shall be considered satisfied where the non-qualifying Revenue derived by the Qualifying Free Zone Person in a Tax Period does not exceed 5% (five percent) of the total Revenue of the Qualifying Free Zone Person in that Tax Period or AED 5,000,000 (five million dirhams), whichever is lower.”
[44] See article 1 ‘Glossary’ of Corporate Tax Guide | CTGGCT1 version September 2023, Financial Statements definition: “A complete set of statements as specified under the Accounting Standards applied by the Taxable Person, which includes, but is not limited to, statement of income, statement of other comprehensive income, balance sheet, statement of changes in equity and cash flow statement.”
[45] See article 5(1)(b) of Ministerial Decision No. 139 of 2023: “It prepares audited financial statements in accordance with any decision issued by the Minister on the requirements to prepare and maintain audited financial statements for the purposes of the Corporate Tax Law.”
[46] See article 2(1) of the Ministerial Decision No. 84 of 2025: “It prepares audited financial statements in accordance with any decision issued by the Minister on the requirements to prepare and maintain audited financial statements for the purposes of the Corporate Tax Law.”
[47] See article 34(2) ‘Arm’s Length Principle’ of Corporate Tax Law: “A transaction or arrangement between Related Parties meets the arm’s length standard if the results of the transaction or arrangement are consistent with the results that would have been realised if Persons who were not Related Parties had engaged in a similar transaction or arrangement under similar circumstances.”
[48] See article 24(7) ‘Foreign Permanent Establishment Exemption’ of Corporate Tax Law: “7. The exemption under Clause 1 of this Article shall only apply to a Foreign Permanent Establishment that is subject to Corporate Tax or a tax of a similar character under the applicable legislation of the relevant foreign jurisdiction at a rate not less than the rate specified in paragraph (b) of Clause 1 of Article 3 of this Decree Law.”
[49] See article 45(1) ‘Withholding Tax’ of Corporate Tax Law: “1. The following income shall be subject to Withholding Tax at the rate of 0% (zero percent) or any other rate as specified in a decision issued by the Cabinet at the suggestion of the Minister: a) The categories of State Sourced Income derived by a Non-Resident Person as prescribed in the decision issued by the Cabinet pursuant to this Article, insofar such income is not attributable to a Permanent Establishment of the Non-Resident Person in the State. b) Any other income as specified in a decision issued by the Cabinet at the suggestion of the Minister.”
[50] See article 56 ‘Record Keeping’ of Corporate Tax Law: “1. Notwithstanding the provisions of the Tax Procedures Law, a Taxable Person shall maintain all records and documents for a period of (7) seven years following the end of the Tax Period to which they relate that: a) Support the information to be provided in a Tax Return or in any other document to be filed with the Authority. b) Enable the Taxable Person’s Taxable Income to be readily ascertained by the Authority. 2. Notwithstanding the provisions of the Tax Procedures Law, an Exempt Person shall maintain all records that enable the Exempt Person’s status to be readily ascertained by the Authority for a period of (7) seven years following the end of the Tax Period to which they relate.”
[51] See article 1 ‘Definitions’ of VAT Law, Value-added Tax (VAT) definition: “A tax levied on the importation and supply of goods and services at every stage of production and distribution, including the deemed supply.”
[52] See article 1 ‘Definitions’ of VAT Law, Goods definition: “Tangible properties which can be supplied, including real property, water and all types of energy, as defined by the Executive Regulations of this Decree Law.”
[53] See article 1 ‘Definitions’ of VAT Law, Services definition: “Anything, other than Goods, which can be supplied.”
[54] See article 1 ‘Definitions’ of VAT Law, Applying State definition: “The GCC States which apply the Tax law under a legislative instrument issued thereby, and as defined by the Executive Regulations of this Decree-Law.”
[55] See article 30 ‘Place of Supply in Special Cases’ of VAT Law: “Notwithstanding the provisions of Article (29) of this Decree-Law, the place of supply in special cases shall be as follows: 1. If the Recipient has a place of residence in an Applying State and is registered for the tax purposes therein, the place of supply shall be the place of residence of the Recipient. 2. If the Recipient is a Person practicing the Business and has a place of residence in the State, and the supplier does not have a place of residence in the State, the place of supply shall be in the State. 3. In case of the supply of Services related to Goods, such as the Services of installation related to Goods supplied by others, the place of supply shall be the place where such Services are performed. 4. If the supply is leasing means of transport to a lessee who is a Untaxable Person in the State and does not have a Tax Registration Number in an Applying State; the place of supply shall be the place where such means of transport are made available to the lessee. 5. In case of the supply of restaurant, hotel, and food and drink catering services; the place of supply shall be the place where such Services are actually performed. 6. In case of the supply of any cultural, artistic, sporting or educational Services or any similar Services; the place of supply shall be the place where such services are performed. 7. In case of the supply of Services related to a real property, as determined by the Executive Regulations of this Decree-Law, the place of supply shall be the place where such real property is located. 8. In case of the supply of transport Services or transport-related services, the place of supply shall be where the transport starts. The Executive Regulations of this Decree-Law shall determine the place of supply of transport services if the trip includes more than one stop.”
[56] See article 1 ‘Definitions’ of VAT Law, Exempted Supply definition: “The supply of Goods or Services for a Consideration during the practice of the Business within the State, which shall not be taxed and the input tax levied on may not be refunded except under the provisions of this Decree-Law.”
[57] See article 13 ‘Mandatory Tax Registration’ of VAT Law: “1. Every Person who has a Place of Residence in the State or in one of the Applying States shall register for the Tax if: a. The value of the supplies set forth in Article (19) hereunder exceeds, during the previous (12) twelve-month period, the Mandatory Registration Threshold; or b. It is expected that the value of the supplies set forth in Article (19) hereunder will exceed the Mandatory Registration Threshold during the next (30) thirty days. 2. Every Person who does not have a Place of Residence in the State or in one of the Applying States shall register for the Tax if such Person makes supplies of Goods or Services and no other Person obligated to pay the Due Tax for such supplies is in the State. 3. The Executive Regulations of this Decree-Law shall determine the time limits during which the Person shall notify the Authority of the necessity to register for the Tax and the effective date of the Tax Registration.”
[58] See article 15(3) ‘Exemption from the Registration’ of VAT Law: “3. The Authority shall be entitled to collect the Due Tax and the Administrative Fines for the period of exemption if it found that the Taxable Person is not entitled to be exempted.”
[59] See article 1.8 ‘Meaning of ordinarily resident’ of Income Tax Folio S5-F1-C1, Determining an Individual’s Residence Status: “1.8 To determine residence status, all of the relevant facts in each case must be considered, including residential ties with Canada and length of time, object, intention and continuity with respect to stays in Canada and abroad.”
[60] See article 1.10 ‘Residential ties in Canada’ of Income Tax Folio S5-F1-C1, Determining an Individual’s Residence Status: “1.10 The most important factor to be considered in determining whether an individual leaving Canada remains resident in Canada for tax purposes is whether the individual maintains residential ties with Canada while abroad. While the residence status of an individual can only be determined on a case by case basis after taking into consideration all of the relevant facts, generally, unless an individual severs all significant residential ties with Canada upon leaving Canada, the individual will continue to be a factual resident of Canada and subject to Canadian tax on his or her worldwide income.”
[61] See article 1.11 ‘Significant residential ties’ of Income Tax Folio S5-F1-C1, Determining an Individual’s Residence Status: “1.11 The residential ties of an individual that will almost always be significant residential ties for the purpose of determining residence status are the individual's: dwelling place (or places); spouse or common-law partner; and dependants.”
[62] See article 1.14 ‘Secondary residential ties’ of Income Tax Folio S5-F1-C1, Determining an Individual’s Residence Status: “1.14 Generally, secondary residential ties must be looked at collectively in order to evaluate the significance of any one such tie. For this reason, it would be unusual for a single secondary residential tie with Canada to be sufficient on its own to lead to a determination that an individual is factually resident in Canada while abroad. Secondary residential ties that will be taken into account in determining the residence status of an individual while outside Canada are: personal property in Canada (such as furniture, clothing, automobiles, and recreational vehicles); social ties with Canada (such as memberships in Canadian recreational or religious organizations); economic ties with Canada (such as employment with a Canadian employer and active involvement in a Canadian business, and Canadian bank accounts, retirement savings plans, credit cards, and securities accounts); landed immigrant status or appropriate work permits in Canada; hospitalization and medical insurance coverage from a province or territory of Canada; a driver's license from a province or territory of Canada; a vehicle registered in a province or territory of Canada; a seasonal dwelling place in Canada or a leased dwelling place referred to in 1.12; a Canadian passport; and memberships in Canadian unions or professional organizations.”
[63] See article 1.17 ‘Evidence of intention to permanently sever residential ties’ of Income Tax Folio S5-F1-C1, Determining an Individual’s Residence Status: “1.17 Whether an individual intended to permanently sever residential ties with Canada at the time of his or her departure from Canada is a question of fact to be determined with regard to all of the circumstances of each case. Although length of stay abroad is one factor to be considered in making this determination (that is, as evidence of the individual's intentions upon leaving Canada), the Courts have indicated that there is no particular length of stay abroad that necessarily results in an individual becoming a non-resident. Generally, if there is evidence that an individual's return to Canada was foreseen at the time of his or her departure, the CRA will attach more significance to the individual's remaining residential ties with Canada (see 1.11 to 1.15), in determining whether the individual continued to be a factual resident of Canada subsequent to his or her departure. For example, where, at the time of an individual's departure from Canada, there exists a contract for employment in Canada if and when the individual returns to Canada, the CRA will consider this to be evidence that the individual's return to Canada was foreseen at the time of departure. However, the CRA would have to review each individual's situation on a case-by-case basis to determine whether the individual's remaining residential ties with Canada, including the contract of employment, are sufficient to conclude that the individual continues to be resident in Canada.”
[64] See ‘Who is considered an emigrant’ on https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/individuals-leaving-entering-canada-non-residents/leaving-canada-emigrants.html: “Generally, you are an emigrant for income tax purposes if you meet all the following conditions: You leave Canada to live in another country; You sever your residential ties with Canada. Severing your residential ties with Canada means that you do not keep your main ties with Canada. This could be your case if: You dispose of or give up your home in Canada and establish a permanent home in another country, or Your spouse or common-law partner or dependants leave Canada, or You dispose of personal property and break social ties in Canada and acquire or establish them in another country. If you leave Canada and keep residential ties in Canada, you are usually considered a factual resident of Canada and not an emigrant. However, if you are also considered to be a resident of another country with which Canada has a tax treaty, you may be considered a deemed non-resident of Canada. Deemed non-residents are subject to the same rules as emigrants.”
[65] See ‘Deferring the tax owing’ on https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/individuals-leaving-entering-canada-non-residents/dispositions-property.html: “You can elect to defer the payment of tax on income relating to the deemed disposition of property (departure tax), regardless of the amount. You would then pay the tax later, without interest, when you sell (or otherwise dispose of) the property. This election does not apply to the deemed disposition of an employee benefit plan. To make this election, complete Form T1244, Election, under Subsection 220(4.5) of the Income Tax Act, to Defer the Payment of Tax on Income Relating to the Deemed Disposition of Property. You must make this election by April 30 of the year after you emigrate from Canada. If you make this election and the amount of federal tax owing on income from the deemed disposition of property is more than $16,500 (more than $13,777.50 for former residents of Quebec), you have to provide adequate security to cover the amount. You may also be required to provide security to cover any applicable provincial or territorial tax payable. Contact the CRA as soon as possible to make acceptable arrangements before April 30.”
[66] See “T1243 Deemed Disposition of Property by an Emigrant of Canada” on https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t1243.html
[67] See ‘Electing under section 217 of the Income Tax Act’ on https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/individuals-leaving-entering-canada-non-residents/leaving-canada-emigrants.html: “If you receive certain types of income from Canada after you leave, the Canadian payer has to withhold non‑resident tax on the income and send it to the CRA. The tax withheld is usually your final tax obligation to Canada on this income. However, you could benefit from choosing to elect under section 217 to include this income on your return.”
[68] See ‘Registered Retirement Savings Plan (RRSP) on https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/registered-retirement-savings-plan-rrsp.html: “An RRSP is a retirement savings plan that you establish, that the CRA registers, and to which you or your spouse or common-law partner contribute. Deductible RRSP contributions can be used to reduce your tax. Any income you earn in the RRSP is usually exempt from tax as long as the funds remain in the plan. You generally have to pay tax when you receive payments from the plan.”
[69] See ‘Registered Retirement Income Fund (RRIF)’ on https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/registered-retirement-income-fund-rrif.html: “A registered retirement income fund (RRIF) is an arrangement between you and a carrier (an insurance company, a trust company or a bank) that the CRA has registered. You transfer property to your RRIF carrier from an RRSP, a PRPP, an RPP, an SPP, from another RRIF, or from an FHSA and the carrier makes payments to you. The minimum amount must be paid to you in the year following the year the RRIF is entered into. Earnings in a RRIF are tax-free and amounts paid out of a RRIF are taxable on receipt. You can have more than one RRIF and you can have self-directed RRIFs. The rules that apply to self-directed RRIFs are generally the same as those for RRSPs. For more information, refer to Self-directed RRSPs.”
[70] See ‘Foreign Income Verification Statement’ on https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/information-been-moved/foreign-reporting/foreign-income-verification-statement.html: “The objectives of this reporting requirement are: 1. to enhance compliance with tax laws that require reporting of foreign-source income; 2. to increase taxpayers' awareness of these laws; 3. to provide information to the Canada Revenue Agency (CRA) for the purpose of verifying taxpayers' compliance with these laws; 4. to better target international tax evasion and aggressive tax avoidance. Who has to report? Form T1135, Foreign Income Verification Statement, must be filed by: Canadian resident individuals, corporations, and certain trusts that, at any time during the year, own specified foreign property costing more than $100,000; and certain partnerships that hold more than $100,000 of specified foreign property”
[71] See ‘Filing deadline’ on https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/information-been-moved/foreign-reporting/foreign-income-verification-statement.html: “Individuals, corporations and trusts – Form T1135 is due on the same date as the income tax return. Partnerships – Form T1135 is due on the same date as the partnership information return under section 229 of the Income Tax Regulations (or what would be the due date for this return if the partnership had to file one).”
[72] See ‘Do you have to file a return?’ on https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/information-been-moved/foreign-reporting/information-returns-relating-foreign-affiliates.html: “Form T1134 consists of a summary and supplements. A separate supplement must be filed for each foreign affiliate (non-resident corporation or non-resident trust) of the taxpayer or partnership that is at any time in the year either of the following: controlled foreign affiliate; or non-controlled foreign affiliate. Only the lowest-tiered Canadian corporation has to report on its foreign affiliate. For example, if Canco 1 owns 100% of the shares of Canco 2 and if Canco 2 owns 100% of the shares of Foreignco 1, only Canco 2 has to report, even though Foreignco 1 is a foreign affiliate of Canco 1. A non-resident trust that is considered to be resident under section 94 of the Income Tax Act for purposes of Part I (discretionary trust) is also considered resident for purposes of the foreign affiliate reporting rules. As a result, such a trust may have to file Form T1134.”
[73] See ‘Does Form T1134 have to be filed for a foreign affiliate in each of the following situation?’ on https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/information-been-moved/foreign-reporting/questions-answers-about-form-t1134.html: “the foreign affiliate does not have a tax year ending in the reporting taxpayer's tax year; the foreign affiliate has been sold before its tax year-end; the foreign affiliate is acquired or formed in the year and has not had a tax year end in the reporting taxpayer's tax year; the foreign affiliate stops being a controlled foreign affiliate before the end of the reporting taxpayer's tax year. To ensure an accurate record of the history of the foreign affiliate and transparency of offshore structures, filing is required in all of the above situations. The legislative requirement is that Form T1134 must be filed if the non-resident corporation or trust is either a foreign affiliate or a controlled foreign affiliate at any time during the reporting taxpayer's tax year. It is recognized that, in certain situations, the amount of information to be filed will be minimal. For instance, this is the case if the corporation or trust stops being a controlled foreign affiliate before the end of the reporting taxpayer's tax year. Another example is if the foreign affiliate hasn't prepared financial statements because the reporting taxpayer's year end is before the foreign affiliate's year end. If the required information isn't available, the reporting taxpayer must complete the disclosure section of the form to comply with the requirements of the due diligence exception.”
[74] See ‘Residency of a corporation’ on https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/businesses-international-non-resident-taxes/residency-a-corporation.html: “The ITA does not define residency. Generally, the CRA determines a corporation's residency using common-law principles. In addition, there are statutory provisions that deem a corporation to be either resident or non-resident under certain circumstances. A corporation can be resident in Canada without being a Canadian corporation. To determine if a corporation is resident in Canada, the CRA first considers the deeming provisions of the ITA.”
[75] See ‘Persons subject to Chapter 3 or Chapter 4 withholding of the Internal Revenue Code (IRC)’ on https://www.irs.gov/individuals/international-taxpayers/tax-withholding-types: “Chapter 3 withholding under IRC sections 1441-1443 generally applies a 30% statutory rate of withholding to payments of FDAP income or gains from U.S. sources but only if the payments are not effectively connected with a U.S. trade or business and are paid to a payee that is a foreign person. It does not apply to payments made to U.S. persons, except in certain cases in which the U.S. person acts as an agent for a foreign person. Usually, the payee's classification and status as a U.S. or foreign person is determined based on the documentation that the payee provides to the withholding agent. See the Documentation section in Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities. However, if the withholding agent receives no documentation or cannot reliably associate all or a part of a payment with valid documentation, then the withholding agent must apply certain presumption rules to make these determinations. If the withholding agent fails to withhold, the withholding agent may be held liable for the tax, plus any applicable penalties and interest. See section 1461. To the extent the tax is paid by the foreign person, the withholding tax will not be collected from the withholding agent. However, this does not relieve the withholding agent from liability of any applicable penalties and interest. See section 1463.”
[76] See ‘Persons subject to Chapter 3 or Chapter 4 withholding of the Internal Revenue Code (IRC)’ on https://www.irs.gov/individuals/international-taxpayers/tax-withholding-types: “Chapter 4 withholding requires a withholding agent to withhold 30% on withholdable payments made to an entity that is a Foreign Financial Institution (FFI) unless the withholding agent is able to treat the FFI as a participating FFI, deemed-compliant FFI, or exempt beneficial owner. Chapter 4 withholding also applies to withholdable payments made to an entity that is a passive non-financial foreign entity (NFFE) that fails to identify its substantial U.S. owners (or to certify that it does not have any substantial U.S. owners). You must establish the payee’s chapter 4 status to determine if withholding applies by applying the documentation requirements of chapter 4, generally by obtaining a Form W-8 (or, under an applicable Intergovernmental Agreement (IGA), a similar agreed form) associated with the payment, or other documentation for payments made outside of the U.S. with respect to offshore obligations. See Treasury regulations section 1.1471-3(d) for details on these documentation requirements. Withholding under chapter 4 may also apply to account holders of a participating FFI or registered deemed-compliant FFI that the FFI is required to treat as recalcitrant account holders. The section titled "Persons Subject to Chapter 3 or Chapter 4 Withholding" in Publication 515 applies to both chapters 3 and 4, except where otherwise indicated and except where the text clearly applies to one or the other (e.g., reduced rates and exemptions under income tax treaties).”
[77] See ‘Purpose of Form’ on https://www.irs.gov/instructions/iw8bene: “This form is used by foreign entities to document their statuses for purposes of chapter 3 and chapter 4, as well as for certain other Code provisions as described later in these instructions. Foreign persons are subject to U.S. tax at a 30% rate on income they receive from U.S. sources that consists of: Interest (including certain original issue discount (OID)); Dividends; Rents; Royalties; Premiums; Annuities; Compensation for, or in expectation of, services performed; Substitute payments in a securities lending transaction; or Other fixed or determinable annual or periodical gains, profits, or income.”
[78] See ‘Who Must Provide Form W-8BEN-E’ on https://www.irs.gov/instructions/iw8bene: “You must give Form W-8BEN-E to the withholding agent or payer if you are a foreign entity receiving a withholdable payment from a withholding agent, receiving a payment subject to chapter 3 withholding, or if you are an entity maintaining an account with an FFI requesting this form.”
[79] See ‘Effectively connected income (ECI)’ on https://www.irs.gov/individuals/international-taxpayers/effectively-connected-income-eci: “Generally, when a foreign person engages in a trade or business in the United States (USTB), all income from sources within the United States (U.S.) connected with the conduct of that trade or business is considered to be Effectively Connected Income (ECI). Generally, a foreign person must be engaged in a U.S. trade or business during the tax year to be able to treat income received in that year as ECI, which is taxable in the U.S. A foreign person can be a nonresident alien (NRA) or a foreign corporation. If a foreign person owns and operates a business in the U.S. selling services, products, or merchandise, the foreign person is, with certain exceptions, engaged in a trade or business in the U.S. For example, profit from the sale in the U.S. of inventory property purchased either in the U.S. or in a foreign country is effectively connected trade or business income. This applies whether or not there is any connection between the income and the trade or business being carried on in the U.S. during the tax year. If the USTB sells inventory, the resulting income is clearly ECI. If a foreign corporation’s head office, which is located in another country, also directly sells inventory to U.S. customers, without involvement by the USTB, that income may also be ECI if title to the inventory passes in the U.S.”
[80] See ‘Effectively connected income (ECI)’ on https://www.irs.gov/individuals/international-taxpayers/effectively-connected-income-eci: “Foreign persons generally are engaged in a U.S. trade or business when personal services are performed in the U.S. However, the business activities must be “considerable, continuous and regular” to qualify as a USTB.”
[81] See ‘Effectively connected income (ECI)’ on https://www.irs.gov/individuals/international-taxpayers/effectively-connected-income-eci: “If a foreign person is a member of a partnership that at any time during the tax year is engaged in a trade or business in the U.S., then the foreign person is considered to be engaged in a trade or business in the U.S.”
[82] See ‘Withholding exemption on effectively connected income’ on https://www.irs.gov/individuals/international-taxpayers/withholding-exemption-on-effectively-connected-income: “Generally, if you are not a partnership, you do not need to withhold tax on ECI income (income which is effectively connected with a U.S. trade or business) if you receive a Form W-8 ECI on which a foreign payee represents that: The foreign payee is the beneficial owner of the income, The income is effectively connected with the conduct of a trade or business in the United States, and The income is includible in the payee's gross income. The W-8 ECI must include the payee’s U.S. TIN. Income effectively connected with the conduct of a trade or business in the United States is not a withholdable payment under chapter 4 and thus is not subject to withholding under FATCA. This withholding exemption also applies to income for services performed by a foreign partnership or foreign corporation (unless item (4) below applies to the corporation).”
[83] See ‘Withholding on payments of US source income to foreign persons under IRC 1441 to 1443 (Form 1042)’ on https://www.irs.gov/individuals/international-taxpayers/nra-withholding: “Generally, a foreign person is subject to U.S. tax on its U.S. source income. Most types of U.S. source income received by a foreign person are subject to U.S. tax of 30%. A reduced rate, including exemption, may apply if an Internal Revenue Code Section provides for a lower rate, or there is a tax treaty between the foreign person's country of residence and the United States. The tax is generally withheld (NRA withholding) from the payment made to the foreign person. The term NRA withholding is used in this area descriptively to refer to withholding required under sections 1441, 1442, and 1443 of the Internal Revenue Code. Generally, NRA withholding describes the withholding regime that requires 30% withholding on a payment of U.S. source income and the filing of Form 1042 and related Form 1042-S. Payments to all foreign persons, including nonresident alien individuals, foreign entities and governments, may be subject to NRA withholding In referring to NRA withholding in this area, it does not include withholding done under section 1445 of the Internal Revenue Code, dealing with Withholding of Tax on Dispositions of U.S. Real Property Interests (FIRPTA), or under section 1446 of the Internal Revenue Code, dealing with Withholding Tax on Foreign Partners’ Share of Effectively Connected Income (Partnership Withholding) or withholding under section 1446(f) on disposition of certain partnership interests.”
[84] See ‘Fixed, determinable, annual, or periodical (FDAP) income’ on https://www.irs.gov/individuals/international-taxpayers/fixed-determinable-annual-or-periodical-fdap-income: “Fixed, determinable, annual, or periodical (FDAP) income is all income except: Gains derived from the sale of real or personal property (including market discount and option premiums but not including original issue discount); and Items of income excluded from gross income, without regard to the United States (U.S.) or foreign status of the owner of the income, such as tax-exempt municipal bond interest and qualified scholarship income. Income is fixed when it is paid in amounts known ahead of time. Income is determinable whenever there is a basis for figuring the amount to be paid. Income can be periodic if it is paid from time to time. It does not have to be paid annually or at regular intervals. Income can be determinable or periodic, even if the length of time during which the payments are made is increased or decreased.”
[85] TIN definition: Tax Identification Number.
[86] EIN definition: Employer Identification Number.
[87] See ‘Foreign Account Tax Compliance Act (FATCA)’ on https://www.irs.gov/businesses/corporations/foreign-account-tax-compliance-act-fatca: “The Foreign Account Tax Compliance Act (FATCA), which was passed as part of the HIRE Act, generally requires that foreign financial Institutions and certain other non-financial foreign entities report on the foreign assets held by their U.S. account holders or be subject to withholding on withholdable payments. The HIRE Act also contained legislation requiring U.S. persons to report, depending on the value, their foreign financial accounts and foreign assets.”
[88] See ‘FATCA information for US financial institutions and entities’ on https://www.irs.gov/businesses/corporations/fatca-information-for-united-states-entities: “U.S. financial institutions (USFIs) and other types of U.S. withholding agents are required to withhold 30% on certain U.S. source payments made to foreign entities, if they are unable to document such entities for purposes of FATCA. Forms 1042 PDF, 1042-S, and Form 1042-T PDF are used to report amounts withheld under chapter 3 or chapter 4. See current Form 1042 instructions PDF, Form 1042-S instructions PDF, Publication 1187 PDF, and excise tax on federal foreign procurement payments for filing these forms. USFIs and U.S. withholding agents must also report to the IRS information about certain non-financial foreign entities with substantial U.S. owners. USFIs are also eligible to submit a FATCA registration application via the FATCA registration website for the following reasons: A USFI with a foreign branch in a Model 1 IGA jurisdiction to obtain a GIIN for the branch. A USFI with a foreign branch that is a qualifying intermediary (QI) to renew the branch's QI agreement. A USFI may register as a sponsoring entity for FFIs and agree to perform, on behalf of the FFI, all the FATCA activities that the FFI otherwise would have to do. A USFI may register as a Lead FI to manage the FATCA registration process for members of its expanded affiliated group of FFIs.”
[89] See ‘South Dakota v. Wayfair, Inc.’ on https://www.supremecourt.gov/opinions/17pdf/17-494_j4el.pdf: “Each year, the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the States.”
[90] See ‘Widespread adoption of sales tax economic nexus law’ on https://www.pwc.com/us/en/services/tax/assets/pwc-salt-tax-insight-wayfair-5-years-later.pdf: “Post-Wayfair, it is not surprising that states and localities began enacting sales tax economic nexus laws and issuing guidance similar to South Dakota’s. In fact, in anticipation of the Wayfair decision, some states had laws in place or on hold that were in direct conflict with Quill; thus, once the Supreme Court ruled, those states could begin enforcing economic nexus. For example, New York Tax Law Section 1101(b)(8)(iv) established sales tax economic nexus standards that had sat dormant for almost 30 years until the Wayfair ruling. Months after Wayfair, New York issued guidance notifying taxpayers of its intent to enforce the dormant provisions, effective back to the date of the Wayfair decision.”
[91] SaaS definition: Software As A Service.
[92] See ‘About Form W-9, Request for Taxpayer Identification Number and Certification’ on https://www.irs.gov/forms-pubs/about-form-w-9: “Use Form W-9 to provide your correct Taxpayer Identification Number (TIN) to the person who is required to file an information return with the IRS to report, for example: Income paid to you. Real estate transactions. Mortgage interest you paid. Acquisition or abandonment of secured property. Cancellation of debt. Contributions you made to an IRA.”
[93] NRA definition: Nonresident Alien.
[94] See article 1 ‘Glossary’ of Corporate Tax Guide | CTGGCT1 version September 2023, Permanent Establishment definition: “A place of Business or other form of presence in the UAE of a Non-Resident Person in accordance with Article 14 of the Corporate Tax Law.”
[95] See article 5.4.1 ‘Non-Resident Person with a Permanent Establishment in the UAE’ of Corporate Tax Guide | CTGGCT1 version September 2023: “The concept of a Permanent Establishment is used in tax regimes across the world to determine if and when a foreign juridical person has established sufficient presence in a country to warrant the direct taxation of their profits in that country.”
[96] See article 5.4.1 ‘Non-Resident Person with a Permanent Establishment in the UAE’ of Corporate Tax Guide | CTGGCT1 version September 2023: “Generally, a country only has the right to tax the profits of a foreign business if that business has a Permanent Establishment in that country.”
[97] See article 1 ‘Glossary’ of Corporate Tax Guide | CTGGCT1 version September 2023, Foreign Permanent Establishment definition: “A place of Business or other form of presence outside the UAE of a Resident Person that is determined in accordance with the criteria prescribed in Article 14 of the Corporate Tax Law.”
[98] See article 14 ‘Permanent Establishment’ of Corporate Tax Law: “[…] 2. For the purposes of paragraph (a) of Clause 1 of this Article, a fixed or permanent place in the State includes: a) A place of management where management and commercial decisions that are necessary for the conduct of the Business are, in substance, made. b) A branch. c) An office. d) A factory. e) A workshop. f) Land, buildings and other real property. g) An installation or structure for the exploration of renewable or non-renewable natural resources. h) A mine, an oil or gas well, a quarry or any other place of extraction of natural resources, including vessels and structures used for the extraction of such resources. i) A building site, a construction project, or place of assembly or installation, or supervisory activities in connection therewith, but only if such site, project or activities, whether separately or together with other sites, projects or activities, last more than (6) six months, including connected activities that are conducted at the site or project by one or more Related Parties of the Non-Resident Person. […]”
[99] See article 5.3.2 ‘Effective management and control’ of Corporate Tax Guide | CTGGCT1 version September 2023: “Determining residence for Corporate Tax purposes solely on the basis of place of incorporation may not reflect the economic reality of where the business is actually managed or controlled. Accordingly, determination of residence for Corporate Tax purposes will take into account whether the juridical person incorporated or otherwise recognised in a foreign jurisdiction is effectively managed and controlled in the UAE, in line with tax regimes in other countries that apply the concepts of “central management and control” and “place of effective management” rules for this same purpose.”
[100] See article 5.3.4 ‘Impact of Double Taxation Agreements on Resident Taxable Persons’ of Corporate Tax Guide | CTGGCT1 version September 2023: “In some cases, due to cross-border activities, a Person may be resident for Corporate Tax purposes in more than one jurisdiction. For example, a company may be incorporated in one jurisdiction but effectively managed and controlled in another. If these criteria are used, as in the UAE, to determine the tax residence of a juridical person, this company would be tax resident in both jurisdictions. In instances where there is an in-force Double Taxation Agreement between the UAE and that other jurisdiction, this agreement will, in general, contain provisions to determine where that Person would be considered as resident. These provisions take precedence over the treatment under the Corporate Tax Law and its implementing decisions. In general, Double Taxation Agreements include rules to solve dual residence situations for juridical persons either based on the place of effective management criterion or through the mutual agreement procedure.”
[101] See article 1 ‘Definitions’ of VAT Law, Business Establishment definition: “The place where the Business is legally established in a state, in accordance with the establishment resolution, and where important management decisions are taken or the functions of the central administration are carried out.”
[102] See article 1 ‘Definitions’ of VAT Law, Fixed Establishment definition: “Any fixed place of Business other than the Business Establishment, through which the Person conducts its Business on a regular or permanent basis and which has the sufficient human and technical resources necessary to enable it to supply or receive Goods or Services, including the Person's branches.”
[103] See article 14 ‘Permanent Establishment’ of Corporate Tax Law: “5. For the purposes of paragraph (b) of Clause 1 of this Article, a Person shall be considered as having and habitually exercising an authority to conduct a Business or Business Activity in the State on behalf of a Non-Resident Person if any of the following conditions are met: a) The Person habitually concludes contracts on behalf of the Non-Resident Person. b) The Person habitually negotiates contracts that are concluded by the Non-Resident Person without the need for material modification by the Non-Resident Person.”
[104] See article 14 ‘Permanent Establishment’ of Corporate Tax Law: “3. Notwithstanding Clauses 1 and 2 of this Article, a fixed or permanent place in the State shall not be considered a Permanent Establishment of a Non-Resident Person if it is used solely for any of the following purposes: a) Storing, displaying or delivering of goods or merchandise belonging to that Person. b) Keeping a stock of goods or merchandise belonging to that Person for the sole purpose of processing by another Person. c) Purchasing goods or merchandise or collecting information for the Non-Resident Person. d) Conducting any other activity of a preparatory or auxiliary nature for the Non- Resident Person. e) Conducting any combination of activities mentioned in paragraphs (a), (b), (c) and (d) of Clause 3 of this Article, provided that the overall activity is of a preparatory or auxiliary nature.”
[105] See article 14 ‘Permanent Establishment’ of Corporate Tax Law: “4. Clause 3 of this Article shall not apply to a fixed or permanent place in the State that is used or maintained by a Non-Resident Person if the same Non-Resident Person or its Related Party carries on a Business or Business Activity at the same place or at another place in the State where all of the following conditions are met: a) Where the same place or the other place constitutes a Permanent Establishment of the Non-Resident Person or its Related Party. b) The overall activity resulting from the combination of the activities carried out by the Non-Resident Person and its Related Party at the same place or at the two places is not of a preparatory or auxiliary nature and together would form a cohesive Business operation, had the activities not been fragmented.”
[106] CRS definition: Common Reporting Standard.
[107] See article 18 ‘Qualifying Free Zone Person’ of the Corporate Tax Law, see article 4 of Ministerial Decision No. 139 of 2023, see article 5 of Ministerial Decision No. 139 of 2023, see Cabinet Decision No. 55 of 2023.
[108] See article 24 ‘Foreign Permanent Establishment Exemptions’ of Corporate Tax Law: “1. A Resident Person can make an election to not take into account the income, and associated expenditure, of its Foreign Permanent Establishments in determining its Taxable Income. 2. Where Clause 1 of this Article applies, a Resident Person shall not take into account the following in determining its Taxable Income or Corporate Tax Payable for a Tax Period: a) losses in any of its Foreign Permanent Establishments, calculated as if the relevant Foreign Permanent Establishments were a Resident Person under this Decree-Law; b) positive income and associated expenditure in any of its Foreign Permanent Establishments, calculated as if the relevant Foreign Permanent Establishments were a Resident Person under this Decree-Law; and c) any Foreign Tax Credit that would have been available under Article 47 of this Decree-Law had the election under Clause 1 of this Article not been made.”
[109] See article 6.4.3 ‘Foreign Permanent Etablishment Exemption’ of Corporate Tax Guide | CTGGCT1 version September 2023: “To eliminate or reduce potential international double taxation, a Resident Person can make an election when determining its Taxable Income to have income derived from Foreign Permanent Establishments exempted from Corporate Tax in the UAE.”
[110] See article 6.4.3 ‘Foreign Permanent Establishment Exemption’ of Corporate Tax Guide | CTGGCT1 version September 2023: “In the case of deciding to exclude the income, expenses and losses of the Foreign Permanent Establishments from the calculation of Taxable Income, the election will only apply to the Resident Person’s Foreign Permanent Establishments which are subject to Corporate Tax, or a tax of a similar character to Corporate Tax, in the relevant foreign country at a rate of not less than 9% (i.e. the “subject to tax requirement”).”
[111] See article 6.4.3 ‘Foreign Permanent Establishment Exemption’ of Corporate Tax Guide | CTGGCT1 version September 2023: “In determining income and associated expenditure, a Resident Person and its Foreign Permanent Establishments must be treated as separate and independent Businesses. Any transactions which take place between them must be treated as having taken place at Market Value.”
[112] See article 5 ‘Permanent Establishment’ of OECD Model Tax Convention on Income and Capital on https://www.oecd.org/content/dam/oecd/en/publications/reports/2019/04/model-tax-convention-on-income-and-on-capital-2017-full-version_g1g972ee/g2g972ee-en.pdf, also see article 5.4.5 ‘Impact of Double Taxation Agreements on Non-Resident Taxable Persons’ of Corporate Tax Guide | CTGGCT1 version September 2023: “The definition of Permanent Establishment in the Corporate Tax Law generally follows the principles provided in Article 5 of the OECD Model Tax Convention on Income and Capital. A Non-Resident Person may need to consider these principles and the relevant provisions of any Double Taxation Agreement between the country of residence of the Non-Resident Person and the UAE, in their assessment of whether they have a Permanent Establishment in the UAE.”
[113] See article 5.4.5 ‘Impact of Double Taxation Agreements on Non-Resident Taxable Persons’ of Corporate Tax Guide | CTGGCT1 version September 2023: “If a Non-Resident Person has a Permanent Establishment in the UAE under a specific Double Taxation Agreement, the primary taxing rights on the income earned from the activity of the Permanent Establishment will be allocated to the UAE, as the source State. However, each case will need to be determined considering the nature of the Business of the Non-Resident Person and its own facts and circumstances, as well as the terms of the applicable Double Taxation Agreement.”
[114] See article 5.4.5 ‘Impact of Double Taxation Agreements on Non-Resident Taxable Persons’ of Corporate Tax Guide | CTGGC1 version September 2023: “In instances where the terms of a Double Taxation Agreement are inconsistent with the provisions of the Corporate Tax Law, the terms of the Double Taxation Agreement would prevail.”
[115] See article 35 ‘Related Parties and Control’ of Corporate Tax Law: “1. For the purposes of this Decree-Law, “Related Parties” means any of the following: a) Two or more natural persons who are related within the fourth degree of kinship or affiliation, including by way of adoption or guardianship. b) A natural person and a juridical person where: 1. the natural person or one or more Related Parties of the natural person are shareholders in the juridical person, and the natural person, alone or together with its Related Parties, directly or indirectly owns a 50% (fifty percent) or greater ownership interest in the juridical person; or 2. the natural person, alone or together with its Related Parties, directly or indirectly Controls the juridical person. c) Two or more juridical persons where: 1. one juridical person, alone or together with its Related Parties, directly or indirectly owns a 50% (fifty percent) or greater ownership interest in the other juridical person; 2. one juridical person, alone or together with its Related Parties, directly or indirectly Controls the other juridical person; or 3. any Person, alone or together with its Related Parties, directly or indirectly owns a 50% (fifty percent) or greater ownership interest in or Controls such two or more juridical persons; d) A Person and its Permanent Establishment or Foreign Permanent Establishment. e) Two or more Persons that are partners in the same Unincorporated Partnership. f) A Person who is the trustee, founder, settlor or beneficiary of a trust or foundation, and its Related Parties.”
[116] See article 1 ‘Definitions’ of Corporate Tax Law, Connected Person definition: “Any Person affiliated with a Taxable Person as determined in Clause 2 of Article 36 of this Decree-Law.”
[117] See Ministerial Decision No. 139 of 2023 ‘Qualifying Activities and Excluded Activities’.
[118] See article 5.5.2 ‘Excluded Activities’ of Corporate Tax Guide | CTGGCT1 version September 2023: “Qualifying Income does not include income derived from Excluded Activities. The Excluded Activities are listed in Ministerial Decision No. 139 of 2023 Regarding Qualifying Activities and Excluded Activities, and include: Transactions with natural persons, except in relation to certain Qualifying Activities; Banking, insurance, finance and leasing activities that are subject to the relevant regulatory oversight of the relevant competent authority in the UAE, except for certain exceptions; Ownership or exploitation of UAE immovable property, other than Commercial Property located in a Free Zone provided such activity in relation to Immovable Property located in a Free Zone is conducted with other Free Zone Persons; Ownership or exploitation of intellectual property assets; and Activities that are ancillary (which serve no independent function) to the above activities.”
[119] See article 6.4.1 ‘Domestic dividends’ of Corporate Tax Guide | CTGGCT1 version September 2023: “Dividends, and other profit distributions, received from a Resident Person are exempt from Corporate Tax. There are no additional conditions a Taxable Person has to meet in order to benefit from this exemption. This reflects a distinction between payments a juridical person makes in order to earn its profits, and distributions it makes out of its profits which will already have been taxed under the Corporate Tax regime. This exemption also covers distributions made by a Resident Free Zone juridical person (whether qualifying or not) to another Resident Person.”
[120] See article 1 ‘Glossary’ of Corporate Tax Guide | CTGGCT1 version September 2023, Participating Interest definition: “An ownership interest in the shares or capital of a juridical person that meets the conditions referred to in Article 23 of the Corporate Tax Law.”
[121] See article 6.4.2.1 ‘Distributions received from foreign juridical persons’ of Corporate Tax Guide | CTGGCT1 version September 2023: “Dividends and other profit distributions received from foreign juridical persons are exempt from Corporate Tax if the recipient has a Participating Interest in the foreign company. A Participating Interest is a significant long-term ownership interest in the shares or capital of a juridical person (the “Participation”) that provides the basis for the exercise of some level of control or influence over the activities of the Participation.”
[122] See article 6.4.2.1 ‘Distributions received from foreign juridical persons’ of Corporate Tax Guide | CTGGCT1 version September 2023: “A Participating Interest exists where all of the following conditions are met: The Taxable Person has an ownership interest of 5% or greater in the shares or capital of the Participation which has been held, or its intended to be held, for a period of at least 12 months; The Taxable Person is entitled to at least 5% of distributable profits and at least 5% of liquidation proceeds of the Participation; No more than 50% of the Participation’s assets consist of ownership interests that would not have qualified for an exemption from Corporate Tax if they were held directly by the Taxable Person. The Participation is subject to Corporate Tax, or a similar tax, in the country in which it is resident at a rate of at least 9% (i.e. the “subject to tax” requirement). A Participation is considered to meet this requirement for a given Tax Period when it is resident for Tax purposes in a foreign jurisdiction throughout this same Tax Period, and: that jurisdiction has a headline statutory tax rate of at least 9%, or it can demonstrate that it is subject to an effective tax on profits, income or equity of at least 9% in that jurisdiction.”
[123] See article 34 ‘Arm’s Length Principle’ of Corporate Tax Law: “3. The arm’s length result of a transaction or arrangement between Related Parties must be determined by applying one or a combination of the following transfer pricing methods: a) The comparable uncontrolled price method. b) The resale price method. c) The cost-plus method. d) The transactional net margin method. e) The transactional profit split method.”
[124] See article 35 ‘Related Parties and Control’ of Corporate Tax Law: “c) Two or more juridical persons where: 1. one juridical person, alone or together with its Related Parties, directly or indirectly owns a 50% (fifty percent) or greater ownership interest in the other juridical person; 2. one juridical person, alone or together with its Related Parties, directly or indirectly Controls the other juridical person; or 3. any Person, alone or together with its Related Parties, directly or indirectly owns a 50% (fifty percent) or greater ownership interest in or Controls such two or more juridical persons;”
[125] See article 35 ‘Related Parties and Control’ of Corporate Tax Law: “2. For the purposes of this Decree-Law, “Control” means the ability of a Person, whether in their own right or by agreement or otherwise to influence another Person, including: a) The ability to exercise 50% (fifty percent) or more of the voting rights of another Person. b) The ability to determine the composition of 50% (fifty percent) or more of the Board of directors of another Person. c) The ability to receive 50% (fifty percent) or more of the profits of another Person. d) The ability to determine, or exercise significant influence over, the conduct of the Business and affairs of another Person.”
[126] See article 36 ‘Payments to Connected Persons’ of Corporate Tax Law: “1. Without prejudice to the provisions of Article 28 of this Decree-Law, a payment or benefit provided by a Taxable Person to its Connected Person shall be deductible only if and to the extent the payment or benefit corresponds with the Market Value of the service, benefit or otherwise provided by the Connected Person and is incurred wholly and exclusively for the purposes of the Taxable Person’s Business.”
[127] See article 6.6.4 ‘Transfer pricing’ of Corporate Tax Guide | CTGGCT1 version September 2023: “Transfer pricing rules aim to ensure that the price of a transaction is not influenced by the relationship between the parties involved. In order to achieve this and to avoid artificially profit shifting, the internationally recognized arm’s length principle is used for transactions between Related Parties and Connected Persons. The transfer pricing rules apply to both cross-border and domestic transactions carried out by juridical persons and individuals.”
[128] See article 6.6.4.1 ‘General transfer pricing disclosure requirements’ of Corporate Tax Guide | CTGGCT1 version September 2023: “Taxable persons may be subject to certain transfer pricing disclosure requirements in case of entering into transactions or arrangements with Related Parties, which may allow the FTA to conduct comprehensive and reasonable transfer pricing risk assessment, and confirm whether these transactions with Related Parties and Connected Persons have been conducted in accordance with the arm’s length principle. The FTA can require a Taxable Person to disclose information regarding their transactions and arrangements with their Related Parties and Connected Persons, together with their Tax Return. The purpose of maintaining transfer pricing related information is to describe how the Taxable Person has determined the transfer prices of transactions with Related Parties and Connected Persons, and why those transfer prices are sufficiently comparable to prices applied by independent parties in a similar situation. A Taxable Person must comply with a request issued by the FTA to provide information which supports the arm’s length nature of its transactions or arrangements with its Related Parties and Connected Persons. This information must be submitted within 30 days following the request, or by any such other later date as directed by the FTA.”
[129] See article 9 ‘Supply by an Agent’ of VAT Law: “1. Where goods and services are supplied by an agent acting on behalf of a principal, the supply shall be deemed to be made by the principal and for his benefit. 2. Where goods and services are supplied through an agent acting in his own name, the supply shall be treated as a direct supply by the agent and for his benefit.”
[130] See article 17 ‘Family Foundation’ of Corporate Tax Law: “1. A Family Foundation can make an application to the Authority to be treated as an Unincorporated Partnership for the purposes of this Decree-Law where all of the following conditions are met: a) The Family Foundation was established for the benefit of identified or identifiable natural persons, or for the benefit of a public benefit entity, or both. b) The principal activity of the Family Foundation is to receive, hold, invest, disburse, or otherwise manage assets or funds associated with savings or investment. c) The Family Foundation does not conduct any activity that would have constituted a Business or Business Activity under Clause 6 of Article 11 of this Decree-Law had the activity been undertaken, or its assets been held, directly by its founder, settlor, or any of its beneficiaries. d) The main or principal purpose of the Family Foundation is not the avoidance of Corporate Tax. e) Any other conditions as may be prescribed by the Minister. 2. Where the application under Clause 1 of this Article is approved, the Family Foundation shall be treated as an Unincorporated Partnership effective from the commencement of the Tax Period in which the application is made, or from the commencement of a future Tax Period, or any other date determined by the Authority. 3. For the purposes of monitoring the continued compliance by a Family Foundation with the conditions of Clause 1 of this Article, the Authority may request any relevant information or records from the Family Foundation within the timeline specified by the Authority.”
[131] See article 7 ‘Supply in Special Cases’ of VAT Law: “Notwithstanding the provisions contained in Articles (5) and (6) of this Decree-Law, the following shall not be deemed as a supply: 1. Selling or issuing any Voucher, unless the received Consideration exceeds its declared cash value, as determined by the Executive Regulations of this Decree-Law; 2. Transferring Business or independent part thereof from a Person to a Taxable Person to continue such transferred Business; and 3. Any other supply identified by the Executive Regulations of this Decree-Law”
[132] See article 36 ‘Value of Supply and Deemed Supply for Related Parties’ of VAT Law: “Notwithstanding the provisions of Articles (34), (35) and (37) of this Decree-Law, the value of the supply or Importation of Goods or Services between the Related Parties shall be considered equal to the market rate if all the following conditions are fulfilled: 1. The value of the supply is less than the market rate. 2. If the supply is taxable and the Recipient of Goods or Recipient of Services is not entitled to recover the full Tax to be levied on such supply as an Input Tax.”
[133] See article 1 ‘Glossary’ of Corporate Tax Guide | CTGGCT1 version September 2023, Dividend definition: “Any payments or distributions that are declared or paid on or in respect of shares or other rights participating in the profits of the issuer of such shares or rights which do not constitute a return of capital or a return on debt claims, whether such payments or distributions are in cash, securities, or other properties, and whether payable out of profits or retained earnings or from any account or legal reserve or from capital reserve or revenue. This will include any payment or benefit which in substance or effect constitutes a distribution of profits made in connection with the acquisition or redemption or cancellation of shares or termination of other ownership interests or rights or any transaction or arrangement with a Related Party or Connected Person which does not comply with Article 34 of the Corporate Tax Law.”
[134] See article 45 ‘Withholding Tax’ of Corporate Tax Law: “1. The following income shall be subject to Withholding Tax at the rate of 0% (zero percent) or any other rate as specified in a decision issued by the Cabinet at the suggestion of the Minister: a) The categories of State Sourced Income derived by a Non-Resident Person as prescribed in the decision issued by the Cabinet pursuant to this Article, insofar such income is not attributable to a Permanent Establishment of the Non-Resident Person in the State. b) Any other income as specified in a decision issued by the Cabinet at the suggestion of the Minister. 2. The Withholding Tax payable under Clause 1 of this Article shall be deducted from the gross amount of the payment and remitted to the Authority in the form and manner and within the timeline prescribed by the Authority.”
[135] See article 36 ‘Payments to Connected Persons’ of the Corporate Tax Law: “1. Without prejudice to the provisions of Article 28 of this Decree-Law, a payment or benefit provided by a Taxable Person to its Connected Person shall be deductible only if and to the extent the payment or benefit corresponds with the Market Value of the service, benefit or otherwise provided by the Connected Person and is incurred wholly and exclusively for the purposes of the Taxable Person’s Business. 2. For the purposes of this Decree-Law, a Person shall be considered a Connected Person of a Taxable Person if that Person is: a) An owner of the Taxable Person. b) A director or officer of the Taxable Person. c) A Related Party of any of the Persons referred to in paragraphs (a) and (b) of Clause 2 of this Article. 3. For the purposes of paragraph (a) of Clause 2 of this Article, an owner of the Taxable Person is any natural person who directly or indirectly owns an ownership interest in the Taxable Person or Controls such Taxable Person. 4. Where the Taxable Person is a partner in an Unincorporated Partnership, a Connected Person is any other partner in that same Unincorporated Partnership, and any Person that is a Related Party of that partner. 5. To determine that a payment or benefit provided by the Taxable Person corresponds with the Market Value of the service or otherwise provided by the Connected Person in exchange, the relevant provisions of Article 34 of this Decree-Law shall apply as the context requires. 6. Clause 1 of this Article shall not apply to any of the following: a) A Taxable Person whose shares are traded on a Recognised Stock Exchange. b) A Taxable Person that is subject to the regulatory oversight of a competent authority in the State. c) Any other Person as may be determined in a decision issued by the Cabinet at the suggestion of the Minister.”
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