Taxes in the UAE: Impact of real estate investments on the enterprise

> Tax issues: Organizations with a UAE base have significant real estate investments on their books. The introduction of a corporation tax in the UAE would be laudable from a policy perspective.

With the organic growth of business in the UAE, some old practices are suddenly becoming tax inefficient and could be a significant cost in the future. Tax policies and clarifications from the authorities regarding such old practices should be considered.

One such practice is the purchase of real estate by business owners in the name of the company. Separate legal entity of the company. In the UAE, it is quite common for business owners to buyreal estate in the name of their company rather than their personal name. This practice helps to pool assets, strengthen the financial performance of the company and facilitate future borrowing, if any.

If one or more persons actually own/control 100% of the company, the owner(s) and the company can be virtually seen as an extension of each other. However, under the Corporation Tax Law, companies on the mainland or in free zones are treated as "legal entities", that is, an entity incorporated or otherwise recognized under UAE law. "Legal entities" have a separate legal identity that is distinct and independent from its owners/shareholders. A legal entity has its own rights, obligations and responsibilities. This has been an established global principle since 1896 (cf.

The real estate held in the name of a company should be treated as the company and not the owners. The consequences will not change whether it is commercial or residential, whether it is in the UAE or outside the UAE. All activities are businesses.

Business owners often consider only the core activities of a company such as manufacturing/trading/services when considering the impact of tax on a corporation. It is incorrect to suggest that a company is not in the real estate business just because it owns real estate (of its owner(s)). It is also assumed that rents or gains on subsequent sale should not be taxed as profits.

For the application of the Corporation Tax Act to companies and other legal entities, however, all activities conducted and assets used/retained will be treated as activities conducted and assets used/retained for "business" purposes. All activities undertaken by a legal entity will be considered "business activities" and will fall within the scope of the UAE corporation tax unless specifically excluded. There is currently no explicit exemption for companies deriving income from real estate under the Corporation Tax Law.

The FAQ states that companies engaged in real estate management, construction, development, agency and brokerage activities will be subject to corporation tax in the UAE. Hence, income/gains from real estate owned by companies may be taxed in the future.

Tax on individuals with real estate. Certain income received by an individual in his personal legal form is not taxable, such as (i) interest and income from bank deposits and (ii) dividends, capital...