The introduction of corporate tax in the UAE is going to be a commendable effort from a policy perspective. Considering the organic growth of businesses in the UAE, certain legacy practices suddenly appear as tax-inefficient and could pose significant costs in the future.
The tax policy and clarifications by the authorities around such legacy practices should be reviewed. One such is for business owners to purchase real estate under their company’s name.
Separate legal personality of a company
It is fairly common in the UAE for business owners to purchase real estate under their company’s name instead of their personal name. The practice helps consolidate assets, strengthen the company’ financial statements and facilitates future borrowings, if any.
If one or more person de-facto holds 100 per cent ownership/control of a company, the owner(s) and the company might practically be perceived as an extension of each other. However, under the CT Law, companies on the mainland or in the free zones are treated as ‘juridical persons’, i.e., an entity established or otherwise recognised under UAE laws.
‘Juridical persons’ have a separate legal personality which is distinct and independent from its owners/shareholders. The juridical person has its own rights, obligations and liabilities. This is an established global principle since 1896 (Ref: Solomon vs. Solomon case).
The real estate held under the company’s name should be treated as that of the company and not of its owners. The implications would not change whether it is a commercial property or a residential, whether in the UAE or outside.
All activities are business
Business owners often consider only the principle activities of the company such as manufacturing/trading/services for reviewing the CT impact. It is incorrectly assumed that the company is not in the business of real estate merely because it holds the real estate (of its owner(s)). It is also assumed lease rentals, or gains from future disposal, should not be taxed as profits.
However, for the application of the CT Law to companies and other juridical persons, all activities conducted and assets used/held will be considered activities conducted, and assets used/held, for the purposes of a ‘business’. All activities undertaken by a juridical person will be deemed as ‘business activities’ and within the scope of UAE CT, unless specifically exempted.
There is no apparent exemption proposed under the CT decree law for companies earning income from property. It has been mentioned in the FAQs that businesses engaged in real estate management, construction, development, agency and brokerage activities will be subject to UAE CT.
Accordingly, the income/gains from real estate held by companies could be taxed in future.
Tax on individuals with real estate exposure
Certain income earned by an individual in their personal capacity would not be taxable, such as (i) interest and income from bank deposits and (ii) dividends, capital gains and other income from owning shares or other securities. The income earned by an individual from investment in UAE property in their personal capacity will generally not be subject to CT. However, further details are awaited to determine the scope of exemption on such investments.
Is it too late?
As the income earned by an individual from real estate may not be taxed, business owners might think transferring the real estate in the company’s name to their own before the CT implementation. Would it be the correct thing to do? Even though the Law will be effective from June 1, the ‘anti-abuse’ rules are already in effect since the publication of the CT decree law in the official gazette.
Under the ‘anti-abuse’ rules, a transaction or an arrangement not for a valid commercial reason and is essentially carried out to obtain a CT advantage inconsistent with CT laws could be disregarded for tax purposes. In other words, if the transfer is not for valid commercial reasons, the transfer may be disregarded and the property still considered as of the company's for tax purposes.
Tax policy and clarification
As corporate tax is new to the UAE landscape, business owners would need significant support and guidance on tax matters. A public clarification from the authorities on such legacy issues will be of immense help.