Real estate corporate income tax in UAE - | Khaleej Times News

In the UAE, every real estate market participant doing business as an individual is subject to tax, reports Mahar Afzal/Compliance Corner.

In the real estate industry, there are various participants such as developers, contractors, subcontractors and brokers, each with a specific role. The parties may be categorized as resident or non-resident. Residents can be classified as legal entities or individuals. Developers, contractors, subcontractors or brokers incorporated as limited liability companies, public limited companies, etc., having a separate legal entity from its owner are called legal entities. If such a company is registered in a free economic zone, it is known as a free economic zone legal entity. A free economic zone person who meets the criteria of a qualified free economic zone person is called a "Qualified Free Zone Person (QFZP)".

Resident entities established in or outside the UAE but controlled and managed from the UAE are subject to corporate income tax (CT) on their entire worldwide taxable income. Individuals operating as a sole proprietorship, civil society, non-legal partnership or freelancers without a separate legal entity from their owners but doing business in the UAE are considered natural persons. Such individuals are only required to pay CT on income related to their UAE business. These are the general rules for the application of corporate income tax, but there are some exceptions and special rules.

Any participant in the real estate market, such as a realtor or contractor doing business in the UAE as an individual, is subject to the same taxes regardless of its location. These persons are not liable to pay corporate income tax and are not required to register if their gross income does not exceed AED 1 million for the Gregorian calendar year. If their annual income is up to AED 3 million in the current and any previous tax period, they can benefit from the small business exemption for corporate income tax for tax periods ending before December 31, 2026. If their annual income exceeds AED 3 million, a 0% tax rate applies on the first AED 375,000 of taxable income and any income above AED 375,000 is subject to a 9% tax rate. The previously mentioned exemption where the gross amount of income is up to AED 1 million does not apply to legal entities. However, they can take advantage of the small business exemption for tax periods ending before December 31, 2026, if their annual income is up to AED 3 million in the current and any previous tax period. If builders, contractors, subcontractors, brokers, etc.

If real estate developers, contractors, subcontractors, brokers, etc. are QFZPs and engage in transactions with another person from a free economic zone, their income from such activities is considered qualifying income if they do not qualify as an excluded activity. On the other hand, if they engage in transactions with persons from outside the free economic zone, all of their income will be non-qualifying income, except for income derived from qualifying activities that do not fall within the excluded activities. The general principle mentioned earlier does not apply to income derived from domestic permanent establishments, foreign permanent establishments or income from the possession or use of immovable residential property in the free economic zone or immovable commercial property in the free economic zone if the transaction is carried out with a person from outside the free economic zone. This income of qualifying real estate developers, contractors, subcontractors, brokers, etc. from a free economic zone is taxed at a rate of 9% and does not affect the de minimis threshold. Article 3(1)(e) of Ministerial Decision No. 139 of 2023 states that the possession or use of real property is an excluded activity, but the possession or use of commercial property located in a free economic zone where there is a transaction with other persons from the free economic zone is not an excluded activity but will give rise to qualifying income. The term "commercial property" is defined as "real property or a portion thereof" used exclusively for business or commercial purposes and not used as a place of lodging or accommodation, including hotels, motels, guest houses, serviced apartments, and the like." The term "use of property" is not defined in the law, but it can be assumed that it refers to the use of property for economic purposes. This may include actions such as leasing property, extracting resources from the property, or using the property for commercial purposes. The use of the property may also relate to the development of the property. Mahar Afzal, Managing Partner of Kress Cooper Management Consultants, shared his personal opinion which does not represent the official position of Khaleej Times. If you have questions or need further clarification, contact Mahar at [email protected].