The UAE issued a new Corporate Tax Law (“CTL”) on 09 December 2022. The law establishes the legal framework for introducing and implementing a federal corporate tax in the UAE. The law applies to financial years that start on or after 1 June 2023.
The CTL applies to both juridical persons (such as companies and partnerships) and natural persons (such as individuals and sole proprietors) who conduct business or business activities in the UAE. However, not all natural persons are subject to the corporate tax, as there are certain criteria and exemptions that determine their tax liability.
Who is liable for Corporate Tax in the UAE?
According to Clause (6) Article 11 of the Corporate Tax Law, Taxable Persons are those who are obliged to pay Corporate Tax on their income. They can be either Resident Persons or Non-Resident Persons.
The Corporate Tax Law applies to the following categories of Taxable Persons:
- Juridical persons, such as companies, that are either established in the UAE or controlled and managed from the UAE;
- Non-resident juridical persons that have a fixed place of business or a dependent agent in the UAE;
- Non-Resident Persons that earn income from sources within the UAE;
- Non-resident juridical persons that have a connection to the UAE through earning income from real estate activities in the UAE; and
- Natural persons who carry out business or commercial activities in the UAE and have an annual turnover of more than AED 1,000,000 from such activities.
Who is a natural person?
According to the CTL, a natural person is a “living human person of any age, whether resident in the UAE or elsewhere”. This means that any individual who engages in any economic activity in the UAE, regardless of their nationality, residence, or immigration status, is considered a natural person for tax purposes.
Scope of Corporate Tax for Natural Persons
- The Corporate Tax Law covers natural persons who run a Business or Business Activity in the UAE, have a fixed base of operations in the UAE, or earn income from sources within the UAE. This is to ensure fairness between incorporated and unincorporated businesses operated by individuals.
- However, some income categories are exempt from Corporate Tax for individuals, such as income from employment, personal investments, or real estate investments.
- Additionally, the Corporate Tax Law is subject to any international agreements, such as Double Taxation Agreements, that the UAE has with other countries. Therefore, the tax residency and liability of an individual may depend on the relevant agreement between the UAE and their home country.
Taxable Income for Natural Persons
A natural person has to pay Corporate Tax on their income from a Business or Business Activity that they run in the UAE. However, if a natural person’s total Turnover from Business or Business Activities in the UAE is less than AED 1 million in a Gregorian calendar year, they are exempt from registering for or paying Corporate Tax on their income from the Business or Business Activities. The Turnover can include “in-kind” payments that are valued at Market Value.
For Corporate Tax purposes, a natural person’s income from Wage (employment income), Personal Investment income, and Real Estate Investment income is not subject to Corporate Tax and is not considered for the AED 1 million threshold.
When does the Corporate Tax apply to natural persons?
The Corporate Tax applies to natural persons who conduct a business or business activity in the UAE. Natural persons need to consider the following factors to determine if they are liable for Corporate Tax:
- A natural person who runs a Business or Business Activity in the UAE is regarded as a Taxable Person and a Resident Person according to the Corporate Tax Law.
- A natural person has to pay Corporate Tax on their Business or Business Activity only if the total Turnover from Business or Business Activities in the UAE is more than AED 1 million in a Gregorian calendar year.
- A natural person’s income from these sources is not counted as part of their Business or Business Activity, and is excluded from Turnover and Corporate Tax, no matter how much they earn:
- Personal Investment income, and
- Real Estate Investment income.
If the Turnover from Business or Business Activities in the UAE is more than AED 1 million in a Gregorian calendar year, the natural person (whether resident or non-resident) has to follow the rules of the Corporate Tax Law, such as registering for Corporate Tax with the FTA, filing Corporate Tax Returns and paying Corporate Tax.
Excluded Income for Natural Persons under the Corporate Tax Law
Not all income of a natural person is considered taxable for Corporate Tax purposes. The Corporate Tax Law excludes the following types of income from the scope of taxation:
- Wage: This is the income earned by a natural person as an employee or a worker under an employment contract or a similar arrangement. This includes salaries, bonuses, allowances, benefits, and any other payments made by the employer to the employee.
- Personal investment income: This is the income earned by a natural person from investing their personal funds in various assets, such as stocks, bonds, funds, deposits, loans, and other securities. This also includes dividends, interest, capital gains, and any other returns from such investments.
- Real estate income: This is the income earned by a natural person from owning, leasing, or selling real estate property, such as land, buildings, apartments, villas, and other immovable assets. This also includes rent, royalties, and any other income from such property.
These types of income are not subject to Corporate Tax and will not be taken into account to compute the AED 1 million threshold regarding the income obtained from a business or business activity.
Resident and Non-Resident Taxable Persons
- Resident Taxable Persons
Physical residence in the UAE, based on citizenship or a residency visa, does not decide whether a natural person is a Resident Person for Corporate Tax purposes, or whether their income is taxable. The following is the approach to determine the residence status and tax liability of natural persons under the Corporate Tax Law:
- A natural person who lives in the UAE and runs a Business or Business Activity in the UAE is treated as a Resident Person and a Taxable Person for Corporate Tax purposes, subject to the important factors mentioned above.
- A natural person who lives outside the UAE - for example, having their home in another country - is treated as a Resident Person for Corporate Tax purposes if they run a Business or Business Activity in the UAE, subject to the important factors mentioned above.
Therefore, under the UAE Corporate Tax Law, and if the natural person has not applied an applicable Double Taxation Agreement, any natural person who runs a Business or Business Activity in the UAE will be a Resident Person for the Corporate Tax Law.
- Non-Resident Taxable Persons
- If a natural person lives in a country that has an applicable Double Taxation Agreement with the UAE, and because of the application of that Double Taxation Agreement the natural person is not resident in the UAE but has a Permanent Establishment in the UAE (and the Turnover related to the Permanent Establishment is more than AED 1 million in a Gregorian calendar year), they would be a Non-Resident Person and Taxable in the UAE.
- A natural person who lives outside the UAE may also become a Non-Resident Taxable Person if they earn State Sourced Income, which is income that is accrued in, or derived from, the UAE, but is not derived through a Business or Business Activity run by the natural person in the UAE.
The Corporate Tax Law applies to natural persons who conduct business or business activities in the UAE, under certain conditions and exceptions. Natural persons who are liable for Corporate Tax need to calculate their taxable income, file their Corporate Tax returns, and pay their Corporate Tax dues, as well as comply with other obligations under the law. Natural persons who are unsure about their Corporate Tax status or obligations should consult a qualified tax expert before making any decisions.
Corporate Tax UAE: How We Can Help You
If you are a natural person who owns or operates a business in the UAE, you may be wondering how this new tax will affect you and what you need to do to comply with the new rules. That’s where we come in.
We are Corporatetaxuae, a tax consultancy firm in the UAE with experience in providing tax advisory and compliance services to businesses and individuals. We have a team of qualified and experienced tax consultants who can help you with:
- Understanding the scope and implications of the new Corporate Tax law and how it applies to your business activities and income.
- Preparing and filing your Corporate Tax returns on time.
- Claiming any exemptions, deductions, or reliefs that you may be eligible for under the Corporate Tax law.
- Planning and optimizing your tax position and minimizing your tax exposure.
- Dealing with any queries or disputes that may arise with the tax authorities.
Whether you are a sole proprietor, a partner, or a shareholder in a business, we can help you navigate the new Corporate Tax regime and ensure that you comply with your tax obligations while maximizing your tax savings. Contact us today and let us help you with your Corporate Tax needs.