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Citizenship vs Fiscal Residency: Becoming a UAE Fiscal Resident

Contributed by Loggerhead Partners
01 September, 2020


Most of us entrepreneurs, business owners, managers or wealthy individuals with interests in multiple locations and with an extensive travel plan, find it hard to clearly identify a single location as "home" and probably have been, at one point or another, confronted with the terms of Residency and Citizenship. Familiar words, yet not so clear, as they are most of the times confusing and wrongly used interchangeably.

In this article we will discuss the concepts and distinguish the terms. We will set out the advantages of a UAE Residency - a favorable tax jurisdiction - and provide real, client examples illustrating how once structured properly, it can open up possibilities to a new efficient business set-up. And this without relinquishing your citizenship.

Introducing Fiscal Residence

The best way to understand the terms Residency and Citizenship is to first make the differentiation between Civil and Fiscal Residence.

Civil Residence is a "casual" term often used to define the country which you are currently living in, and/or the country which you have the strongest affiliation with. But in an extremely technical world, especially for people with big financial interests, what really matters is your Fiscal Residency, and the two may not be the same.

A Fiscal Residency is the country which you claim as your "fiscal home" and therefore called to pay taxes to and most importantly according to that country's tax laws. Therefore, the Fiscal Residency is what we often call our Tax Residency.

Fiscal residency from country to country can have huge variations and financial impact, as each country defines by itself who they can accept as a "fiscal resident" and how much taxes they can ask them to pay.

The determining factor of claiming a fiscal residency is the ability to meet the country's criteria and "substantiate" that indeed the said country is your "fiscal home". These requirements vary from country to country and they are usually a combination of the below:

  • Duration of stay: To be physically present in that country for the most part of the calendar year i.e. at least 183 days
  • Residing home: To have a permanent home there, regularly pay utility bills and generally demonstrate that you are present and active in the country
  • Centre of interest: To have substantial personal ties and economic interests in that country and in some cases social and civil involvement. Your fiscal residence should be the country where most of your money is exchanging hands.

In a small number of countries, nationality defines you as a fiscal resident e.g. the US or Argentina. This means that irrespective of where you earn any income, or where you reside or spend your time, you must still pay taxes on your global income, to your country of nationality! It is like paying an annual price to hold the passport of that country.

What is Citizenship and how is it different from Nationality?

It is often the case that the words Citizenship and Nationality are used as synonyms. In reality, there is an "inherent" difference between the two.

The nationality of a person is defined by that person's place of birth. It is an "attribute" that is innate rather than obtainable, as it is defined either by birth or inherited by one's parents. Hence, your nationality never changes. On the other hand, citizenship is granted to an individual by the government of a country (if not by birth, then via marriage, naturalization, investment etc.), when that person complies with the respective country's political framework and legal formalities. Citizenship is the country that issues your passport. In fact, it is possible for a person - simultaneously satisfying the citizenship requirements of more than one country - to hold multiple citizenships and thus have multiple passports.

In the following sections we will be referring to Citizenship, as this is the one mostly used in the same context as that of Fiscal Residency.

How is Citizenship complementary rather than a synonym to Fiscal Residency?

The fact that citizenship is a status held or acquired, makes some people falsely assume that it is the same as a fiscal residency.

It is indeed common for most people to be a citizen of the same country where they live and work, but nowadays it is becoming clear that for certain groups of people (business owners, international executives, HNWI), citizenship should not be the default for determining the country in which one should pay taxes.

To the contrary, in today's interconnected world, where people move, live and work in different countries, it is important for the so-called 'citizens of the world' to have a choice and for them to consciously make that choice. (There are people who are born and live their whole life in a country, in which they never earn a Citizenship). It is the only way to incentivise talent mobility, economic expansion and foreign investment.

The increasing use of the term Tax Residency in contrast to Citizenship, the expanding reach of the residency programmes across the world, and the increasing acceptance of the term demonstrates the changing landscape and moves away from the misconception that it is a means to evade taxes.

The OECD argument is clear: "the mere relation of citizenship could no longer be considered a sufficient tie to impose on non-residents by their country of nationality. Instead, a permanent or habitual resident in a country should contribute to the expenses of such jurisdictions as a result of his economic interest."

This is a valid argument - a person living or having its primary economic activity in a country, should have more tax obligations to that country than to the country he was fortunate or unfortunate enough to have on his passport. It is in fact possible to be a tax resident in several countries in the same period (this is where Double Tax Treaties between countries become important, to avoid or equate double taxation). But there is no economically backed argument to suggest that you need to be a tax resident in your country of nationality.

It is important to note at this point that, being a tax resident of a country other than your country of citizenship, does not mean you stop being a citizen of your country nor does it mean obtaining a second passport. It simply means calling that country your "fiscal home" and paying taxes in a country other than your own nation. And it is becoming increasingly customary, for both statuses to co-exist without the one undermining the other.

UAE Residency - a powerful tool in your arsenal

With a clear distinction between the various terms, we will help explain the supremacy of the UAE Residency which, when used efficiently and in a substantiated manner, will benefit your international corporate structure and personal wealth management.

Substance

What is substance? Substance is the collection of sufficient evidence required by both the tax authorities, as well as financial institutions to demonstrate that the country you are claiming as your "fiscal home" (and thus your fiscal residency) is indeed where you have substantial interests, whether personal or professional.

From a corporate perspective, the establishment of a UAE company (there are several company formation options, including Freezone Companies) with an assigned working/operating space (either permanent or flexi space), local corporate bank accounts, a PO Box, a local website, a landline and adequate number of employees, would build a strong case of substance and legitimacy.

On an individual level, the best way to satisfy this requirement is very similar to the corporate. A proper employment (a double benefit if at your own UAE company), maintaining a personal current account (on which salary payments are made and from which local expenses are deducted), a local phone number, a local mailing address and of course a place of accommodation.

Joining other credible international business hubs, the UAE has been working towards fully implementing the economic substance regulations into its national law, in essence, "requiring" all corporations operating in its grounds to demonstrate actual economic proof. This is strongly welcomed as it will further portray the UAE as a real economy; and a solid jurisdiction for international trade.

The UAE redefined

The UAE is a country well known for its year-round sunshine, desert and oil. To people who have never visited, worked or done business there, it can be easily associated to its "old-fashioned", "conservative" and "bureaucratic" neighbours in the Middle Eastern region, a region of ever-lasting conflict. But, the UAE is far from this! The above misconceptions are quickly and easily invalidated upon one's first real interaction with the country.

The UAE has been repeatedly voted as one of the safest countries to live and one of the most progressive countries to do business in. Despite politics taking place in a framework of monarchy, the UAE has managed to convert the negative aspects brought about by the absence of opposition into one of its strongest points. The country's leadership has a reputation of being pro-business modernisers, adamant in making whatever changes and corrective actions it takes to remain at the forefront of innovation and bringing in business. It is a country populated by more than 80% of citizens of other countries and some 236+ nationalities live there.

The country boasts anunprecedented modern infrastructure (airports, road network, public transportation etc.), an advanced legal framework (rules and regulations, investor protection schemes, etc.), a world class financial establishment and a resilient banking system. An impressive positive line up of characteristics.

In a world of an ongoing Brexit saga, trade wars and anti-extradition protests, the UAE proudly presents another version of safe haven.

Combined with its unique tax characteristics, the UAE offers one of the best options available for an alternative residency, for investors and corporates alike. For the smart investor, apart from tax efficiency, a major trading country with zero tax and with no exchange of tax information taking place, can very well present a unique opportunity for asset diversification and confidentiality.

Case Studies

When set up as part of an efficient structure, the UAE Residency can prove a very powerful tool in your international corporate and personal portfolio.

Case Study 1

Client profile: Assume you are a wealthy individual, owner of a medium-size manufacturing business in an Asian country, e.g. China, with clients all over the world. Your main focus is to set up an efficient international, corporate structure and save personal and corporate money on taxes.

Problem: As a client and Chinese tax resident you pay your taxes in China. Your business also pays its corporate taxes in the country, which eats away from its profits.

Solution: Setting up an independent, operating company in the UAE provides you with the following benefits:

  • As owner manager and investor in the Free Zone company, you become a UAE Resident - free to enjoy the zero tax benefits of the UAE residency status
  • As a UAE Resident, you can own both a UAE personal bank account and also a private bank account elsewhere, for example in Singapore or Switzerland
  • With the right structuring, your Chinese company ends up selling its products to your newly established UAE Free Zone company at a lower margin. Products will then be sold on to your global clientele at full price. Accrued profits will be flowing to the corporate bank account of the UAE Free Zone company. The company will be paying no corporate tax for its profits.
  • Profits will be distributed to you as the owner, thus creating a unique combination of personal and corporate tax efficiency

Case Study 2

Client profile: Assume you are a wealthy individual, owner of a medium-size manufacturing business in mainland China with clients all over the world. Heavy international travel requirements. As a holder of the Chinese passport, you need (in most of the cases) a visa to travel to Europe, for leisure and to meet up with your EU clients.

Problem: In addition to your company, you, as a client and Chinese tax resident, currently pay your taxes in China. This is not the most tax efficient structure for your personal and business affairs. Furthermore, all this travelling, requiring a visa every time, is becoming logistically difficult and economically disadvantageous.

Solution: Here we apply the solution to case #1 and strengthen it by applying for a Cyprus passport.

Setting up an independent, operating company in the UAE provides with the following benefits:

  • As owner manager and investor in the Free Zone company, you become a UAE Resident free to enjoy the zero tax benefits of the UAE residency status
  • As a UAE Resident, you can own both a UAE personal bank account and also a private bank account elsewhere, for example in Singapore
  • With the right structuring, your Chinese company ends up selling its products to your newly established UAE Free Zone company at a lower margin. Products will then be sold on to your global clientele at full price. Accrued profits will be flowing to the corporate bank account of the UAE Free Zone company. The company will be paying no corporate tax for its profits.
  • Profits will be distributed to you as the owner, thus creating a unique combination of personal and corporate tax efficiency.
  • An additional layer of efficiency can be obtained here by applying for a Cyprus passport. In addition to having a second citizenship, it will solve the logistics of having to frequently travel to Europe for your business:
    • Cyprus is part of the EU. A Cyprus passport gives you a visa-free travel opportunity to 169 countries around the world and borderless access to Europe.
    • Cyprus does not disclose its citizenships to other countries. It is a guarantee for confidentiality and one of your safest options for dual citizenship.
    • Via the Cyprus Citizenship by Investment Program, there is potentially a strong return you can make on your property investment which could ultimately cover the cost of the whole setup. Furthermore, by adding EUR - a strong recognized currency - in your portfolio adds an additional layer of diversification.

Conclusion

Entrepreneurs, business owners, managers and wealthy individuals need to consider their needs and possible options of an alternate fiscal residency. In today's political and financial environment this is an integral part of proper corporate and wealth planning. With the help of professional advisors experienced in international corporate structuring they should aim to achieve not only tax efficiency but also asset diversification and confidentiality in their personal and business affairs. And keeping in mind that neither a second residency nor a second citizenship means giving up their nationality. Instead, they provide viable solutions to real problems.


If you are interested in knowing more about how to set foot in the UAE, reach out to us to arrange for a free consultation.

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