The UAE Ministry of Finance recently announced that the UAE will introduce a federal corporate tax (“CTF”) for fiscal years beginning on or after June 1, 2023. This has implications for the UAE real estate sector.
- Real estate investment income held by individuals in their own name for personal use is likely to be exempt from federal corporation tax.
- Income from real estate assets held by individuals through corporate structures may be subject to corporation tax on capital gains.
Although the FCT law has not yet been enacted, the UAE Ministry of Finance has published a list of frequently asked questions (FAQs) about the FCT on its website, which provides an overview of some key features. of the CTF described below. It is important to note that the FAQs provide only a brief indication of what FCT law may entail and are subject to change without notice. Therefore, they should not be relied upon for making trading decisions, but the FAQs certainly provide guidance, for planning purposes, with respect to the FCT regime. This article summarizes the main features of the FCT regime (based on the information available to date) and discusses the potential impact on real estate investments.
The FCT will be levied on the net income or profit of the businesses. Taxable income will be a company’s accounting net profit (as shown in financial statements prepared in accordance with internationally acceptable accounting standards), after making adjustments for certain items that are yet to be specified under the FCT Act. FCT at the rate of 9% will be levied on taxable income above AED 375,000. Taxable income below AED 375,000 will not be subject to the FCT. A separate FCT rate will be announced for certain large multinational corporations. However, it is clarified that simply earning income outside the home country without a foreign presence or registration would not make an entity a multinational corporation.
The FCT will apply to all businesses and commercial activities in the UAE, with the exception of natural resource extraction, which will continue to be subject to local corporation tax at the emirate level ( not federal tax).
Activities undertaken by a business entity are likely to be considered “business activities” which will be subject to the CTF.
Applicability to Individuals
Under the current announcement, the CTF will not be deducted from an individual’s salary or other employment income. Individuals will also not be subject to CTF on dividends, capital gains and other income derived from owning shares or other securities in a personal capacity. Individuals will also not be required to pay CTF on interest and other income from bank deposits or savings schemes.
However, business income earned under a business license and income from activities conducted under an independent license/permit will be subject to the CTF.
Individuals should also consider how any personal income in the UAE may be treated under the tax regime of their home jurisdiction or where they may be deemed to be domiciled for tax purposes.
Free trade zones
Companies established in a free zone will be subject to the FCT and required to register and produce an FCT declaration.
However, the FCT regime is likely to continue to honor tax incentives currently provided by free zones to free zone entities that comply with all regulatory requirements. Further information is awaited on the tax treatment of free zone entities operating in the UAE mainland.
Key considerations from a real estate perspective
Commercial activities in real estate subject to the FCT
Any business or commercial activity carried out in relation to real estate, whether by an individual in a personal capacity or by a legal entity, will be subject to the FCT.
Companies engaged in property management, construction, development, agency and brokerage activities will be subject to the FCT.
Individual investments in real estate exempt from FCT
Real estate investment income held by individuals in their own name for personal use is shown as exempt from FCT. However, it remains to be seen whether the law will consider the ownership of several properties and their rental on a regular or continuous basis as taxable on the grounds that it is a “commercial activity”. There is no indication at this stage whether the FCT law will create a distinction between properties for residential use and those for commercial use such as offices, stores, etc. to determine whether rental income derived solely from commercial properties could be subject to the CTF.
Since dividends and other income derived by an individual from the ownership of shares or other securities in a personal capacity are exempt from the FCT levy, income derived from investments made in real estate through financing platforms equity or REIT would not seem to attract the CTF.
With respect to foreign individuals, the FAQs simply state that the CTF will generally not be levied on the investment income of a foreign investor. For the time being, it can be assumed that income derived by foreign individuals from real estate investments will also not be taxed under the FCT regime. It is possible that a special regime will be created for GCC nationals, but there is currently no mention of this in the FAQ.
Income received by legal persons on real estate investments subject to the FCT
All activities undertaken by a legal person are considered commercial activities and will be subject to the CTF. This will include income from real estate investments held by SPVs. It is possible that the FCT will also be levied on capital gains from the disposal of property. This will have a significant financial impact on investors who have set up corporate structures to hold personal real estate assets.
Real estate assets held in free zones by free zone entities appear to be exempt from the FCT regime. However, assets held by these entities on the mainland may be subject to the FCT, as they are likely to be considered to be carrying on business onshore. It is also unclear whether the same policy will apply to offshore entities in the free zone. Furthermore, it is unclear if and how FCT will be levied on intra-group transactions when some group entities are incorporated in the UAE and the rest in free zones.
It also remains to be seen whether exceptions or concessions will be made for foundations, trusts, non-profit organizations and charities. Similar exceptions could be made for donations, grants or gifts.
The FCT will have significant implications for real estate investments in the UAE.
Pending the enactment of the FCT Act, it is likely that the law will come under scrutiny as legislators and businesses determine the most effective way to organize and structure their businesses from a perspective of tax view. Businesses and investors should be careful in their interpretation of the FCT to ensure they are compliant with the new tax regime and are not faced with surprises. It is therefore advisable to seek legal and tax advice regarding existing and future property investments. Market participants may also need advice on structuring business entities and investment vehicles, while considering optimization for tax and estate planning purposes.