The UAE’s Corporate Tax regime, introduced under Federal Decree-Law No. 47 of 2022, affects businesses and individuals alike. However, for natural persons earning income from real estate investments, there are specific exclusions from Corporate Tax. The article is aligned with Cabinet Decision No. 49 of 2023 & Corporate Tax Guide “CTGREI1” of October 2024, which outlines specific cases when real estate income of natural persons can be excluded from corporate tax.
Real Estate Investment
For the Real Estate Investment exclusion, only specific activities related to land or real estate property are recognized as investment activities. These activities include:
Selling,
- Leasing/renting, and
- Sub-leasing.
This list is exhaustive; only activities directly or indirectly tied to these qualify as Real Estate Investments. Income must stem from using the property itself, not from services related to it, such as property management.
However, if these activities require a license from a Licensing Authority to operate, they won’t be treated as Real Estate Investment and will fall under the scope of Corporate Tax.
The scope of "land or real estate property"
- Land
Any area where rights, interests, or services can be created, including agricultural, industrial, and residential land.
Buildings and Structures
Permanent constructions attached to land or seabed, such as residential & commercial properties, furnished holiday homes, parking lots, warehouses, and other integral structures.
Permanent Fixtures and Equipment
Which are attached as part of the land or building or seabed.
Real estate investment activities cover income earned from both commercial and residential property use, regardless of whether the tenants use the property for business or personal reasons. As long as the income aligns with the definition of real estate investment, it is exempt from Corporate Tax, regardless the property’s size, quantity, value, or income generated.
No Corporate Tax applies to investment activities conducted in the UAE, whether the land or real estate property is located within the UAE or abroad.
Sole Establishments or Sole Proprietorships
A sole establishment or sole proprietorship is a business owned and run by a natural person in their own name, meaning the business and the person are legally the same. This setup differs from a single-owner company, which has its own legal identity, separating the business from its owner. In a sole proprietorship, the natural person directly controls the business and holds unlimited liability for its debts and obligations. For Corporate Tax, the taxable person is the natural person operating the business, not the sole proprietorship itself.
Corporate Tax implications of Real Estate Investment
When income from real estate investment qualifies for exclusion, expenses directly or indirectly related to that income are also excluded from deductions for Corporate Tax purposes.
Licensing Requirement
For natural persons, the UAE Corporate Tax Law does not automatically require a license for every real estate activity. Whether a license is needed depends on the nature of the activity and the rules set by the local Licensing Authorities.
Some real estate investment activities do not need a business license. However, if a license is legally required but has not been obtained, this does not exempt the activity from Corporate Tax. In such cases, the income from that activity would still be subject to Corporate Tax if it exceeds the turnover threshold.
Impact on Corporate Tax Registration
Natural persons conducting business in the UAE must register for Corporate Tax if their annual turnover exceeds AED 1 million within a Gregorian calendar year, starting from the 2024 Gregorian calendar year. Income from real estate investments excluded from Corporate Tax shall not be counted in this turnover threshold.
Differentiating Business Income and Real Estate Investment Income
Real Estate Investment income is excluded from Turnover and not subject to Corporate Tax, regardless of the amount. This exclusion does not apply if the land or real estate is part of a Business or Business Activity requiring a Licence.
A natural person may own real estate in a non-Business capacity and also operate a Business or Business Activity needing a Licence. In such cases, it’s essential to determine if real estate investment income qualifies as outside the scope of Corporate Tax or if it’s Taxable Income.
If a Licence is held or required for a Business, the Real Estate Investment exclusion is still available if Business and Real Estate Investment activities are clearly distinct. However, if the real estate forms part of the Business requiring a Licence, the related income is taxable under Corporate Tax.
For example, A natural person owns apartments and receives rental income through a real estate management sole establishment, which lacks a separate legal identity. This establishment, licensed for property management and leasing, handles services like finding tenants, registering contracts, advertising, and collecting rent. Since the sole establishment is licensed to conduct leasing and property-related activities, the natural person cannot claim the Real Estate Investment exclusion. Therefore, the rental income must be included in the natural person’s Turnover for Corporate Tax purposes.
Apportioning Income and Expenses
For those who generate both real estate investment income and business income, separating them is essential for accurate tax reporting. If a person rents out some properties as licensed holiday homes and others as residential apartments without needing a license, they should apportion the income appropriately. Licensed holiday home income falls under business income, while the rental income from residential properties can still be treated as real estate investment income which is outside the scope of corporate tax.
Similarly, shared expenses should be allocated based on a logical apportionment method. This might include dividing overheads based on property usage or value, ensuring that each income category reflects its share of expenses.
Income from Jointly-Owned Properties
In cases of co-owned land or real estate property, income from real estate investments should be allocated to each owner based on the specific details of their circumstances. Where the owner is a natural person, and does not conduct the investment activity which requires a License, their share of income falls outside the scope of Corporate Tax. Each co-owner should assess their own circumstances to determine if their income qualifies as real estate investment income.
