Corporate Tax on Real Estate Investment for Natural Persons

What Qualifies for Corporate Tax Exclusion?

Under UAE Corporate Tax law, resident and non-resident natural persons conducting business activities in the UAE are subject to corporate income tax if their taxable revenue exceeds AED 1 million within a calendar year.

However, income from the following categories is not considered as generated from a business activity and is therefore outside the scope of UAE Corporate Tax:

• Real Estate Investment income
• Wages
• Personal Investment income

For natural persons, real estate investment income can be excluded from taxable income if it is derived from specific investment activities in land or property and is conducted in a personal capacity, without requiring a business license or permit.

Real estate investment includes both residential and commercial properties; however, only income from the following activities qualifies for Corporate Tax exclusion, regardless of the income amount:

• Rental Income: Leasing, sub-leasing, or renting land or property.
• Property Sales: Selling property as part of a personal investment.

Other activities, such as property management services, do not qualify for the Corporate Tax exclusion.

Licensing Conditions

To qualify for tax exclusion, real estate investment must be conducted without a business license, including sole establishment or sole proprietorship licenses. For example, renting an apartment as a holiday home, which requires a permit from the Department of Economy and Tourism in Dubai, is considered a licensed business activity and thus subject to Corporate Tax. In contrast, renting residential apartments with registered tenancy contracts, such as Ejari, qualifies as a Real Estate Investment and remains outside the scope of Corporate Tax

Determining What Counts as Personal Real Estate Investment

Personal Real Estate Investment generally includes cases where individuals buy, hold, or rent properties for income without engaging in licensed commercial activities. Examples of exempt personal real estate investments include:

• Residential and Commercial Leases: Leasing a personally owned property without involvement in additional property management services.
• Personal Property Sales: Selling personally owned property at a profit.
• Passive Income from Leases: Collecting rental income through an intermediary, like a property manager, while remaining a passive investor.

Practical Examples

To illustrate how these rules apply, here are some examples:

Example 1: Leasing Residential Property Without a License

• A person owns an apartment in Dubai and leases it without a business license. This rental income qualifies as personal investment and is therefore exempt from Corporate Tax.

Example 2: Managing Property Through a Licensed Sole Establishment

• An individual forms a sole establishment (license) to manage their property portfolio with a license. This business activity would fall under Corporate Tax, even if it involves their own properties.

Example 3: Rent Collection Through a Licensed Property Management Firm

• A property owner hires a licensed property management firm to collect rent on their behalf. Even though the intermediary is licensed, the rental income remains tax-exempt for the individual, as they aren’t directly involved in the licensed activities.

Corporate Tax Implications for Mixed Income Sources

Natural persons who operate other businesses alongside personal real estate investments may need to separate business and personal income. Key points to keep in mind:

• Separate Business Activities: Income from licensed businesses (e.g., running a hotel, property management) is taxable.
• Real Estate Income Allocation: Only income from personal real estate investment activities is exempt.
• Mixed Use Properties: Costs and income may need to be apportioned if a property serves both personal investment and business purposes. A fair allocation method should be used for accurate reporting.

Anti-Abuse Rule

The UAE Corporate Tax regime includes a General Anti-Abuse Rule (GAAR) to prevent misuse of tax exemptions by ensuring that transactions are genuine and commercially meaningful. This rule empowers the Federal Tax Authority (FTA) to counteract or adjust any transaction that lacks commercial substance or economic reality if it is primarily undertaken to gain a Corporate Tax advantage inconsistent with the law’s intent.

Application to Real Estate Investment for Natural Persons:

If a natural person’s real estate transaction is structured primarily to benefit from the Corporate Tax exemption, such as claiming the Real Estate Investment exclusion without a genuine economic basis, the FTA may challenge this arrangement. The FTA has the authority to deny the tax advantage if the transaction lacks substance or goes against the spirit of the Corporate Tax Law.

Key Considerations for Individual Real Estate Investors

For individual real estate investors in the UAE, managing real estate income while remaining compliant with Corporate Tax rules requires a few essential considerations. Here’s what you need to keep in mind:

• Follow Accepted Accounting Standards: Ensure that your real estate investments are accounted for in line with UAE-accepted accounting standards, IFRS (International Financial Reporting Standards). Proper accounting supports compliance and provides clarity on income and expenses.
• Determine Your Tax Treatment: Identify whether you are taxed on income generated through a licensed activity, as a personal investment, or both. The Corporate Tax treatment will vary based on your licensing status.
• Maintain Separate Books for Personal and Business Investments: Keep distinct records for personal real estate investments and those connected to business activities. This separation simplifies tax reporting and ensures that income is accurately allocated to each category.
• Allocate Common Expenses Properly: For shared or common expenses, ensure you allocate them appropriately between personal and business investments.
• Apply the Arm’s Length Principle for Related Party Transactions: When engaging in transactions with related parties, such as between a building owner and their own property management company, make sure these dealings are conducted at arm’s length. This means the transaction terms should be as if they were between independent parties.
• Verify Licensing Requirements: Determine whether your real estate activities require a business license. If so, income from such activities is typically subject to Corporate Tax.
• Clarify Income Allocation for Jointly Owned Properties: If you co-own a property, accurately identify the income portion allocated to you. Each co-owner’s income share must be separately accounted for to ensure proper tax treatment.
• Avoid Transactions Solely for Tax Advantages: Do not engage in real estate transactions or arrangements with the primary purpose of obtaining a Corporate Tax benefit. Such arrangements may attract scrutiny under the UAE’s anti-abuse rules.
• Consult a Tax Agent or UAE Corporate Tax Advisor: Seek advice from an expert tax agent or UAE Corporate Tax advisor to assess your current real estate investments, especially before making any new investments or considering changes in ownership or licensing arrangements. This is crucial, as the same investment could either be exempt from tax or taxed at 9%, depending on its structure and licensing status.