Taxation of Natural Person under the UAE Corporate Tax Law
In November 2023, the Federal Tax Authority (FTA) unveiled the Corporate Tax Guide (CTGTNP1) aimed at providing comprehensive insights into the “Taxation of Natural Persons under the UAE Corporate Tax Law.” This guide serves to elucidate the circumstances under which natural persons become liable to Corporate Tax, defining parameters for business and business activities, outlining exclusions from Corporate Tax, elucidating the requisites for registration and de-registration, detailing the methodology for Corporate Tax calculation pertaining to natural persons, and addressing aspects related to tax periods and the submission of tax returns. This discussion will delve into a thorough exploration of the various facets associated with the taxation of natural persons under the UAE Corporate Tax Law.
“Natural Person & Applicability of UAE CT”
In the United Arab Emirates (UAE), a natural person, regardless of age or residency status, engaging in business activities is classified as a Taxable Person. Corporate tax applies to the natural persons only when the total turnover from business or business activities conducted in the UAE surpasses AED 1 million within a Gregorian calendar year.
Turnover, defined as the gross income during a Gregorian Calendar Year, includes “in-kind” payments valued at market value. It represents the sum of all income before deducting any costs. Corporate tax is applicable solely to income derived from business or business activities conducted within the UAE by a natural person.
Turnover should be measured on ‘Accrual Basis’ except where the natural person applies the ‘Cash Basis’ of Accounting.
If a natural person conducts business activities while physically present in the UAE, their taxable income encompasses revenue from both UAE and non-UAE sources, provided it is linked to the business or business activities conducted in the UAE.
To assess whether income is related to UAE business or business activities, consider factors such as:
- Whether individuals contributing to production or sales are UAE residents;
- Whether contracting or business development for selling/providing goods/services occurred in the UAE; and
- Whether assets contributing to production or services are situated in the UAE.
On the contrary, when an natural person is classified as a Non-Resident Person and the aggregate Turnover generated from their Business or Business Activities in the UAE surpasses AED 1 million, the Taxable Income of such an natural person will be confined to the income earned from the UAE sources.
“Business or Business Activities & Exclusions from UAE CT”
A business is characterized as a regularly conducted, independent activity encompassing industrial, commercial, agricultural, vocational, professional services, excavation, and the utilization of tangible or intangible properties. The term ‘ongoing’ should not be narrowly construed to exclude short-term activities, as corporate tax regulations acknowledge the inclusivity of such endeavors. Consequently, the corporate tax law emphasizes the “conduct” of a business rather than the specific phrase “carrying on” to ensure a comprehensive scope that encompasses both short-term and long-term activities.
Exclusions from UAE CT
- Wage: The Corporate Tax does not apply to wages, including compensation and benefits, received by employees from their employers, whether in cash or in-kind. Director fees are generally not considered a Business or Business Activity and are therefore not subject to Corporate Tax.
- Personal Investment Income: Income from Personal Investments is exempt from Corporate Tax for natural persons engaging in investment activities conducted in a personal capacity. This exemption applies when the activity is not conducted through a license or necessitates one from a Licensing Authority, and it is not deemed a commercial business as defined by the Commercial Transactions Law. Notably, an activity not classified as a commercial business under the Commercial Transactions Law does not automatically qualify as a Personal Investment unless conducted on the individual’s personal account and does not require a license.
- Real Estate Investment Income: Income generated from real estate investments is exempt from corporate tax for natural person in the UAE when associated, either directly or indirectly, with the sale, lease, sub-lease, or rental of land or real estate properties. This exemption applies specifically to transactions not requiring a license from a Licensing Authority.
“General deduction rules relating to business expenditure”
Expenditure incurred by a natural person for their business, excluding capital expenses, is deductible in the tax period of incurrence, subject to limitations. No deduction is allowed for:
- Expenditure unrelated to the person’s business.
- Expenditure for generating exempt income (excluding interest expenditure).
- Losses not connected with or arising from the person’s business.
If expenditure serves multiple purposes, a deduction is allowed for the identifiable part exclusively for deriving taxable income. If not solely for business purposes, a fair and reasonable proportion is deductible, considering the relevant facts and circumstances of the person’s business.
General Interest Deduction Limitation Rules
When natural person is liable for Corporate Tax, the General Interest Deduction Limitation Rule doesn’t apply. Typically, capping interest deductions at AED 12,000,000 or 30% of taxable earnings (EBITDA), this rule is waived for natural persons. For natural persons, full deductibility of interest expenditures is granted if incurred solely for their business, meeting the arm’s length principle.
Article 33 of the Corporate Tax Law prohibits the deduction of specific expenditures, notably disallowing the deduction of amounts withdrawn by a natural person from their sole proprietorship business. This restriction applies even if such withdrawals are labelled as wage or salary.
“Corporate Tax Rate”
If a natural person’s turnover in a given Gregorian calendar year surpasses AED 1 million, their taxable income becomes subject to corporate tax. The applicable rates are as follows:
- 0% on the portion of taxable income up to AED 375,000.
- 9% corporate tax is applied to the portion of taxable income exceeding AED 375,000.
Individuals conducting business in the UAE become subject to Corporate Tax registration when their total turnover exceeds AED 1 million within a calendar year. If a person is a partner in an Unincorporated Partnership, they assess their taxable status based on their share in the partnership’s income and other business activities. Once registered, the same Tax Registration Number is used for any new business activities. Individuals must include relevant information in their Tax Return under the same registration if engaging in new business. If turnover falls below AED 1 million in subsequent years, they retain their Tax Registration status unless they cease business activities.
Natural persons or their legal representatives, registered for Corporate Tax, must submit a Tax Deregistration application to the FTA within 3 months of ceasing business activities. If any business remains active, regardless of turnover falling below AED 1 million, deregistration is not applicable. A natural person has a single Tax Registration Number for all their businesses and should only deregister when all activities cease. Ceasing business mid-Tax Period requires submitting the deregistration application within 3 months, with the Tax Return due within 9 months from the Tax Period end. Approval is contingent upon filing all required Tax Returns and settling outstanding Corporate Tax and Administrative Penalties. If a natural person deregisters and starts a new business in the same year, the suspended Tax Registration Number is reactivated.
Upon the demise of a natural person engaged in business activities, their status as a Taxable Person cease. Settlement of pre-death Corporate Tax liabilities is governed by Article 42(1) of the Tax Procedures Law. Corporate Tax Payable preceding the date of death is to be satisfied from the estate’s value or income elements before distribution to heirs or legatees.
“Tax Period & Tax Returns”
For natural persons engaging in business subject to Corporate Tax, the tax period aligns with the Gregorian calendar year, spanning from January 1 to December 31. Commencing from the potential first Tax Period in 2024.
Natural person classified as Taxable Persons must submit their Corporate Tax Return to the Federal Tax Authority (FTA) within 9 months from the conclusion of the relevant Tax Period. For simplicity, natural persons should consolidate all their Businesses and Business Activities subject to Corporate Tax into a single Tax Return.
If a natural person registers for Corporate Tax with the FTA after meeting the necessary conditions, they must file a ‘nil’ Tax Return within 9 months after the end of subsequent Tax Periods where the total Turnover from their Business or Business Activities in the UAE does not exceed AED 1 million. In instances where the Turnover surpasses AED 1 million, the regular Tax Return filing requirements apply as mentioned earlier.
“Small Business Relief”
Natural persons can opt for Small Business Relief as per Article 21 of the Corporate Tax Law, provided certain conditions are met. Notably, the Revenue from the natural person’s taxable Business or Business Activity should not exceed AED 3 million in the relevant Tax Period and preceding ones. Small Business Relief is contingent on Revenue, defined as the gross income during a Tax Period, aligned with the Gregorian calendar year for natural persons. In essence, an individual’s Revenue equates to Turnover, representing the gross income throughout a Gregorian calendar year.
- Natural persons in the UAE become liable to Corporate Tax if their total turnover from business activities exceeds AED 1 million in a Gregorian calendar year.
- Corporate tax rates for natural persons are 0% on income up to AED 375,000 and 9% on income exceeding AED 375,000.
- Exclusions from Corporate Tax include wages, personal investment income, and real estate investment income, under specific conditions.
- Business expenditure is deductible, subject to limitations, and interest deduction rules are waived for natural persons.
- Registration for Corporate Tax is required when turnover exceeds AED 1 million, and deregistration is applicable when ceasing all business activities.
- Tax periods align with the Gregorian calendar year, with Corporate Tax returns due within 9 months of the period’s conclusion.
- Small Business Relief is available for natural persons with taxable business or business activity revenue not exceeding AED 3 million in the relevant Tax Period and preceding ones.