The implementation of the UAE corporate tax law has sparked numerous inquiries and confusion, particularly regarding its impact on natural persons. In the context of this law, a “natural person” refers to an individual, distinguishing them from legal entities such as corporations.
This encompasses individuals engaged in personal business endeavours, such as freelancers, sole establishments, and civil companies. A natural person conducting a business or business activity in the UAE will be subject to taxation only if the turnover from such activities exceeds Dh1 million in a Gregorian year, from January to December. Additionally, they need to register only if the turnover exceeds Dh1 Million.
The corporate tax law applies uniformly to all individuals, regardless of citizenship or visa status. Tax liability is determined solely by the income generated when the business activity is managed and controlled from the UAE, or when the assets contributing to such activities are located in the UAE. Nationality or residency does not affect this tax liability. Income earned from business activities outside the UAE falls under corporate tax only when such income is derived from business activities conducted within the UAE.
The corporate tax law allows for the deductibility of all expenses incurred wholly for the business purposes of a natural person, while disallowing certain expenses such as donations, fines, and bribes as they are considered non-business-related. Furthermore, salaries withdrawn by a natural person from their own sole proprietorship concern are not considered deductible expenses under corporate tax. Interest expenditure is deductible according to the general interest deduction rule. Whereby interest expenditure exceeds Dh12 million in a tax period, it will be limited to 30 per cent of the accounting EBITDA.
The UAE corporate tax law specifies that salaries/wages, personal investment income, and real estate investment income earned by a natural person are not taxable under the UAE corporate tax. To calculate a natural person’s turnover, the gross income from all business activities conducted in a Gregorian year should be considered. This income, after deducting allowable expenses under corporate tax, will be taxed at nine per cent for any part of income above Dh375,000. If the calculated turnover does not exceed Dh3 Million, the natural person can opt for small business relief under corporate tax.
The UAE corporate tax Law represents a significant shift in the country’s tax landscape. Natural persons must understand the implications of this law on their various income streams to effectively navigate the regulatory environment and ensure compliance.
The writer is Partner, MI Capital Services