The Federal Tax Authority has clarified that individuals’ income from real estate investment is exempt from the 9% corporate tax, as a natural person (individual) can practice investment activities directly or indirectly through an intermediary.
The Authority indicated that by referring to the phrase “indirectly”, the income that an individual receives through an intermediary may be eligible for exemption as real estate investment income, depending on the facts and circumstances of each individual case. This intermediary may be an agent or a real estate management company.
According to the Corporate Tax Law that came into effect in the UAE on June 1, 2023, the income of a natural person (individual), derived from (wage “salary”), private investment income, and real estate investment income, is not subject to corporate tax, because these sources are not considered businesses or business activities, and this income is not taken into account when determining whether an individual has achieved revenues exceeding one million dirhams during a calendar year from the business he practices in the country.
For example, if an individual contracts with an independent agent (a third party) to manage the rental process of his apartment and collect rent on his behalf, the contract with the agent and the rent received by the individual are considered part of the real estate investment activity. In this case, it is not important to the individual whether the independent agent has a license to practice his business or not.
Similarly, income earned by the individual from other activities related to the real estate investment activity will be excluded from corporate tax only if the activities are not practiced or do not require a license from the licensing authority.
Example
Ahmed, who owns a number of apartments, receives rental income through an independent property management company that manages the apartments on his behalf. The lease contracts indicate Ahmed as the owner of the apartments, the landlord or the lessor. While the property management company has the appropriate license to manage the properties and is subject to tax.
In addition to providing other services, such as: reaching tenants, registering leases, advertising properties, etc., the property management company also collects rent from tenants and then transfers it to the natural person (the owner). The property management company is entitled to receive a management fee for the services it provides.
The use of an agent does not change the nature of the income or the fact to whom the income is attributed. Therefore, the rental income that Ahmed receives through the property management company relates to the real estate investment activity, which is the leasing of properties by a natural person (individual), and Ahmed does not have a license for this activity, and is not required to obtain a license for it, and he has the right to exclude this income from the scope of the 9% corporate tax.
The Corporate Tax Law indicated that a natural person (individual) is subject to corporate tax if he practices a business or commercial activity in the country, and the total revenues from the business or business activity exceed one million dirhams, during a calendar year (from January to September).
How is revenue calculated?
Business revenues do not include income from salaries, or private investment income (shares, or the like), nor from income from real estate investment. The UAE has begun imposing a corporate tax on the business community, at a rate of 9% on income exceeding AED 375,000, and at a rate of 0% on income that does not exceed this amount, starting from the fiscal year starting on or after June 1, 2023.