Offering consultancy services in the UAE while based here? Or freelancing? It's time single person owned businesses get all their strategies in place for corporate tax. Image Credit: Shutterstock

Dubai: Individuals based in the UAE and offering consultancy or other business services and generating Dh1 million or more during a year must register for corporate tax.

This would also have implications for social media influencers, freelancer work, and for those who are retired and doing consultancy or other work.

In a new update, the Federal Tax Authority issued a comprehensive update on when corporate tax and registering for it will apply to single individual businesses, or when their business activity puts them past Dh1 million in revenue for a year.

For instance, if a self-employed person provides consultancy and nets over Dh1 million and a profit on that, the income generated comes under ‘business or business activity’ conducted by a resident (‘natural person’).

“There is no exemption for the profit relating to the first Dh1 million of turnover,” the FTA said in the guidebook. However, the individual will be able to benefit from the 0 per cent rate on the first Dh375,000 of taxable income.”

Under UAE corporate tax, the 9 per cent applies to those businesses that exceed Dh375,000 in profit over a year.

Defining a business or business activity for individuals

Keep in mind these elements:

  1. Whether persons who contributed to producing or selling the goods or services are managed, working from or residents of the UAE.
  2. Whether contracting or business development related to selling the goods or providing the services was conducted from the UAE.
  3. Whether the assets that contributed to the production of the goods or rendering of the services are located in the UAE.

If the individual's activities fall within these parameters, he/she must register for corporate tax purposes and obtain a Tax Registration Number if total turnover exceeds Dh1 million within a Gregorian calendar year from 2024.

Small Business Relief

This is where these individuals could consider applying for the ‘Small Business Relief’ package announced by the UAE tax authorities earlier. The business must not exceed Dh3 million over the year – and also not have touched that revenue milestone for the previous tax period too.

“Such ‘natural persons’ can consider Small Business Relief,” said Atik Munshi, Managing Partner at the consultancy FinExpertiza UAE.

It would mean the individual gets a tax break for the relevant period.

Exempted income category

The tax authority has over the months categorically stated that income derived as wages, real estate investments, or personal investments by an individual will not come under the purview of corporate tax.

Who gets covered under corporate tax? 

  1. 'Natural persons' based in UAE will come under the purview of corporate tax if their annual income is more than Dh1 million.
  2. "This will likely include director remunerations too - this is different from directors' 'sitting fees', which are to be considered as wages," says Atik Munshi of FinExpertiza.
  3. Freelancers or individuals doing any commercial activity (irrespective of their residency status) will come under the CT law if they reach the Dh1 million threshold.
  4. Hence, it is essential that they should maintain proper accounts and support documentation to show their earnings and cost details," said Munshi.

So, who needs to register?

“If a natural person’s total turnover from business or business activities conducted in the UAE does not exceed Dh1 million within a Gregorian calendar year, they do not have to register for or pay corporate tax on their income,” the FTA states.

“The turnover may include ‘in-kind’ payments which are valued at market value.” (So, if an influencer gets to enjoy a free stay at a luxury hotel in lieu of a direct payment, that too will constitute as part of the turnover for the year.)

‘Sole proprietors’

“The UAE corporate tax law considers sole proprietorship and the ‘natural person’ as one and the same because of the direct relationship and control over the business,” said Jeet Gianchandani, Chairman of Jitendra Consulting Group.

“And also because of their ‘unlimited’ liability for the debts and other obligations of the business.

Unincorporated partnerships

“At the same time, the UAE corporate tax law treats each partner in an ‘unincorporated partnership’ as an individual taxable person,” said Gianchandani.

“However, the partners can formally request the FTA to treat the ‘unincorporated partnership’ as a ‘taxable person’.

“If FTA approves the application, the income will be taxed at the level of the unincorporated partnership instead of at the level of the individual partners.”

Rental income or gain from selling property
As long as such activity is not conducted through a licence from a local licensing authority, the income generated will not be under corporate tax.
"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," says the FTA.

Some likely scenarios where income could come under corporate tax:

Based in the UAE – and with income from Gulf

The Federal Tax Authority provides multiple scenarios where an individual can generate income – and how it would be taxed.

It cites a probable case of a reputed physiotherapist with his main center of activity being in the UAE and with interests elsewhere in the Gulf.

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The Federal Tax Authority cites a scenario where a physiotherapist builds up a business in the UAE and also does services in other Gulf countries. This income comes under corporate tax. Image Credit: Shutterstock

“When calculating the turnover, both the income derived from the UAE and from other Gulf countries (not being considered as wage) should be included as they relate to business or business activities conducted in the UAE,” the FTA states.

Because it’s ‘due to his work in the UAE and reputation for providing high-quality services’ that the individual ‘receives requests to provide treatment sessions from therapy centres in various Gulf countries’.

Earning a wage – and running a separate business

The UAE has as part of its recent reforms allows more flexibility for those who are employed but want to try their hand at freelancing or setting up a separate business of their own. While they retain their day job.

In these instances, only the income generated from their own business or consultancy services will come under the corporate tax bracket – and even then if the total for a year breaches Dh1 million.

The wages that the individual derives will not be taxed under any circumstance.

Tax deduction on salary?

Here’s another scenario put forth under the FTA guidebook – suppose an individual operates a ‘sole proprietorship’ and is registered with the FTA after meeting all conditions.

If the individual takes out an amount from the business and cites the reason as being his annual salary cost, that sum will not be eligible for tax deduction. ‘No deduction is allowed’ as the individual and the business are ‘one and the same taxable person’.