UAE VAT: Business Impact of Real Estate Investments

What measures can business owners with significant assets registered in the company's name take?

The introduction of corporate tax in the UAE is a laudable move from a policy perspective. Given the organic growth of business in the UAE, some outdated practices are suddenly tax inefficient and can lead to significant costs in the future. Tax policies and clarifications by the authorities regarding such outdated practices should be reviewed.

One such practice is the purchase of real estate by business owners in the name of their company. Separate legal identity of the company It is quite common in the UAE for business owners to purchase real estate in the name of their company rather than their personal name. This practice helps consolidate assets, strengthen a company's financial performance, and facilitate future borrowing if needed. If one or more persons are de facto 100% owners/controllers of a company, the owner(s) and the company may in practice be considered as an extension of each other. However, under the Corporation Tax Act, companies on the mainland or in free zones are treated as "juridical persons", i.e.. entities created 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 (ref: Solomon v. Solomon). The real estate on the company's balance sheet should be considered the property of the company, not its owners. The impact 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 the company, such as manufacturing/trading/services, when considering the corporation tax impact.

Tax on individuals with immovable property Certain income earned by an individual in a personal capacity is not taxable, such as (i) interest and income from bank deposits and (ii) dividends, capital gains and other income from holding shares or other securities. Income earned by an individual from real estate investments in the UAE in a personal capacity is generally not subject to CGT. However, additional details are awaited to determine the area of exemption for such investments.

Is it too late? Since income earned by an individual from real estate may not be taxable, business owners may want to consider transferring real estate into their company's name prior to the introduction of QT. Would it be the right decision? Although the law will be effective from June 1, the "anti-abuse" rules have already been in force since the decree on IPs was published in the official gazette. Under the "anti-abuse" rules, a transaction or contract that lacks a valid business purpose and is principally for the purpose of obtaining a tax advantage contrary to the corporation tax laws may be disregarded for tax purposes. In other words, if the transfer does not have a valid business reason, it can be ignored and the property will still be considered company property for tax purposes.

Tax Policy and Explanation As corporation tax is a new phenomenon for the UAE, business owners will need considerable support and guidance on tax issues. Public clarification from the authorities on such outdated issues would be a huge help.