Introduction
Understanding the concept and importance of Corporate Tax in the UAE are vital for natural persons engaged in business activities within the country. This section will provide an overview of the applicability of Corporate Tax to natural persons, highlighting the changes introduced by Federal Decree-Law No. 47 of 2022 and its significance for individuals engaging in business activities within the UAE.
This guide aims to assist natural persons in understanding the implications of the Corporate Tax Law, providing details on when the law applies to them, the calculation of Corporate Tax, interactions with other businesses, and compliance requirements. The guide is intended to be read in conjunction with the Corporate Tax Law, its implementing decisions, and other relevant guidance published by the Federal Tax Authority (FTA).
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Legislative references, definitions, and examples will be provided to facilitate a comprehensive understanding of the application of Corporate Tax to natural persons in the UAE. Tax implications, exemptions, and the computation of Turnover for Corporate Tax purposes will also be discussed.
The upcoming sections will delve into the applicability of Corporate Tax to natural persons, covering key considerations, exclusions from taxation, computation of Turnover, Corporate Tax rates, and deduction rules relating to business expenditures and interest. Moreover, examples illustrating the application of Corporate Tax rules to specific scenarios will be provided to enhance clarity and understanding.
Understanding Natural Persons under UAE Corporate Tax Law
Under the UAE Corporate Tax Law, a “natural person” refers to a living human individual, regardless of age, who may be classified as a Taxable Person based on specified criteria. This section will provide an explanation of how the Corporate Tax Law applies to natural persons, including the criteria that classify an individual as a Taxable Person, resident vs. non-resident status, and the relevance of these classifications.
When does the Corporate Tax Law apply to natural persons?
Who is a natural person?
The term “natural person” refers to any living human individual, whether residing in the UAE or elsewhere. For minors or incapacitated individuals, the Corporate Tax obligations are fulfilled by their Legal Representative.
Corporate Tax Law and natural persons
The Corporate Tax Law applies to natural persons conducting a Business or Business Activity in the UAE, having a Permanent Establishment in the UAE, or deriving State Sourced Income. Certain types of income, such as employment income, Personal Investment income, and Real Estate Investment income, are exempt from Corporate Tax for natural persons.
International agreements, including Double Taxation Agreements, take precedence over the Corporate Tax Law in case of any inconsistency.
Key considerations
- A natural person conducting a Business or Business Activity in the UAE is considered a Taxable Person and a Resident Person if their total turnover derived from such activities exceeds AED 1 million within a Gregorian calendar year.
- Income from employment, Personal Investment, and Real Estate Investment is not considered when determining Taxable Person status or assessing Corporate Tax obligations.
Resident vs. non-resident
Residence in the UAE, whether by citizenship or residency visa, does not solely determine Taxable Person status or the taxability of income. A natural person can be considered a Resident Person for Corporate Tax purposes, even if residing outside the UAE, provided they conduct Business or Business Activity in the UAE or derive State Sourced Income.
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What income is considered taxable for natural persons?
Only income derived from a Business or Business Activity conducted in the UAE by a natural person is subject to Corporate Tax. However, certain income sources – such as employment income, Personal Investment income, and Real Estate Investment income – are exempt from Corporate Tax and are not considered when assessing the AED 1 million turnover threshold.
For natural persons, resident status is not affected by immigration, work permits, or business licensing requirements.
For a detailed analysis of the applicabilities of UAE Corporate Tax for natural persons, refer to the upcoming sections on Corporate Tax calculations, interaction with Small Business Relief, and specific deduction rules.
Taxable and Exempt Incomes for Natural Persons
In the context of the UAE Corporate Tax Law, natural persons are subject to specific rules regarding taxable and exempt incomes. The following sections outline the types of incomes considered taxable and those exempt from Corporate Tax for natural persons, as well as the specific exemptions provided for wages, personal investment income, and real estate investment income.
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Taxable Incomes for Natural Persons
The Corporate Tax Law applies to natural persons in the UAE to the extent that they are conducting a Business or Business Activity, have a Permanent Establishment in the UAE, or derive State Sourced Income. Certain types of income are always exempt from Corporate Tax for natural persons. Only income derived from a Business or Business Activity conducted in the UAE by a natural person is subject to Corporate Tax. However, if a natural person’s total Turnover from Business or Business Activities conducted in the UAE does not exceed AED 1 million within a Gregorian calendar year, they do not have to register for or pay Corporate Tax on their income from the Business or Business Activities. Wage, personal investment income, and real estate investment income derived by a natural person are considered exempt from Corporate Tax and are not taken into account in determining if a natural person has derived Turnover in excess of AED 1 million in a Gregorian calendar year from Business or Business Activities conducted in the UAE.
Exempt Incomes for Natural Persons
1. Wage: Wage, including any compensation or benefit received, whether in cash or in-kind, by any employee from their employer is not subject to Corporate Tax.
2. Personal Investment Income: Personal Investment income is not subject to Corporate Tax when derived by natural persons from investment activity conducted in their personal capacity that is neither conducted through a Licence or requiring a Licence from a Licensing Authority, nor considered as a commercial business in accordance with the Commercial Transactions Law.
3. Real Estate Investment Income: Real Estate Investment income is not subject to Corporate Tax when derived by natural persons if it is related, directly or indirectly, to the selling, leasing, sub-leasing, and renting of land or real estate property in the UAE that is not conducted, or does not require to be conducted through a Licence from a Licensing Authority.
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State Sourced Income
State Sourced Income includes income derived from a UAE Resident Person, derived from a UAE Permanent Establishment of a Non-Resident Person, or accrued in or derived from activities performed, assets located, capital invested, rights used, or services performed or benefitted from in the UAE. This includes, but is not limited to, dividends from UAE companies, payments from UAE businesses, royalties paid from the UAE, interest from a UAE bank account, and insurance or reinsurance premiums in specific instances.
In the case of State Sourced Income, a natural person may be subject to Withholding Tax if the income is not attributable to a Permanent Establishment. The current Withholding Tax rate is 0%. However, if the natural person is a Resident Person (or is a Non-Resident Person having a Permanent Establishment in the UAE), their related income would be subject to Corporate Tax at the applicable rate (instead of Withholding Tax).
Conclusion
The Corporate Tax Law in the UAE outlines specific rules regarding taxable and exempt incomes for natural persons. Wages, personal investment income, and real estate investment income are considered exempt from Corporate Tax for natural persons, while income derived from a Business or Business Activity conducted in the UAE is subject to Corporate Tax. State Sourced Income is also subject to specific rules, with some types of income being subject to Withholding Tax.
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Determining Tax Liability & Turnover Calculation
Natural persons under the Corporate Tax Law are subject to specific rules when it comes to determining their taxable income and turnover calculation. These rules apply when a natural person conducts a business or business activity in the UAE, has a Permanent Establishment in the UAE, or derives State Sourced Income.
Taxable Income Calculation
The taxable income for natural persons is determined based on the income derived from their business or business activities. Wage, personal investment income, and real estate investment income are exempt from corporate tax and are not included in the calculation of taxable income.
Turnover Calculation
The turnover for natural persons is calculated based on the gross amount of income derived during a Gregorian calendar year from all categories of businesses or business activities conducted by the natural person. Income derived from Wage, personal investments, or real estate investments is excluded when determining the turnover.
Threshold for Tax Registration and Implications
Natural persons are required to register for corporate tax purposes with the Federal Tax Authority when the total turnover derived from business or business activities conducted in the UAE exceeds AED 1 million within a Gregorian calendar year.
Exceeding this threshold entails compliance with corporate tax obligations, including registration for corporate tax purposes, submitting corporate tax returns, and paying corporate tax.
The corporate tax rate for natural persons is 0% on the portion of the taxable income not exceeding AED 375,000 and 9% on the portion of the taxable income that exceeds AED 375,000.
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Small Business Relief
Natural persons may also elect for Small Business Relief, which allows eligible taxable persons to be treated as having no taxable income for the relevant tax period if certain conditions are met. This relief is based on revenue, where revenue is defined as the gross amount of income derived during a tax period.
These rules and thresholds provide guidance for natural persons in determining their corporate tax liability and turnover calculation under the Corporate Tax Law in the UAE.
Corporate Tax Rate & Deductions
The Corporate Tax Law of the United Arab Emirates imposes different tax rates on natural persons and provides rules for deductions, allowable and non-allowable expenses, interest deduction limitations, and special considerations for natural persons.
Corporate Tax Applicability to Natural Persons
The Corporate Tax Law applies to natural persons conducting a Business or Business Activity in the UAE, having a Permanent Establishment in the UAE, or deriving State Sourced Income. Employment income, Personal Investment income, and Real Estate Investment income are not subject to Corporate Tax for natural persons.
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Computation of Turnover
The Turnover is the gross amount of income derived during a Gregorian calendar year from all categories of Business or Business Activities conducted by the natural person. It is calculated on an accrual basis of accounting, unless the natural person applies the Cash Basis of Accounting.
Corporate Tax Rate
When the Turnover exceeds AED 1 million, the Taxable Income is subject to Corporate Tax at a rate of 0% on the portion not exceeding AED 375,000 and 9% on the portion exceeding AED 375,000.
Deductions
- Interest Deduction: Interest expenditure wholly and exclusively for the natural person’s Business is fully deductible, without being subject to the General Interest Deduction Limitation Rule.
- General Deduction Rules: Expenditure must be wholly and exclusively for the Business, not incurred for deriving Exempt Income, and must not be from losses not connected with or arising out of the Business.
The Corporate Tax Law provides clear definitions and comprehensive guidance for the tax applicability and deductions applicable to natural persons operating in the UAE. These rules ensure transparency and consistency in corporate tax rates and deductions for natural persons.
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Related and Connected Persons
In the context of natural persons under Corporate Tax Law, it is essential to understand the concepts of Related Parties and Connected Persons, as these relationships can impact tax computations and obligations.
Related Parties for Natural Persons
The term “Related Parties” refers to any individuals or entities associated with a taxable person, as determined in accordance with the Corporate Tax Law. Related Parties can include other natural persons, juridical persons, partners in the same unincorporated partnership, and trusts and foundations. When it comes to natural persons, Related Parties are significant because certain transactions or activities involving Related Parties may have tax implications. For example, transactions with Related Parties may need to be conducted at arm’s length to determine market value for tax purposes.
Connected Persons for Natural Persons
Connected Persons are individuals or entities affiliated with a taxable person based on the conditions specified in the Corporate Tax Law. The concept of Connected Persons is crucial for natural persons as certain transactions or activities between Connected Persons may impact tax computations and obligations, similar to Related Parties.
In the context of tax computations and obligations, transactions or activities involving Related and Connected Persons may need to be carefully examined to ensure compliance with the arm’s length principle and to determine the appropriate tax treatment.
Understanding the relationships with Related and Connected Persons is essential for natural persons to meet their tax obligations and ensure compliance with the Corporate Tax Law. Any transactions or activities involving Related or Connected Persons should be carefully reviewed to determine their impact on tax computations and obligations.
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Corporate Tax Compliance for Natural Persons
In this section, we will discuss the compliance requirements for natural persons under the Corporate Tax Law in the United Arab Emirates. This includes tax registration, tax deregistration, tax period, the preparation and filing of tax returns, and maintaining financial statements in accordance with specified accounting standards.
Tax Registration
Natural persons conducting a business or business activity in the UAE are considered taxable persons and must register for corporate tax purposes with the Federal Tax Authority (FTA) if the total turnover derived from the business activities exceeds AED 1 million within a Gregorian calendar year. The registration process will require the submission of relevant information to the FTA.
Tax Deregistration
If a natural person ceases their business activities in the UAE or, in the case of an individual, in the event of death, the person must apply for tax deregistration with the FTA. The applicable rules and procedures for tax deregistration should be followed in accordance with the guidelines provided by the FTA.
Tax Period
The tax period for a natural person is the Gregorian calendar year. Therefore, tax returns and other compliance activities are based on the annual financial activities of the natural person’s business.
Preparation and Filing of Tax Returns
A natural person is required to prepare and file tax returns with the FTA for corporate tax purposes. The information to be filed includes the details of the income derived from the business or business activity, expenses incurred, and other relevant financial information. The tax returns must be filed in the form and manner prescribed by the FTA.
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Maintaining Financial Statements
Natural persons are required to maintain financial statements in accordance with the specified accounting standards. The financial statements must include a complete set of statements, as specified under the accounting standards applied by the natural person. This includes the statement of income, statement of other comprehensive income, balance sheet, statement of changes in equity, and cash flow statement.
Compliance with these requirements is essential for natural persons to fulfill their corporate tax obligations in the UAE and to ensure adherence to the Corporate Tax Law. It is important to consult the relevant legislation and guidance materials provided by the FTA for accurate and up-to-date compliance information.
Interaction with Other Business Entities
When conducting business, natural persons are subject to specific tax treatments based on the structures in which they operate. This involves consideration of different entities such as sole proprietorships, partnerships, and family foundations in relation to the Corporate Tax law.
For natural persons, the Corporate Tax Law applies to their business activities in the UAE when conducting a Business or Business Activity, having a Permanent Establishment in the UAE, or deriving State Sourced Income. However, specific types of income, such as employment income, personal investment income, and real estate investment income, are exempt from Corporate Tax. International agreements, including Double Taxation Agreements, may also affect the tax obligations of natural persons.
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The determination of whether a natural person is considered a Resident Person for Corporate Tax purposes is not solely dependent on their physical residence in the UAE but also on their business activities. The Turnover derived from Business or Business Activities conducted in the UAE exceeding AED 1 million within a calendar year triggers the Corporate Tax obligations for natural persons.
Certain income, such as dividends, wages, personal investment income, and real estate investment income, are exceptions to the Corporate Tax for natural persons and are not considered in the calculation of Turnover. Additionally, the Corporate Tax rate for natural persons varies, with a 0% rate applicable to the portion of Taxable Income not exceeding AED 375,000, and a 9% rate on the portion exceeding AED 375,000.
Furthermore, natural persons may elect for Small Business Relief under specific conditions, and the Corporate Tax Law provides regulations for the deduction of interest and general business expenditure.
In summary, the treatment of natural persons conducting business in various structures is defined by the Corporate Tax Law, taking into account different income sources and specific tax rates for effective tax computation.
Relief Programs & Incentives
In the United Arab Emirates (UAE), natural persons, particularly those engaged in small business activities, are eligible for various tax relief programs and incentives. One such relief program available to eligible taxable persons is the “Small Business Relief” which allows them to be treated as having no taxable income for the relevant tax period.
Conditions for Application
To qualify for the Small Business Relief, the Revenue from the taxable Business or Business Activity of the natural person in the relevant Tax Period and previous Tax Periods should not exceed AED 3 million for each Tax Period. This relief is specifically targeted towards small businesses, allowing eligible natural persons to benefit from reduced tax obligations, potentially resulting in greater financial stability and growth opportunities.
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Interaction with Corporate Taxation
When the Turnover derived by the natural person in a Gregorian calendar year exceeds the AED 1 million threshold, the Taxable Income of a natural person will be subject to Corporate Tax at a rate of:
- 0% on the portion of the Taxable Income not exceeding AED 375,000
- 9% on the portion of the Taxable Income that exceeds AED 375,000
Example
To further illustrate, a hypothetical natural person earning revenue from freelance services and domestic sales with a turnover of AED 1,900,000 may elect for Small Business Relief as their total turnover does not exceed AED 3 million. This would enable them to benefit from reduced or completely eliminated tax obligations for the relevant tax period.
This relief program provides significant support to small business owners by reducing their tax burden and allowing them to retain more of their earnings to reinvest in their businesses and personal financial objectives. It plays a crucial role in incentivizing entrepreneurship and fostering economic growth in the UAE.
Case Studies and Practical Examples
As per the UAE Corporate Tax Law, natural persons are subject to corporate tax if they conduct a business or business activity in the UAE, have a permanent establishment in the UAE, or derive state sourced income from the UAE. However, specific types of income such as wage, personal investment income, and real estate investment income are exempt from corporate tax. Here are some practical examples and case studies to demonstrate the application of the UAE Corporate Tax Law on natural persons in various scenarios covering different income types and business structures.
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Scenario 1: Freelance Consultancy Services
Case Study: Jane, a resident in the UAE, is a self-employed consultant providing services to various companies. In one calendar year, she earned AED 1,200,000 from her consultancy services. Additionally, she earned AED 300,000 as a salary from an employment contract with a local company.
Application of Corporate Tax Law: In this case, Jane is subject to corporate tax as the turnover from her consultancy services exceeds AED 1 million. Her AED 300,000 salary from employment is exempt from corporate tax.
Scenario 2: Real Estate Investment and Rental Income
Case Study: Mr. and Mrs. Smith, residents in the UAE, generate income from rental properties – earning AED 2,000,000 per calendar year. They also make AED 1,500,000 from the sale of a residential property.
Application of Corporate Tax Law: The rental income from properties and the profit from the property sale are considered real estate investment income and are exempt from corporate tax.
Scenario 3: Sole Proprietorship Turnover
Case Study: Ahmed, a UAE resident, operates a sole proprietorship selling clothing and accessories domestically and internationally. In one calendar year, he earned AED 2,500,000 from domestic sales and AED 1,800,000 from international sales.
Application of Corporate Tax Law: Ahmed’s total turnover for the year exceeds AED 1 million, making him subject to corporate tax. However, he can benefit from small business relief if his total revenue does not exceed AED 3 million for the tax period.
These case studies illustrate the application of the UAE Corporate Tax Law on natural persons in various income types and business structures, demonstrating the taxation requirements and exemptions based on specific scenarios.
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Conclusion and Future Outlook
In conclusion, the Corporate Tax Law in the UAE has a significant impact on natural persons conducting business activities. The law applies to natural persons when they conduct a business, have a Permanent Establishment, or derive State Sourced Income within the UAE. However, certain types of income such as wage, personal investment income, and real estate investment income are exempt from Corporate Tax for natural persons.
Looking ahead, anticipated future developments in taxation policy for natural persons may include potential changes to the tax rates, deduction rules, and Small Business Relief criteria. Furthermore, ongoing updates and amendments to the Corporate Tax Law and related guidance materials are expected, likely to address specific scenarios and provide further clarification on the applicability of the law to natural persons.
As the tax landscape evolves, natural persons are encouraged to stay informed and seek professional advice to ensure compliance with the Corporate Tax Law and to optimize their tax positions. It is essential for natural persons to understand the implications of this tax regime and ensure proper adherence to the law while conducting their business activities in the UAE.
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