The UAE’s tax landscape has undergone a significant transformation over the past few years, with the introduction of corporate tax laws in 2023 marking a pivotal shift. These changes are designed to align the UAE with global tax standards, promote economic growth, and attract international businesses. One of the most significant aspects of this transformation is the concept of Nexus under the UAE Corporate Tax Law, particularly regarding how non-residents will be subject to corporate tax in 2025.

The intricacies of the Nexus UAE corporate tax system, focusing on non-resident taxation and how it impacts foreign entities operating in the region, involve several key quantitative thresholds:

1. Tax Rates: The standard corporate tax rate is 9% on taxable income exceeding AED 375,000, with a 0% rate for income below this threshold. Large multinational enterprises (MNEs) with consolidated global revenues exceeding €750 million are subject to a different tax rate for Pillar Two, which is a 15% Domestic Minimum Top-up Tax (DMTT) effective from 1 January 2025.
2. Nexus for Investment Funds: For non-resident investors in Qualifying Investment Funds (QIFs) or Real Estate Investment Trusts (REITs), a taxable nexus is established if the fund distributes 80% or more of its immovable property income within 9 months from the end of its financial year. To qualify for exemption, a REIT must hold rental real estate assets with a value of at least AED 100 million.
3. Free Zone Operations: To maintain a 0% tax rate on Qualifying Income, Free Zone Persons must avoid conducting business with the UAE mainland, with non-qualifying income being subject to the standard 9% rate.
4. Compliance Deadlines: Corporate tax returns must generally be filed within 9 months from the end of the relevant financial year. For Unincorporated Partnerships not treated as a Taxable Person, the registration deadline for a financial year ending before 1 July 2025 was 31 August 2025.

What Does It Mean for Non-Residents?

In 2025, the UAE’s corporate tax laws will have expanded the scope of taxation to include corporate tax for non-residents. While in the past, the UAE has been known for its tax-free environment, the introduction of corporate tax is a key element of the country’s efforts to modernize its economy and meet international standards.

Non-residents will be subject to corporate tax if they meet specific criteria, such as establishing a Permanent Establishment UAE or deriving income from UAE sources. The tax is imposed on the UAE-sourced income, and the rate is 9% for businesses earning over AED 375,000.

Key Criteria for Nexus in Non-Resident Taxation

To understand when a non-resident entity will be subject to corporate tax, it is essential to consider the concept of Permanent Establishment UAE. A permanent establishment refers to a fixed place of business in the UAE through which the business carries out its operations, such as a building site lasting more than 6 months. This can include a branch, office, factory, or even a dependent agent acting on behalf of the company in the UAE. If a non-resident entity meets these conditions, it may be required to pay corporate tax on the income derived from these activities at the standard rate of 9% on taxable income exceeding AED 375,000. For natural persons, a registration requirement is triggered if the turnover attributable to their Permanent Establishment exceeds AED 1,000,000 within a Gregorian calendar year.

Non-Resident Taxation and Source-Based Income

As mentioned earlier, the UAE operates on a source-based income taxation model. This means that businesses are taxed based on the origin of the income, rather than their global income. For non-residents, this means that if they earn income from UAE sources, they will be required to pay corporate tax on that income.

For example, a foreign company providing services to clients in the UAE, or a non-resident entity with UAE-based employees, may find themselves subject to UAE corporate tax if their income is sourced from within the country.

What is a Taxable Nexus?

A taxable nexus refers to the connection that a business must have with a jurisdiction for that jurisdiction to impose taxes. In the case of non-resident businesses, the taxable nexus can be established in several ways:

1. Permanent Establishment UAE: If a foreign business has a physical presence in the UAE, such as an office or branch, this would be considered a taxable nexus.
2. Economic Nexus: Large Multinational Enterprises (MNEs) with consolidated global revenues of EUR 750 million or more in at least two of the four preceding financial years are subject to the Domestic Minimum Top-up Tax (DMTT) effective from 1 January 2025, ensuring a minimum 15% effective tax rate.
3. Source-Based Nexus: Non-residents generating income from UAE-based sources, like immovable property, can also be taxed under UAE corporate tax laws.

Difference Between Resident and Non-Resident for Tax Purposes

One of the key distinctions under the UAE corporate tax regime is the differentiation between resident and non-resident for tax purposes. While both categories may be subject to taxation, the criteria for determining whether a company is a resident or non-resident are clear:

• Resident Companies: A resident company is a business that is incorporated or established in the UAE and conducts its primary operations from within the UAE. Such companies are liable to pay taxes on their worldwide income.
• Non-Resident Companies: Non-residents, on the other hand, are businesses incorporated outside the UAE that earn income from UAE sources or establish a Permanent Establishment UAE. These companies will be taxed only on their UAE-sourced income.

Understanding these differences is crucial for any non-resident company wishing to understand how the Nexus UAE Corporate Tax impacts their operations in the UAE. While resident companies face a broader scope of taxation, non-residents are only taxed on the income directly generated from the UAE activities.

Practical Implications for Foreign Businesses

Foreign businesses operating in the UAE must now be more diligent in determining whether they meet the criteria for a taxable nexus. For instance, a non-resident business setting up a representative office or entering into a joint venture with a UAE-based partner (where the non-resident owns 50% or more) could establish a taxable nexus, even if they don’t have a full-fledged branch office in the country.

Additionally, non-residents will need to assess their source-based income from the UAE to determine whether they must pay taxes. Non-residents with income from services provided to UAE clients (if revenue exceeds the AED 375,000 VAT registration threshold), income from real estate properties in the UAE (taxed at the standard 9% corporate tax rate), or earnings from business activities conducted in the UAE (subject to the 9% corporate tax on taxable income above AED 375,000) should review their tax obligations to ensure compliance.

Insights UAE helps clients navigate the evolving corporate tax landscape by providing expert guidance on compliance, structuring, and planning under the new UAE Corporate Tax Law. We assist both resident and non-resident entities in understanding Nexus rules, managing Permanent Establishment exposure, optimizing Free Zone operations, and ensuring timely registration and reporting with the Federal Tax Authority. Our advisory ensures businesses remain compliant, tax-efficient, and strategically aligned with global standards as the UAE expands corporate tax applicability to non-residents in 2025.

FAQs

1. What is Nexus in the context of UAE Corporate Tax? Nexus is the connection that makes a business taxable in the UAE, such as a Permanent Establishment or UAE-sourced income.

2. How does Nexus UAE Corporate Tax impact non-residents in 2025? Non-residents must pay corporate tax if they operate through a UAE Permanent Establishment or earn income from UAE sources.

3. What is the tax rate for non-residents under the UAE Corporate Tax law? Non-resident businesses pay 9% on UAE-sourced income above AED 375,000; income below this threshold is exempt.

4. What qualifies as a Permanent Establishment in the UAE? A Permanent Establishment includes offices, branches, factories, or agents conducting business in the UAE.

5. What is the difference between resident and non-resident companies for tax purposes in the UAE? Residents are taxed on global income, while non-residents are taxed only on UAE-sourced income.

6. How can non-residents determine if they are subject to corporate tax in the UAE? They should check for a UAE Permanent Establishment or income earned from UAE sources.

7. Are foreign companies with no physical presence in the UAE subject to corporate tax? Yes, if they earn UAE-based income or engage in substantial UAE economic activities.

8. What types of income are considered source-based income for non-residents? Source-based income includes UAE real estate, services to UAE clients, and trade with UAE businesses.

9. What should non-resident businesses do to comply with the UAE Corporate Tax law in 2025? They must assess Nexus presence and seek tax advice to ensure compliance with UAE regulations.