In the recent update, the UAE Corporate Tax sets out which residents/non-residents engaging in business gets to come under tax regime. It also offers clarity on personal investments and income from those. Image Credit: Vijith Pulikkal/Gulf News

Since the announcement of UAE Corporate Tax on January 31, 2022, it has been a gradual realisation that this is not just on big corporations but also on individual-managed businesses.

‘Natural persons’ conducting a business or activity in the UAE could be subject to CT - UAE residents and non-UAE residents alike, irrespective of their tax residency status. The categories of business or business activity conducted by a natural person subject to corporate tax have been specified through a cabinet decision last week.

It would not be an understatement to say the decision has been a huge respite to anxious individuals, especially investors. It is still important to understand the tax implications and the critical scenarios that could give rise to a tax liability.

Scope of tax on individuals

The corporate tax will be applicable only where the total turnover derived (by individuals) from the business/activity exceeds Dh1 million within a calendar year. The turnover means the consolidated gross amount of income/revenue from all business\activities without deduction of expenses (i.e., not the profit).

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As the taxability is dependent on the turnover threshold, one does not need to figure out the nature of a particular business/activity to determine taxability. To illustrate, a freelancer, a social media influencer or a lawyer practicing individually would be treated equally for the tax purposes.

Business and business activity

The crucial factor would be to determine what is business or business activity.

‘Business’ means any activity, conducted with an intention of generating profits (irrespective of actual profit or loss), whether for a fixed period of time or continuous. The definition uses ‘conduct’ instead of ‘carrying on’ of business, thereby implying that business conducted for short duration would also be covered.

The scope of the ‘business activity’ definition is wider than that of a ‘business’, and includes any transaction or other element or action undertaken by or as part of a business, which may be carried out entirely or partially within the UAE. The wider scope of business activity requires careful evaluation to determine taxability.

Wages, personal investment and real estate investment

These three income sources would not be treated as business/activity itself, thereby providing a huge relief to individuals:

  1. Wages: that what is given to the employee in consideration of their services under the employment contract including bonuses and allowances.
  2. Personal investment income: income from investment activity that a natural person conducts for their personal account. The investment activity should not be considered as commercial business (Ref: Federal Decree-Law No. 50 of 2022).
  3. Real estate Investment income: income earned by a natural person in relation to, directly or indirectly, the sale, leasing, sub-leasing, and renting of land or real estate property in the UAE.

To enjoy tax exclusion, investment activity under (b) and (c) should not be conducted through a licence or require to be conducted through a Licence.

The above three income sources are not taxable or counted in Dh1 million threshold irrespective of the actual quantum of the income.

The exclusion of personal investment income would require the individuals to evaluate the scope of investment activity and commercial business.

Will cryptocurrencies be treated as an investment?

Will an art collector be considered as doing business or as making personal investments?

Will a daily trader in a stock market, or a commodity trader, be treated as making investments or conducing a commercial business?

If yes, whether their total turnover exceeds Dh1 million even if they incur a net loss or make insignificant profits?

The above questions highlight the importance of corporate tax for individuals and compliance thereof.

Small Business Relief

Individuals with business/activity turnover above Dh1 million should not lose heart. The Small Business Relief still provides them relief until end 2026. If a taxable person’s revenue in a financial year (starting on or after June 1, 2023) does not exceed Dh3 million, no corporate tax would be payable irrespective of the actual profits.

However, the requirement to maintain books of accounts and submit tax returns.

The evolving corporate tax laws are pragmatic and future oriented. Natural persons have been given the anticipated tax reliefs on their wages and investment incomes. One must always remember that taxation does not work on presumptions.

A natural person should not presume that any and every income of an individual will be excluded from tax. A proactive review of income sources will ensure a smooth transition into the tax regime.