Other BriefingsUAE Criteria to Determine Natural Persons Subject to Corporate Tax
The UAE Federal Tax Authority (FTA) has released the criteria for identifying natural persons subject to the Corporate Tax Law, which came into force on June 1, 2023.
Natural persons in the UAE must register for corporate tax and obtain a Tax Registration Number if their total turnover surpasses AED 1 million within a Gregorian calendar year, starting from 2024.
Furthermore, non-resident natural persons are subject to corporate tax if they possess a permanent establishment in the UAE, and the total turnover of that establishment exceeds AED 1 million within a Gregorian calendar year, effective from 2024.
Definition of a natural person
The term “natural person” holds its standard meaning, meaning living human beings of any age, whether residing in the UAE or elsewhere. For minors or incapacitated individuals, their legal representative assumes corporate tax obligations.
Application of corporate tax to natural persons in the UAE
To establish fairness between incorporated and unincorporated businesses run by individuals, the Corporate Tax Law is applicable to natural persons based on their engagement in business or business activities within the UAE, possession of a permanent establishment in the UAE, or receipt of State Sourced income (i.e., income accrued in or derived from the UAE).
Certain types of income, however, consistently remain exempt from corporate tax for natural persons—employment income, personal investment income, and real estate investment income are excluded.
Moreover, international agreements, including Double Taxation Agreements (DTAs), take precedence in cases of inconsistency between the Corporate Tax Law provisions and the tax treaty.
Therefore, when determining the residence and extent of UAE Corporate Tax for a natural person, consideration of applicable treaty frameworks between the UAE and other jurisdictions is crucial.
Natural persons who are non-resident persons in the UAE should assess the potential implications of a DTA, considering relevant facts and circumstances and to be read with Cabinet Decision No. 85 of 2022 and Ministerial Decision No. 27 of 2023, where relevant.
Key considerations for corporate tax liability of natural persons
When assessing whether a natural person falls under the purview of the UAE Corporate Tax Law, the following factors are crucial:
- Conducting a business or engaged in a business activity: A natural person engaged in a business or business activity within the UAE is designated as a taxable person and a resident person under the Corporate Tax Law.
- Corporate tax applicability threshold: Corporate tax applies to a natural person’s business or business activity only when the total turnover derived from such activities in the UAE surpasses AED 1 million within a Gregorian calendar year.
- Exclusions from business or business activity: Regardless of the amount, income from wage, personal investment, and real estate investment is disregarded when calculating turnover and remains exempt from corporate tax.
- Compliance: Should the turnover from business or business activities conducted in the UAE exceed AED 1 million within a Gregorian calendar year, the natural person—whether resident or non-resident—is obligated to adhere to the Corporate Tax Law. This includes fulfilling requirements, such as registering for corporate tax purposes with the Federal Tax Authority (FTA), submitting corporate tax returns, and settling corporate tax payments.
Corporate tax rate for natural persons
The corporate tax rate for natural persons in the UAE is determined based on their total taxable income, considering all businesses or business activities conducted by the individual within the country. When the turnover of a natural person surpasses AED 1 million in a Gregorian calendar year, the applicable corporate tax rates are as follows:
- 0 percent on the portion of taxable income not exceeding AED 375,000.
- 9 percent on the portion of taxable income that exceeds AED 375,000.
It should be noted that under ‘Small Business Relief’, the UAE provides corporate tax relief that allows eligible taxable persons to be treated as having no taxable income for the relevant tax period in accordance with Article 21 of the Corporate Tax Law and Ministerial Decision No. 73 of 2023.
Small Business Relief is determined based on revenue, which is defined as the gross income derived during a tax period, which aligns with the Gregorian calendar year for natural persons. Therefore, a natural person’s revenue is equivalent to turnover, representing the total gross income earned in a Gregorian calendar year.
A natural person can opt for Small Business Relief under Article 21 of the Corporate Tax Law, provided certain conditions are met. This includes ensuring that the revenue from their taxable business or business activity in the relevant tax period and preceding tax periods does not exceed AED 3 million for each tax period.
Examples to demonstrate liability to corporate tax from the FTA guide
Example 1: Business visit by a natural person
Consider the scenario of Mrs. Z, a natural person employed by a foreign company not based in the UAE, visiting the country for a client meeting. Mrs. Z’s visit spans 5 days and involves client interactions, product presentations, and visits to production facilities.
In this case:
- Mrs. Z is present in the UAE solely as an employee representing her foreign employer.
- She is not engaged in conducting a Business or Business Activity on her own behalf.
- Consequently, Mrs. Z does not meet the criteria to be considered a Resident Person under the Corporate Tax Law.
As Mrs. Z’s activities in the UAE are on behalf of her employer and not for her own business endeavors, she falls outside the scope of Corporate Tax obligations as outlined by the law.
Example 2: Self-employment in the UAE
Let’s examine the case of Mr. X, a natural person on a visit visa in the UAE who establishes a small workshop dedicated to restoring antique jewelry. Operating independently, Mr. X achieves a turnover of AED 1,700,000 by selling items over several months in a Gregorian calendar year.
Key points:
- X is deemed a resident person under the Corporate Tax Law as he is actively involved in conducting a business or business activity in the UAE on his own behalf.
- The turnover generated by Mr. X exceeds AED 1 million within the calendar year, triggering the application of corporate tax to his business or business activity.
- It should be noted that Mr. X’s resident person status for corporate tax purposes remains unaffected by considerations such as immigration status, work permits, or business licensing requirements.
In summary, Mr. X, as a self-employed individual with substantial turnover, falls within the scope of corporate tax obligations as a resident person in the UAE.
Example 3: Consultancy services
Let’s investigate the case of Mrs. A, a natural person providing consultancy services while being self-employed in the UAE. Mrs. A renders consultancy services to a third-party company located outside the UAE and receives AED 1,200,000 for these services in a Gregorian calendar year. After deducting her costs, Mrs. A’s net profit amounts to AED 900,000.
Key points:
- A operates independently and is not an employee of the foreign company; thus her income is not considered in the nature of a wage. Additionally, the income does not fall under the categories of personal investment or real estate investment.
- Given that the income stems from consultancy services, it qualifies as a business or business activity. Since the turnover exceeds AED 1 million, Mrs. A’s consultancy income becomes subject to corporate tax.
- Assuming all costs are deductible for corporate tax purposes, Mrs. A’s taxable income stands at AED 900,000. Notably, there is no exemption for the profit related to the first AED 1 million of turnover. However, Mrs. A can benefit from the 0 percent rate on the initial AED 375,000 of taxable income.
- Furthermore, as Mrs. A’s revenue (AED 1,200,000) does not surpass AED 3 million and considering that the revenue for previous tax periods also stays below AED 3 million, she can opt for Small Business Relief. This selection implies that, for the relevant tax period, she is treated as if no taxable income has been derived.
Example 4: Artwork trading business
Consider the scenario of Mr. L, a natural person based in the UAE, engaging in the trading of artwork. Mr. L notices the consistent increase in prices of artwork by a specific UAE artist over more than a decade. Inspired by this trend, he establishes a home office and commences the purchase of artworks from the UAE with the intention of selling them to clients located outside the UAE. This is facilitated through a network of partners situated in various countries, resulting in a total turnover of AED 5 million within a Gregorian calendar year.
Key points:
- L’s activity of buying and selling artworks is recognized as the conduct of a business or business activity.
- The substantial turnover of AED 5 million in the calendar year places Mr. L’s income from the sale of artwork under the purview of corporate tax.
In summary, Mr. L’s income derived from the sale of artwork is subject to corporate tax as it qualifies as the operation of a business or business activity, as per the provisions outlined in the Corporate Tax Law.
