UAE Corporate Tax Guide – Real Estate Investment for Natural Persons

Navigating FTA’s UAE Corporate Tax Guide – Real Estate Investment for Natural Persons

On 24 October 2024, the UAE’s Federal Tax Authority released a comprehensive guide that outlines the implications on income derived from real estate investments for natural persons. This guide clarifies the scope of real estate investment activities for individuals and understand which income derived from real estate investment will be subject to or exempted from corporate tax.

Real Estate Investment Activities

The FTA’s definition for real estate investment activities for corporate tax purposes is the ownership, purchase, management, sale or lease of real estate for profit. It includes both commercial and residential properties, and it is crucial for the taxable persons involved in real estate to understand this definition. Some of the activities are exempted from corporate tax for natural persons without a business license. This guide helps to differentiate active business ventures and passive income for personal investment, for corporate tax purposes.

Excluded Real Estate Related Activities From Corporate Tax

• Sale or lease of a real estate property
• Rental of real estate property without operating as licensed business
• Management of real estate property indirectly by any third party such as property management companies but the income will be remitted to the natural person 

Real Estate Licensing Requirement For Corporate Tax

If a natural person obtains a license for any real estate related activities, their income will be considered as business income and levied under corporate taxation. The real estate investment does not require a license, it will be excluded from corporate taxation.

For example

• If a natural person is considered to be earning real estate investment income will be excluded from corporate taxation when they lease residential apartments to tenants without a business license.
• If a natural person runs a property management business with a license, the income derived from such business will be considered as taxable income and subject to corporate tax.

Corporate Tax Threshold for Natural Person (Real Estate Investment)

This guide clarifies that the natural person should only register for corporate tax if their income from business activities exceeds AED 1 Million. The real estate investment income will remain excluded as long as the criteria given by the FTA is satisfied. Natural persons with large investment portfolios will now have a clear idea on corporate taxation for their income and they will be subject to taxation only if their activities require a license. 

Apportionment of Expenditures in Mixed Activities 

In a situation where a natural person receives income from both licensed business activities and real estate investment, it is mandatory to fairly distribute expenses between these activities. 

In such cases, the guide instructs to use apportionment methods to determine how expenditures should be distributed across different activities. Many factors such as headcount, time spent, floor space or any other measurable methods will be applied in these methods.

The main objective is to ensure the tax-deductible expenditures are fairly allocated and fosters unbiased determination on the net income derived from both activities. The implementation of this method must be followed from one tax period to the next, unless there are changes in these activities.

Anti-Abuse Provisions

To obstruct the misapply of this real estate investment exclusion, the FTA outlines the General Anti-Abuse Rule (GAAR). The anti abuse rule enables the tax authority to offset the arrangements made merely to utilize tax advantages, such as designing real estate transactions in a manner that unnaturally qualifies them for tax exclusion. The GAAR ascertains that the intention of the regulations is affirmed and real estate activities are taxed correctly in case of lack of economic substance or commercial purpose. 

Conclusion

The FTA’s guide on Real Estate Investment for Natural Persons clarifies the individuals to distinguish personal investments and business activities and help them to take action during the complex scenarios dealing with taxable and excluded income. For real-estate investors, it is required to be updated with these regulations to stay compliant with the corporate tax regime. 

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