Application of corporate tax on the real estate sector in the UAE

Any real estate market participant doing business in the UAE as an individual is liable to pay taxes. There are various players in the real estate industry such as developers, contractors, subcontractors and brokers, each with their own role. All participants may be categorized as resident or non-resident. Residents can be classified as legal entities or individuals. A legal entity is defined as a limited liability company, public limited company, etc. that has a separate legal entity from its owner. If such a company is registered in a free economic zone, it shall be deemed to be a legal entity of the free economic zone. Residents incorporated in the UAE or outside the UAE but controlled and managed from the UAE are liable to pay worldwide income tax.

An individual operating as a sole proprietor, civil society, unregistered partnership or freelancer without a separate legal entity from its owner but carrying on business in the UAE is considered a physical resident. These individuals are only liable to pay income tax on income attributable to their UAE business. There are exceptions and special rules for such individuals.

Any participant in the real estate market, such as a broker or contractor, doing business in the UAE as an individual is subject to mandatory taxation, regardless of its location. These persons are not liable to pay income tax and are not required to register if their gross income does not exceed AED 1 million for the year. If their annual income is up to AED 3 million for the current and any previous tax period, they can benefit from small business benefits and income tax exemptions for tax periods ending before December 31, 2026. If their annual income exceeds AED 3 million, income tax is 0% for the first AED 375,000 of taxable income and any income in excess of AED 375,000 is taxed at 9%.

The previously mentioned exception where the gross amount of income does not exceed 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 real estate developers, contractors, subcontractors, brokers, etc. are not qualified persons of the free economic zone and have not taken or cannot take advantage of the small business exemption, the 0% income tax applies to their taxable income of AED 375,000. Any taxable income in excess of AED 375,000 is taxed at 9%.

Once they are qualified free economic zone persons, it is important to consider the type of business they are engaged in, the real estate they operate and the party they interact with in the UAE, as these factors may affect their tax liability. If builders, contractors, subcontractors, brokers, etc. are qualified persons of the free economic zone and interact with another person of the free economic zone, their income from such transactions shall be considered qualified income unless it falls within the category of excluded activities.

The general principle mentioned earlier does not apply to income derived from national permanent establishments, foreign permanent establishments or income from owning or operating real estate in a free economic zone for residence or commercial activity if the transaction is conducted with a non-free economic zone person. This income of qualified builders, contractors, subcontractors, brokers, etc. free economic zone is taxed at 9% and does not affect the threshold amount. According to paragraph 3(1)(e) of Ministerial Decision No. 139 of 2023, owning or operating real estate is an excluded activity, but owning or operating commercial real estate located in a free economic zone where the transaction of such commercial real estate is conducted with other persons of the free economic zone is not an excluded activity but generates qualified income. The term "commercial real estate" is defined as "real property or a portion thereof" used exclusively for commercial or business purposes and not as a residence or dwelling, including hotels, motels, guest houses, serviced apartments, and the like. The term "exploitation 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 activities such as leasing real estate, extracting resources using real estate, or using real estate for commercial purposes. Property maintenance can also relate to real estate development.

The author of this article, Mahar Afzal, is managing partner at Kress Cooper Management Consultants. In our future articles, we will consider whether the property used falls within the definition of commercial real estate or whether upcoming commercial properties in the free economic zone will be considered commercial real estate. Second, does the developers' stock fall within the definition of commercial real estate? Third, would income received by qualified developers, contractors, subcontractors, and brokers from other free economic zone persons be qualified income if that commercial real estate is not used for residence or domicile? Permanent establishment of non-resident developers, contractors, subcontractors, brokers, etc. will be liable to tax in the UAE as a UAE entity, but their income attributable to the permanent establishment will be taxed in the UAE rather than worldwide income tax. If non-residents receive income from the UAE, it is taxed at 0%, and if there is a connection in the UAE, such as a real estate investment, non-residents are required to register, file a declaration and pay income tax in the UAE. The opinion of Mahar Afzal, Managing Partner at Kress Cooper Management Consultants, is a personal opinion and does not represent the official position of Khaleej Times. If you have questions or need further clarification, contact Mahar at [email protected].