Clarifying UAE Individual Income Tax Liabilities & Exemptions For Residents and Non-Residents

Recent cabinet decisions clarifying Individual Income Tax liability and exemptions have just been issued before the June 1^st new tax regime. Individuals in the UAE should pay immediate attention to these new rules. 

A UAE cabinet decision made just last week has clarified the position concerning Individual Income Tax liabilities – and exemptions – for UAE residents and non-residents. The decision has come on the eve of the UAE tax reforms scheduled to come into effect from June 1^st – just one week away.  

Since the announcement of the new UAE Corporate Income Tax (CIT) regime due from June 1^st, originally gazzetted on January 31, 2022, it has been a gradual realization that this affects not only large corporations but also on individual-managed businesses and sole traders.

Last week’s decision means that ‘Natural persons’ conducting a business or activity in the UAE could be subject to CIT – and could apply to UAE residents and non-UAE residents alike, irrespective of their tax residency status. The categories of business or business activity conducted by a natural person subject to corporate tax have now been clarified.

It is important to understand the tax implications and the critical scenarios that could give rise to a tax liability. We explain these as follows:

Individual Income Tax Threshold

CIT will be applicable only when the total turnover derived (by individuals) from their business/activity exceeds Dirhams 1 million (@US$272,500) within a calendar year. The turnover means the consolidated gross amount of income/revenue from all business\activities without deduction of expenses (i.e: not the profit).

This means that the UAE has ensured a sizeable upper limit for individuals in business.

As the taxability is dependent on the turnover threshold, one does not need to determine the business nature to determine tax liability. A freelance worker, a social media influencer or a lawyer practicing individually would all be treated equally for the tax purposes.

Determining Business Activity

The crucial factor in terms of tax exposure is to determine what is and is not a business or business activity.

‘Business’ means any activity, conducted with an intention of generating profits (irrespective of actual profit or loss), whether for a fixed period of time or on a continuous basis. The definition uses ‘conduct’ instead of ‘carrying on’ of business, thereby implying that business conducted for short duration would also be considered within the business activity scope.

The scope of the ‘business activity’ definition is wider than that of a ‘business’, and includes any transaction or other element or action undertaken by or as part of a business, which may be carried out entirely or partially within the UAE. The wider scope of business activity requires careful evaluation to determine taxability.

Salary, Personal Investments and Real Estate Investments

Each of these three income sources will not be treated as business/activity in themselves. This is a relief to certain individuals. As yet the UAE does not levy Capital Gains Tax. We provide further definitions on these categories as follows:

Salary

This is determined as being what is given to the employee in consideration of their services under the employment contract including bonuses and allowances.

Personal Investment Income

This is determined as income from investment activity that a natural person conducts for their personal benefit. However, this investment activity should not be considered as commercial business (Ref: Federal Decree-Law No. 50 of 2022). Accordingly, income derived from investments such as returns, dividends are not subject to the tax jurisdiction. However, it is important to note that the exclusion of personal investment income requires individuals to evaluate the scope of investment activity and commercial business and to provide supporting documentation.

Real Estate Investment Income

Determined as income earned by a natural person in relation to, directly or indirectly, the sale, leasing, sub-leasing, and renting of land or real estate property in the UAE.

To enjoy tax exclusion, investment activity under (b) and (c) should not be conducted through a licence or require to be conducted through a Licence.

The above three income sources are not taxable or counted as part of the Dirham 1 million threshold irrespective of the actual amount of the income.

Common FAQ

Will Cryptocurrencies Be Treated As An Investment?

Yes, as this is considered trading. The question relates to whether the total traded turnover exceeds Dirham 1 million, even if a net loss or profits are derived. If it does, CIT may be applicable.

This point highlights the importance of understanding CIT law for individuals, and their compliance status.

Small Business Relief

Individuals with business/activity turnover in excess of Dirham 1 million should note that the UAE Small Business Relief plan still provides them with exemptions until end 2026. If a taxable person’s revenue in a financial year (starting on or after June 1, 2023) does not exceed Dirham 3 million (@US$820,000) then no corporate tax would be payable irrespective of the actual profits.

However, this does require the adequate maintenance of the business bookkeeping, accounts, and tax filing returns as supporting documentation. Failure to maintain records could render your business liable. If required, engage a local accountant for assistance.

Summary

The UAEs evolving corporate tax laws are pragmatic and future oriented. Natural persons have been given the anticipated tax reliefs on their wages and investment incomes. One must always remember that taxation does not work on presumptions.

Individuals in the UAE should not presume that any and every income of an individual will be excluded from tax. A proactive review of income sources will ensure a smooth transition into the tax regime. If in doubt, and to avoid nasty surprises, it is best to seek professional advice.

Dezan Shira & Associates assist foreign nationals and businesses in the UAE and maintain an office in Dubai. For professional assistance please contact dubai@dezshira.com  

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