The Emirates, renowned for its robust economy and strategic global positioning, continues to attract investors and entrepreneurs alike. Within this dynamic economic landscape, the real estate industry emerges as a cornerstone, playing a pivotal role in propelling the nation’s growth trajectory.
From a tax perspective, individual investors intending to hold real estate for personal gain find themselves in a favourable position since real estate investment income earned by a natural person from an investment activity in 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, is not subject to the nine per cent rate. Only individuals engaged in business activities requiring a commercial licence are subject to the corporate tax in the UAE. This entitles a natural person, owning several commercial properties in their name, generating rental income even if above Dh1 million, to qualify for exclusion for UAE corporate tax purposes, provided it is not conducted, or required to be conducted through a licence.
It’s important to note that these provisions apply regardless of residency status, ensuring a level playing field for both resident and foreign investors. Conversely, natural persons conducting activities necessitating a trade licence will face a nine per cent corporate tax on profits exceeding Dh375,000, triggered only if annual turnover surpasses Dh1 million.
To clarify further, if the licence is held for a business unrelated to real estate income, then the real estate income directly in the hands of individual would qualify for exclusion i.e. no tax. The same is the case for split income, wherein, if an individual holds a licence for holding specific properties, for example – holiday homes which supposing requires the individual to hold licence, and some residential properties which do not require holding a licence. In such cases only the properties which require the individual to hold a licence would be subject to tax.
Further, If a natural person engages a management company to handle their properties and doesn’t possess or need a licence, the income received remains exempt from the nine per cent tax. However, if the individual establishes a sole establishment or a company to manage the properties, it becomes subject to corporate tax. Alternatively, if the individual owns a company to manage his own properties and pays a management fee to the company, the net real estate income directly in the hands of natural person remains exempt from tax. Further, holding properties through family foundations also offers a tax-free option.
Given the tax complexities surrounding the real estate investment income, it is now not only crucial which property one selects to invest in but also how one decides to manage the real estate investments, for securing the tax benefits offered by law.
The law is a bit straight forward for companies, known as ‘juridical persons’. The companies are subject to a 9 per cent tax on income above Dh375,000 on their real estate income. Further, it is very clear that businesses engaged in real estate management, construction, development, agency and brokerage activities will be subject to UAE corporate tax. A benefit of zero per cent rate is although available for those operating within free zones, subject to complying certain conditions.
Here, it is important to define ‘commercial properties’ since only ‘commercial properties’ located in free zones can benefit from the zero per cent tax rate. According to the law, a commercial property is exclusively used for business activities, not as a place of residence or accommodation. If to be strictly interpreted, hotels, despite being businesses, may not qualify under this definition.
Touching upon international tax angle, for non-resident companies, holding real estate in UAE or deriving income from UAE real estate may give rise to a taxable nexus in the UAE and as such may be subject to corporate tax. This would in turn also mandate the foreign company to obtain a corporate tax registration in the UAE.
In conclusion, while the UAE’s tax system aims to facilitate investment in its thriving real estate market, it ensures that businesses contributing to its development are duly taxed except the ones who are set-up in free zones post complying certain conditions. Favorable tax norms for individual investors, coupled with the enticing residency golden visa scheme, emphasize the government’s commitment to positioning real estate as a key industry, aimed to attract global interest in the years ahead.
Sheetal Soni Partner MICS International DMCC