Change of Individual Tax Residence: Case Study

Facts

Mr. A was a long-term tax resident of the United Kingdom. He owned a substantial shareholding in a private company incorporated and operating in State S (a third jurisdiction). Over several years, the value of the company increased significantly, and Mr. A began considering a full or partial exit.

Approximately eight months prior to the anticipated sale, Mr. A relocated to the United Arab Emirates. He obtained UAE residence status, leased residential property, moved part of his personal assets, and established a holding company in the UAE through which he intended to manage future investments. His stated reasons for relocation were:

• to reinvest the anticipated sale proceeds in Middle Eastern ventures;
• to access new business networks and capital markets;
• to benefit from a more favorable personal tax environment;
• to facilitate negotiations with regional investors interested in acquiring the company.

Shortly after becoming a UAE tax resident, Mr. A completed the sale of his shares in the company located in State S, realizing a substantial capital gain.

Under the domestic law of State S, capital gains derived by a non-resident from the sale of shares may be taxable. However, the Double Taxation Agreement (DTA) between State S and the UAE allocates taxing rights on such gains exclusively to the state of residence of the seller, provided certain conditions are met. In contrast, there is no DTA between State S and UK which could limit Strate S power to tax this gain.

Mr. A claimed treaty protection under the State S–UAE DTA, asserting that as a UAE tax resident, the gain was not taxable in State S.

State S initiated a review under the Principal Purpose Test (PPT) contained in Article 29(9) of the OECD Model Convention (2017).

Question

Whether Mr. A is expected to pass the PPT and obtain the treaty benefit, or whether the PPT is likely to apply so that the treaty benefit is denied.

Executive Summary

Based on the analysis set out below, we conclude as follows:

• On these facts, the PPT would more likely be viewed as failed.
• Accordingly, additional efforts would be required to rebut the reasonable inference that obtaining treaty benefits was one of the principal purposes of the move.
• Economic substance and non-tax motives do not, by themselves, “pass” the PPT. Even if the relocation is genuine, and even if the disposal has commercial logic (including reinvestment plans, business expansion, or the desire to facilitate the sale), the PPT can still apply if it is reasonable to conclude that treaty benefit access was among the principal purposes. In other words, the presence of real-life reasons and a non-artificial transaction does not neutralise a principal-purpose finding.
• The most persuasive rebuttal typically requires demonstrating a counterfactual independence: that the individual would have relocated to the UAE anyway, even

a) if there had been no applicable double tax treaty, and

b) even if the sale had not proceeded or had not been contemplated at the time of the move.

If the relocation can be evidenced as a standalone, long-term personal or commercial decision, rather than a step that is materially explained by the impending disposal and the treaty outcome, this may support the conclusion that exploiting treaty benefits was not one of the principal purposes.

• Therefore, the practical implication is that cases of pre-sale residence changes should be approached on the assumption that PPT risk is high by default. The analysis should be supported by contemporaneous evidence showing that the relocation was driven by durable, non-transactional reasons and would have occurred irrespective of the treaty position and the disposal timeline.
• Given the heightened PPT exposure in pre-sale relocation cases, Mr. A should proceed on the basis that the treaty position may be challenged and take active steps to strengthen the factual record. This starts with collecting and centralizing all existing evidence, and then performing a structured assessment to identify which facts are favorable, which are problematic, and where the evidentiary gaps are.
• Where gaps exist, Mr. A should consider preparing additional contemporaneous paperwork that does not “manufacture” facts but properly documents real ones (e.g. long-term relocation intentions, business or investment plans, reasons for choosing the UAE, and steps demonstrating economic and personal integration). If the current pattern of the move and transaction sequencing creates avoidable PPT risk, he should also consider whether the implementation can be adjusted in a commercially credible way. All evidence should be organized, indexed, and retained as a single file ready to be provided in a tax audit or relied upon in a competent authority procedure or litigation.
• Given the elevated PPT risk on these facts, Mr. A should not rely on his own assessment of motives. He should obtain a professional, evidence-based review grounded in relevant international treaty-abuse case law and the administrative and dispute practice, and compile an audit-ready file of supporting documentation accordingly.

Analysis

1. Article 29(9) of the OECD Model Convention (2017) introduces the Principal Purpose Test (PPT), under which a treaty benefit shall not be granted if “it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit…” unless it is established that granting the benefit would be in accordance with the object and purpose of the relevant provisions of the Convention.

2. Commentary 180 to Article 29 (OECD Model Tax Convention Commentary, C(29)-89) provides a specific example: an individual who changes tax residence shortly before the sale of property, where one of the principal purposes of the relocation is to benefit from a treaty provision allocating taxing rights differently. The Commentary clarifies that treaty benefits may be denied even if the move was also motivated by other non-tax considerations, such as reinvestment of proceeds or facilitating the sale.

Existence of an Arrangement

3. The change of tax residence prior to the disposal constitutes an “arrangement” within the broad meaning adopted by the OECD. The arrangement need not be artificial or legally complex. A relocation of residence, if linked to a tax outcome, may qualify.

One of the Principal Purposes

4. The key question is not whether obtaining the treaty benefit was the sole or dominant purpose of the relocation. Under the OECD Commentary, it is sufficient that it was one of the principal purposes.

5. In this case:

• The relocation occurred shortly before a planned high-value disposal.
• A was aware that under State S domestic law the gain could have been subject to taxation.
• Under the State S–UAE DTA, the gain would be taxable only in the UAE, which does not levy personal income tax.

6. Even if Mr. A can demonstrate additional commercial motives, such as reinvesting in the UAE, developing business networks, or facilitating negotiations, Commentary 180 explicitly states that the PPT may apply even where the relocation was also intended to reinvest the proceeds or “facilitate the sale”.

7. Thus, the existence of mixed motives does not neutralize the PPT if treaty access was among the principal purposes.

Object and Purpose of the Relevant Treaty Provision

8. The capital gains article in a DTA generally seeks to allocate taxing rights between states and prevent double taxation, not to create opportunities for tax avoidance through strategic changes of residence.

9. Where residence is shifted shortly before a disposal primarily to obtain a more favorable allocation of taxing rights, the tax authority may argue that granting the benefit would be contrary to the object and purpose of the provision.

10. The OECD example makes clear that in such circumstances, treaty protection may be denied, even if the taxpayer’s relocation has genuine elements of economic substance.

Substance and Timing

11. While the UAE does not levy personal income tax, residence under the DTA is determined by domestic law and treaty tie-breaker rules. If Mr. A genuinely became a UAE tax resident, the formal condition of residence may be satisfied.

12. However, the PPT analysis is independent of formal residence status. Even a valid change of tax residence does not preclude denial of treaty benefits where the principal purpose test is met.

13. The proximity between relocation and sale is a critical factor. The shorter the interval, the stronger the inference that the relocation was linked to the anticipated tax benefit.

Potential Counterarguments

14. A may argue:

• The relocation was part of a long-term strategic shift in his business and personal life.
• The sale was uncertain at the time of relocation.
• The UAE became the center of his vital interests and economic activity.
• The DTA does not contain a specific minimum holding or look-back rule regarding residence changes.

15. However, under the OECD Commentary, even if reinvestment and business expansion were genuine motives, the presence of treaty benefit as one of the principal purposes is sufficient to trigger the PPT.

Conclusion

16. Based on Commentary 180 to Article 29 of the OECD Model Convention, the Principal Purpose Test may be “failed” even where obtaining treaty benefits was not the sole or dominant objective of the relocation.

17. In this case, where:

• the taxpayer moved from the UK to the UAE shortly before the sale,
• the move resulted in a material change in the allocation of taxing rights,
• and one of the principal purposes of the relocation was to access treaty protection,

State S would be justified, under the PPT, in denying the benefit of the DTA and taxing the capital gain under its domestic law.

18. This case illustrates a critical point in cross-border tax planning: a genuine change of residence and the presence of commercial motives do not, by themselves, shield a transaction from scrutiny under the Principal Purpose Test. Even mixed-motive relocations may fall within the scope of Article 29(9) where treaty access is among the principal drivers of the arrangement.

19. In conclusion, it’s important to note that the Principal Purpose Test is not automatically failed simply by the presence of tax-related motives. While the timing of relocation and the intent to claim treaty benefits are key factors, a balanced assessment must consider the broader context. Additional evidence of genuine, long-term commercial or personal reasons would need to be carefully weighed. Thus, a finding under the PPT is not inevitable but requires a holistic inquiry into all relevant circumstances beyond what was outlined above.

20. Ultimately, the standard might hinge on whether the move would have occurred even in the absence of a double tax agreement or the impending sale. In other words, if Mr. A would have still chosen to relocate to the UAE for genuine personal or economic reasons, independent of treaty benefits or an imminent transaction, that would help demonstrate a broader, non-tax-driven purpose. It is that underlying reality (whether the move stands on its own merit) that can help mitigate concerns under the Principal Purpose Test.

21. A should treat this as an evidence-driven exercise rather than a debate about motives. He is recommended to gather all documentation relevant to the relocation and the disposal, and to run a professional assessment to understand which facts support the narrative that the move had standalone, long-term rationale and which facts may point toward treaty-benefit driven timing.

22. Where the factual matrix is incomplete, additional documentation should be produced to properly record genuinely existing commercial and personal drivers (not to retrofit them), and to demonstrate integration into the UAE and continuity of intention beyond the transaction. He should also consider whether the current sequence or structure of the move unnecessarily amplifies PPT risk and, if so, whether a different commercially consistent pattern would better align with the stated reasons for relocation. Finally, the evidence should be structured, indexed, and retained in a coherent file so it can be efficiently deployed in a tax audit or a potential dispute over treaty entitlement.

23. In practical terms, Mr. A should treat this as a professional, evidence-driven assessment rather than a matter to be decided based on his own view of motives or “commerciality.” PPT outcomes are inherently evaluative and are typically shaped by how tax authorities and courts have approached comparable fact patterns in international practice, including treaty-abuse case law, OECD-informed interpretation, and the administrative and dispute-resolution practice. Mr. A is therefore recommended to engage tax professionals to

• benchmark his facts against relevant case law and local practice,
• map favorable and unfavourable indicators under the PPT,
• identify evidentiary gaps and prepare or formalize supporting paperwork that documents genuinely existing commercial and personal drivers, and
• structure, index, and preserve the full file so it is audit-ready and dispute-ready.

A well-supported advisory assessment of this kind often makes the difference between a treaty benefit being accepted in practice and becoming the subject of a costly challenge.

The disclaimer

Pursuant to the MoF’s press-release issued on 19 May 2023 “a number of posts circulating on social media and other platforms that are issued by private parties, contain inaccurate and unreliable interpretations and analyses of Corporate Tax”.

The Ministry issued a reminder that official sources of information on Federal Taxes in the UAE are the MoF and FTA only. Therefore, analyses that are not based on official publications by the MoF and FTA, or have not been commissioned by them, are unreliable and may contain misleading interpretations of the law. See the full press release here.

You should factor this in when dealing with this article as well. It is not commissioned by the MoF or FTA. The interpretation, conclusions, proposals, surmises, guesswork, etc., it comprises have the status of the author’s opinion only. Furthermore, it is not legal or tax advice. Like any human job, it may contain inaccuracies and mistakes that we have tried my best to avoid. If you find any inaccuracies or errors, please let us know so that we can make corrections.