UAE Corporate Tax – Real Estate Investment for Natural Persons
- October 27, 2024
On 24 October 2024, the Federal Tax Authority (‘FTA’) published a Corporate Tax (‘CT’) Guide on “Real Estate Investment for Natural Persons”, aiming to provide general guidance on the taxation of Natural Persons in case of income from real estate investments under the Corporate Tax Law.
The objective of this guide is to provide clarity on taxation aspects with respect to what constitutes business income and what forms part of personal income from real estate investments.
The key highlights of the Guide are outlined below:
This guide addresses the tax implications for natural persons under Article 2(2)(c) of Cabinet Decision (‘CD’) No. 49 of 2023 in relation to Real Estate Investment and the income derived from it. Further, the CD defines Real Estate Investment as “Any investment activity conducted by a natural person related to, directly or indirectly, the sale, leasing, sub-leasing, and renting of land or real estate property in the State that is not conducted, or does not require to be conducted through a Licence from a Licensing Authority.” Accordingly, the gross amount of income, and related expenditure, derived by a natural person from Real Estate Investment is excluded from CT.
Natural persons shall be subject to CT only when the total Turnover derived from Business or Business Activities conducted by a natural person exceeds AED 1 million within a Gregorian calendar year.
Scope of Land or Real Estate Property
Real Estate means any of the following:
- Any area of land over which rights or interests or services can be created.
- Any building, structure or engineering work attached to the land permanently or attached to the seabed.
- Any fixture or equipment that makes up a permanent part of the land or is permanently attached to the building, structure or engineering work or attached to the seabed.
Real Estate property can include the following:
- Residential Property
- Furnished Holiday Homes
- Commercial Property
- Showrooms
- Warehouses and Storage Rooms
- Parking Lots and Garages, etc.
Further, Land can include any of the below:
- Agricultural Land
- Industrial Land
- Residential Land, etc.
Location of Land or Real Estate Property
The land or real estate property for investment purposes could be located in the UAE and/ or outside of the UAE.
Does Not Require to be Conducted through a Licence
- The phrase “required to be conducted” is to be understood covering the situation where a License is required but it has not been obtained. Accordingly, lack of a valid License does not mean that the investment activity will be outside the ambit of CT.
- Such activity would be considered a Business or Business Activity and the income derived from it would be subject to CT (subject to meeting the relevant Turnover threshold) even if the natural person does not have the required Licence.
Jointly Owned Land or Real Estate Property
- In the case of co-ownership of land or real estate property by multiple persons, the income derived from Real Estate Investment activity must be allocated to each owner.
- Where the owner is a natural person, their allocated income will be out of scope of CT if they do not conduct the Real Estate Investment activity through a Licence (or require a Licence to do so).
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Sole Establishments and Sole Proprietorships
- A sole establishment or sole proprietorship is a Business which is owned and conducted by a natural person on his/ her own account and in their own name
- In such situations, the natural person and the sole establishment/ sole proprietorship are the same Person as opposed to a single-owner company which has its own legal personality where the owner and the company are separate Persons.
Taxable Business and Excluded Real Estate Investment
- A natural person may own land or real estate property in a non-business capacity and also operate a Business or Business Activity requiring a Licence.
- A natural person should be able to clearly demonstrate the basis for separating real estate income earned in a non-business capacity from their other Business or Business Activities to benefit from the exclusion.
- The real estate income earned in a non-business capacity can benefit from the Real Estate Investment exclusion. If a person has (or requires) a Licence for a Business or Business Activity, and those activities can clearly be distinguished from the Real Estate Investment activities, then the Real Estate Investment exclusion may still be available in relation to those Real Estate Investment activities.
- On the other hand, if based on the facts, the land or the real estate property or any related income from it, forms part of the Business or Business Activity, and this is conducted or is required to be conducted through a Licence, then any income would fall outside the definition of Real Estate Investment and, therefore, be within the scope of CT.
Apportionment of expenditure
- Expenditures related to Real Estate Investment may be shared between activities falling within the Real Estate Investment exclusion and activities falling within other Business or Business Activities.
- Shared costs, such as general overheads must be allocated indirectly using a fair and consistent apportionment method to ensure each activity accurately reflects its share of expenses. These methods can be applied to factors such as headcount, floor space, usage, time spent, or any other measurable and reasonable basis.
General Anti-Abuse Rule
If a real estate transaction or arrangement is entered into with the main purpose of obtaining a CT advantage, such as the Real Estate Investment exclusion, and this lacks commercial substance as well as is inconsistent with the intention of the CT Law, the FTA can require the relevant income to be treated as Taxable Income.
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