How Corporate Tax Affects The UAE Real Estate Market

The United Arab Emirates ("UAE") real estate sector, renowned for its high-end residential buildings, sustainable developments, and futuristic design projects, attracts property investors globally. Understanding the implications of "Corporate Tax" on this sector is crucial for determining net income, making investment decisions, and fostering market growth. The introduction of the Corporate Tax in the UAE represents a significant shift in the country's tax landscape, particularly affecting the real estate industry.

Overview of Corporate Tax in the UAE

Corporate Tax in the UAE is a direct tax levied on the profits or net income generated by corporations and businesses operating within the country's borders. This taxation is governed by Federal Decree-Law No. 47 of 2022 (the "CT Law"). Under the CT Law, companies are required to pay taxes based on their taxable income. Effective from June 1, 2023, this legislation aims to accelerate the UAE's development while aligning with international standards for tax transparency and the prevention of harmful tax practices.

Under the CT Law, the Federal Tax Authority ("FTA") is responsible for administering, collecting, and enforcing corporate and other federal taxes in the UAE. The FTA provides guidance, responds to clarifications, and conducts awareness sessions to ensure compliance. The law applies to all Taxable persons, including Resident and Non-Resident persons. A Resident person includes Juridical or natural persons, and Free Zone persons, who are either incorporated, established, or recognized in the UAE, effectively managed and controlled in the UAE, or conducting a business or business activity in the UAE. Conversely, a Non-Resident person is defined as one who has a Permanent Establishment ("PE") in the UAE, derives state-sourced income, or possesses a nexus in the UAE as specified by a Cabinet at the suggestion of the Minister. Furthermore, the Ministry of Finance ("MOF"), through Ministerial Decision No. 83/2023 dated April 10, 2023, has outlined the conditions under which the presence of a natural person in the UAE does not constitute a PE for a Non-Resident person.

Article 12 of the CT Law states that a Non-Resident person is liable to Corporate Tax¹ on Taxable Income² in certain situations, including income attributable to a PE in the UAE. While Article 14 (1) and (2) of the CT Law address the scenarios under which a Non-Resident person is deemed to have a PE in the UAE. Conversely, Article 14 (3) of the CT Law outlines the conditions where a fixed or permanent place of business for a Non-Resident person in the UAE is not considered a PE.

Specifically, Article 14 (7)(a) of the CT Law allows the Minister to prescribe conditions under which the mere presence of a natural person in the UAE, due to a 'temporary and exceptional situation,' does not create a PE for a Non-Resident person. These conditions are elaborated in Ministerial Decision No. 83 of 2023, which defines a 'temporary and exceptional situation' as meeting all of the following criteria:

1. The natural person's presence in the UAE is due to exceptional circumstances of a public or private nature;
2. The exceptional circumstances cannot reasonably have been foreseen by the natural person or the Non-Resident person;
3. The natural person did not intend to remain in the UAE after the exceptional circumstances concluded;
4. The Non-Resident person does not have a PE in the UAE prior to the exceptional circumstances; and
5. The Non-Resident person did not regard the natural person as creating a PE or deriving income in the UAE per applicable tax legislation in other jurisdictions.

The Decision clarifies that an 'exceptional circumstance' refers to an event or situation beyond the natural person's control that occurred while they were in the UAE, which could not have been reasonably predicted or prevented, and which impeded their ability to leave the UAE as initially planned.

Further guidance is provided on what constitutes 'exceptional circumstances of a public nature' and 'exceptional circumstances of a private nature':

Exceptional circumstances of a public nature include: (a) Implementation of public health measures by competent authorities in the UAE, the jurisdiction of the original workplace, or the World Health Organization; (b) Imposition of travel restrictions by competent authorities in the UAE or the jurisdiction of the original workplace; (c) Legal sanctions preventing the natural person from leaving the UAE; (d) Acts of war or terrorist attacks; (e) Natural disasters or force majeure events beyond reasonable control.

Exceptional circumstances of a private nature include: Emergency health conditions affecting the natural person or their relatives up to the fourth degree, including those related by adoption or guardianship.

Impact of Corporate Tax Treatment on Trust and Family Foundations

Family foundations and trusts are typically established for philanthropic purposes and to protect and manage the assets of individuals or families for future generations. While their primary focus is not business activities, they may engage in business-related activities if these are directly related to or aimed at fulfilling their foundational purposes.

These entities undertake various activities such as receiving, holding, investing, disbursing, or otherwise managing funds and assets associated with savings or investments for the benefit of individual beneficiaries or to achieve charitable goals. Although there are differences between family foundations and trusts, both aim to achieve similar non-profit objectives. In a family foundation, assets are transferred to the foundation and managed by a board, whereas in a trust, assets are transferred to a trustee who ensures they are passed on to the beneficiaries according to the trust creator's wishes.

Given their shared purpose, the CT Law defines a foundation, trust, or any similar entity meeting the relevant criteria as a "family foundation." According to the CT Law, a family foundation is defined as foundation, trust or similar entity used to protect and manage the assets and wealth of a natural person or family.

Article 17 of the CT Law states that the foundation, trust, or similar entity must be established for the benefit of natural persons, a public benefit entity, or both. Additionally, their principal activity should be the management of assets or funds associated with savings or investment. These entities should not engage in business activities and must not be established to avoid corporate tax. They must also meet any other conditions imposed by the MOF.

Family Foundations (including certain trusts) are independent juridical persons with separate legal personality, and would therefore prima facie be subject to Corporate Tax in their own right. However, these types of Family Foundations.

Family foundations incorporated, established, and registered in the UAE generally possess a separate legal personality from their family members or trust creators, thus meeting the definition of a juridical person as per the CT law. However, certain trusts, such as those established in the DIFC or ADGM, only have contractual relationships and do not possess legal personalities. Such trusts are treated as transparent for UAE corporate tax purposes, and their income is taxable in the hands of the relevant parties.

By default, family foundations incorporated in the UAE are subject to corporate tax as juridical persons, and their worldwide income is taxable. However, considering their non-profit nature, special provisions are included in the CT Law.

Article 17 of the CT Law offers family foundations the option to be treated as transparent "Unincorporated Partnerships" for Corporate Tax purposes, resulting in the founder/settlor and the beneficiaries of the foundation to remain to be seen as owners of the assets held by the foundation. This would generally prevent the income of the foundation from attracting Corporate Tax. To avail of this option, the family foundation must apply to the FTA. Upon FTA approval, the foundation will be treated as an unincorporated partnership from the start of the tax period in which the application is made, a future tax period, or another date determined by the FTA. Once granted this status, all related provisions of the law applicable to unincorporated partnerships will apply to the family foundation. This would generally prevent the income of the foundation from attracting UAE Corporate Tax.

In this case, each member of the family foundation will be treated as a taxable person, and the tax provisions of the UAE Corporate Tax law will apply to individuals. A natural person will be subject to UAE Corporate Tax when performing any business or business activity generating an annual turnover in excess of AED 1 million. This excludes income generated by a natural person from sources not considered as businesses or business activities, as per Cabinet Decision No. 49 of 2023. The following types of income are not treated as 'business income' for natural persons, without any limits:

1. Wage
2. Personal investment income
3. Real estate investment income (if not conducted through or requiring a license)

According to Cabinet Decision No. 49 of 2023, a natural person can earn income from real estate (sale, lease, etc.) without falling under the purview of Corporate Tax, provided it is not conducted with a license or does not require a license.

This provision offers significant relief for those planning to establish a family foundation.

Impact of Corporate Tax on the Real Estate Investment in UAE

The Corporate Tax in the UAE will be levied on 'taxable income,' defined as a business's accounting net profit after deducting specific items referred to as deductibles under the CT law. This tax applies to commercial activities, including those under a commercial/trade license or permit, as well as income received under freelancer permits (if taxable income exceeds the threshold).

The Corporate Tax rate is 9% which applies to businesses and individuals carrying out commercial activities with over AED 375,000 annual taxable income. This tax covers both leasehold and freehold assets, ensuring extensive coverage of the real estate industry. The tax applies to both resident and non-resident entities and individuals earning income from real estate in the UAE as the real estate investment income is "income earned by a natural person from an investment activity related directly or indirectly to land or real estate property in the UAE, which is not conducted, or required to be conducted, through a Licence issued by a Licensing Authority in the UAE".

Tax Treatment of the property held by a Natural Persons

A natural person who owns property in the UAE may be liable to taxation under Cabinet Decision No. 49 of 2023, if their property ownership is linked to any licensed commercial activity. As per this decision, businesses or commercial activities conducted by a natural person, whether they are a resident or non-resident, will be subject to corporate tax if the turnover from such activities exceeds AED 1 million within a calendar year.

For natural persons, the tax treatment hinges on the nature of their real estate activities:

Investment Income: Income derived from real estate investments that are not part of a licensed business activity including but not limited to the activities that relates to (directly or indirectly) the sale, leasing, sub-leasing, and renting of the real estate, is exempt from Corporate Tax.

Licensed Activities: If a resident individual generates income from licensed activities, such as real estate management, construction, development, agency, brokerage activities and their turnover exceeds AED 1 million, they become subject to Corporate Tax. The tax obligations are as follows:

Income up to AED 1 million: Not liable for registration or Corporate Tax.

Income between AED 1-3 million: Liable for registration and filing returns but can claim exemption until the end of 2026.

Income above AED 3 million: Liable for registration, filing returns, and paying corporate tax (0% up to AED 375,000, 9% on income exceeding AED 375,000).

The information above is summarized in the table below for easy reference:

Each Emirate has distinct regulations governing real estate transactions. Therefore, natural persons should diligently follow the business licensing laws in the Emirates where their properties are located to accurately evaluate tax implications on income derived from real estate.

Tax Treatment of the property held by a Juridical Persons

A "juridical person" is an entity established or otherwise recognised under the laws and regulations of the UAE, or under the laws of a foreign jurisdiction, that has a separate legal personality (means that the entity has its own rights, obligations and liabilities. As a consequence, the owners of the juridical person would typically have limited liability when it comes to the debts and obligations of the entity) which separate from its founders, owners and directors. Examples of UAE domestic juridical persons include a limited liability company, a foundation, an 'onshore' trust, a public or private joint stock company, and other entities that have separate legal personality under the applicable UAE 'mainland' legislation or Free Zone regulations.

UAE branches of a domestic or a foreign juridical person are regarded as an extension of their "parent" or "head office" and, therefore, are not considered separate juridical persons.

All activities undertaken by a juridical person will be deemed "Business Activities" and are within the scope of Corporate Tax, unless specifically exempted. Thus, tax treatment of the property held by a juridical persons includes:

Juridical persons, such as real estate companies operating in the UAE, are not excluded from Corporate Tax payments. According to the MOF Portal and its frequently asked questions (FAQs), entities engaged in property management, building construction, development, agency, and brokerage are subject to Corporate Tax.

Revenues from brokerages, commissions, or earnings attained by real estate agents within the UAE are included under the CT Law. Entities offering property advisory, decision-making, planning, conceptualization, maintenance, sale, purchase, utilization, and disposal services also fall under the scope of the Corporate Tax.

Properties held under a company's name are subject to Corporate Tax on rental income and capital gains, except for commercial real estate located in a free zone and leased to another free zone company.

UAE holding companies will be subject to Corporate Tax. However, dividends from domestic shareholdings will be exempt without condition, and dividends from foreign shareholdings and capital gains from domestic and foreign shareholdings will be exempt, subject to meeting the conditions of the Participation Exemption.

Sole proprietorship or civil company cannot be treated as a juridical person for Corporate Tax purposes but natural persons who conduct a business in the UAE through a sole proprietorship or civil company may be subject to Corporate Tax where a relevant business or business activity is undertaken.

Whether the company is established in the UAE or abroad, rental income and capital gains derived from properties located in the UAE are subject to Corporate Tax.

Ownership and exploitation of immovable property is an excluded activity, except for commercial property transactions between Free Zone persons.

"Exploitation" includes development and leasing for economic benefit. There is a lack of clarity on whether income attributed to commercial property earned by contractors and subcontractors qualifies as taxable income or falls under excluded activities.

Tax treatment for real estate companies based on property type and location

Non-Commercial Properties: Income generated from non-commercial properties, which include real estate utilized non-exclusively as residences or accommodations such as hotels, motels, bed and breakfast establishments, serviced apartments, and similar facilities, the income attributable to such properties is subject to a 9% Corporate Tax, irrespective of the company's residency status. Both resident and non-resident companies owning and operating non-commercial real estate will be liable for Corporate Tax on the income earned from these properties.

Commercial Properties in Free Zones:

The tax treatment for commercial properties in free zones depends on the owner's status and the nature of the transactions. If the owner is a Qualifying Free Zone Person (QFZP) and transacts with other entities within the free zone, the income generated may be exempt from Corporate Tax. However, if the owner is a non-QFZP or made an election to be a regular taxpayer despite meeting conditions for the QFZP status or engages in transactions with parties outside the free zone, a 9% Corporate Tax will apply.

Commercial Properties Outside Free Zones (Mainland):

Income generated from commercial properties located on the mainland is subject to a 9% Corporate Tax, regardless of the owner's residency status or the nature of the transactions. Free zone companies leasing out service apartments or hotel apartments, even within the free zone (e.g., Dubai Multi Commodities Centre (DMCC)), are subject to Corporate Tax on the rental income earned.

The information above is summarized in the table below for easy reference:

Exemptions and Reliefs Under CT Law

Real Estate Investment Trusts (REITs):

REITs may be exempt from Corporate Tax on their UAE investments, provided they meet specific conditions. This exemption is designed to promote the growth and development of REITs in the UAE real estate market.

Individual Investors:

Individual investors, both resident and non-resident, are exempt from Corporate Tax on their real estate investments. This exemption aims to maintain the attractiveness of the UAE real estate market for individual investors and foster a favorable environment for personal wealth creation through real estate investments.

Personal Settings:

Investments made in a personal setting, whether directly or through a trust, foundation, or other fiscally transparent subjects, are exempt from Corporate Tax. This relief ensures flexibility in how individuals can manage and invest in real estate.

Diplomatic or Consulate Property:

Properties owned for land speculation by diplomatic missions or consulates are exempt from Corporate Tax. This exemption acknowledges the unique status and purposes of diplomatic properties.

Hands-On Illustrations and Scenarios

Scenario 1: Residential Real Estate Developer

Company: XYZ Developers LLC

XYZ Developers LLC, a mainland company engaged in the development and sale of residential properties, will be subject to a 9% Corporate Tax on the taxable income earned from these activities under the new CT Law. To optimize its tax position, the company must ensure efficient cost management and explore available tax incentives for property developers. Strategies such as engaging in strategic pricing to maximize revenue, leveraging deductions for development expenses, and timing sales to align with financial reporting and tax planning can help XYZ Developers LLC navigate the new tax landscape effectively.

Scenario 2: Free Zone Commercial Property Owner

Company: Free Zone Holdings FZE

Free Zone Holdings FZE, a company located in the DMCC Free Zone, owns and leases commercial office spaces. As a free zone entity, it may qualify for a 0% Corporate Tax rate on income from these properties if it meets the criteria for a QFZP. The company should ensure that transactions are primarily with other free zone entities to benefit from the 0% tax rate. Additionally, maintaining accurate records to demonstrate compliance with QFZP conditions and exploring opportunities to reinvest tax savings into property improvements or expansion can further enhance its tax position.

Scenario 3: Foreign Investor in Residential Real Estate

Investor: ABC International Investments

ABC International Investments, a foreign company owning various residential properties across Dubai, will not be subject to Corporate Tax on rental income from these properties. However, the company should monitor and comply with local property regulations and explore tax treaties between the UAE and their home country to optimize overall tax liability. Considering restructuring ownership to enhance tax efficiency and potentially leveraging benefits in their home country can also be beneficial for ABC International Investments.

Scenario 4: Mixed-Use Property Owner

Company: Real Estate Ventures Ltd.

Real Estate Ventures Ltd., owning and operating mixed-use buildings in Abu Dhabi, will be subject to a 9% Corporate Tax on income from both commercial and residential units. The company should segregate income streams based on property types and maintain accurate records. Utilizing deductions and allowances for operating expenses to reduce taxable income and implementing a tax-efficient structure for mixed-use properties will help maximize benefits and ensure compliance with the new CT Law.

Scenario 5: REIT Focused on Commercial Properties

Company: UAE REIT Inc.

UAE REIT Inc., investing in income-generating commercial properties across various emirates, may be exempt from Corporate Tax on its UAE investments if it meets specific conditions set for REITs. To maintain its tax-exempt status, UAE REIT Inc. should ensure compliance with all REIT-specific regulations and conditions. Regularly reviewing and updating investment strategies to align with tax benefits and communicating these advantages to investors will help attract more capital and enhance the REIT's position in the market.

Scenario 6: Small-Scale Residential Property Investor

Investor: Michael Doe

Micheal Doe, an individual investor owning a residential apartment in Dubai, will not be subject to Corporate Tax on the rental income from his property. To maximize his investment returns, Micheal Doe should maintain the property to attract high-quality tenants and maximize rental income. He should also consider potential capital gains tax implications if planning to sell the property and explore additional real estate investments to diversify his portfolio while staying informed about any future changes in tax regulations.

Scenario 7: Free Zone Mixed-Use Property Developer

Company: Alpha Development FZE

Alpha Development FZE, a company developing and leasing mixed-use properties in a free zone, will need to navigate different tax treatments for commercial and residential properties within the free zone. To optimize its tax position, Alpha Development FZE should qualify as a QFZP to benefit from the 0% Corporate Tax rate on commercial properties. The company should also maintain clear and separate financial records for commercial and residential income, engage in strategic planning to manage the tax implications of leasing and development activities, and seek professional advice to ensure compliance with the new CT Law.

Footnotes

1 Corporate Tax is a form of direct tax levied on the net income or profit of corporations and other businesses. Corporate Tax is sometimes also referred to as "Corporate Income Tax" or "Business Profits Tax" in other jurisdictions.

2 the taxable income for a tax period is the accounting net profit (or loss) of the business, after making adjustments for certain items as defined in the CT Law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.