UAE Real Estate Investment Income and Tax Liability

Real estate income for individuals in the UAE is generally excluded from Corporate Tax unless the activity requires a business license. Per a guide released by the Federal Tax Authority, joint ownership and the nature of property usage determine whether the income is taxable or excluded.

By Giulia Interesse

On October 24, 2024, the UAE Federal Tax Authority (FTA) released the Real Estate Investment for Natural Persons Corporate Tax Guide (hereinafter, the “guide”). This guide is designed to help individuals understand the tax implications of income derived from private real estate investments. While not legally binding, it provides essential clarification on when such income does not qualify as a taxable business activity for natural persons, thus exempting it from the corporate tax framework established by Cabinet Decision No. 49 of 2023.

The guide comes in the context of significant changes introduced by the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, known as the “Corporate Tax Law,” which took effect on June 1, 2023. This law created a new framework for taxing corporate profits and includes specific provisions that apply to individuals earning income from real estate investments.

The aim of the new guide is to clarify these provisions, which details exemptions for certain types of real estate investment income. Understanding these regulations is crucial for individuals involved in the UAE’s real estate sector, as it helps them navigate their tax obligations and identify potential opportunities.

Who qualifies as “Taxable Person” under the Corporate Tax in the UAE?

Natural persons conducting business or business activities in the UAE are classified as “Taxable Persons” under the UAE Corporate Tax Law.

This classification includes both Resident Persons and Non-Resident Persons. Resident Persons are defined as individuals conducting business activities in the UAE, regardless of their actual place of residence.

Notably, international agreements, such as Double Taxation Agreements (DTAs), take precedence over any conflicting provisions in the UAE Corporate Tax Law when determining the tax residence of natural persons.

Income exclusions from Corporate Tax

Certain types of income are excluded from Corporate Tax for natural persons, meaning they do not count towards the turnover threshold:

• Wages;
• Personal investment income; and
• Real estate investment income.

When is real estate investment income excluded from Corporate Tax?

Real estate investment is defined as any investment activity conducted by a natural person related to the sale, leasing, sub-leasing, and renting of land or real estate property in the UAE. Importantly, these activities do not require a licence from a licensing authority.

Scope and definition of real estate investment in the UAE

The guide clarifies that qualifying real estate investment activities must relate specifically to land or real estate properties as defined by the FTA.

Real estate covers a broad range of assets, including:

• Land areas with associated rights or interests;
• Permanent structures, buildings, or engineering works attached to land or the seabed; and
• Fixtures or equipment that are permanently part of these structures or attached to the seabed.

Properties that fall under this definition for tax purposes include:

• Residential properties, furnished holiday homes, and commercial properties;
• Showrooms, warehouses, storage rooms, parking lots, and garages; and
• Structures and fixtures permanently attached to any of these property types.

Lastly, investment land can span a range of uses, including:

• Agricultural, industrial, and residential land; and
• Land with permanently affixed structures or fixtures, from farming equipment to industrial setups.

A significant point in the guide is that the use of the property by occupants—whether for business or personal purposes—does not impact its eligibility for tax exemption. Income earned from leasing or selling real estate qualifies for exemption regardless of whether it derives from residential or commercial use, or a mix of both.

Additionally, the scale of investment is not a limiting factor. The guide states that there are no restrictions based on the size, quantity, or value of real estate holdings or the income derived from them. As long as the activities meet the criteria for real estate investment, income from such properties remains outside the scope of Corporate Tax. This expansive approach offers real estate investors a clear and inclusive framework to assess their tax obligations and plan their activities effectively.

Criteria for exclusion from Corporate Tax

The exclusion from Corporate Tax applies to investment activities conducted in the UAE, as well as those related to properties located outside of the UAE. Investment activities qualifying for the real estate investment exclusion include:

• Selling;
• Leasing/renting; and
• Sub-leasing.

Activities not directly related to these actions do not qualify for the exclusion.

If an investment activity requires a licence from a licensing authority, it will not be eligible for the real estate investment exclusion, thus falling under the scope of Corporate Tax.

What are the Corporate Tax implications of real estate investment in the UAE?

Income from certain real estate investments is excluded from Corporate Tax, meaning that any expenses tied to generating this income aren’t deductible. In these cases, profits from the investment don’t contribute to taxable income, and any losses incurred won’t qualify for tax relief.

Corporate tax registration requirements

Individuals engaged in business activities, including real estate investment, must register for Corporate Tax if their annual turnover exceeds AED 1 million (approximately US$272,261).

However, if the income from real estate investments is classified as excluded from Corporate Tax, it doesn’t contribute to this turnover threshold, potentially exempting some investors from registration.

Arm’s length standard for transactions

For Related Party transactions, such as lease agreements between associated entities or individuals, the UAE requires these dealings to meet the “arm’s length” standard. This means transactions should reflect fair market values, as if between unrelated parties, to ensure accurate reporting and tax compliance.

How to differentiate taxable businesses from excluded real estate investment?

Real estate investment income can be excluded from Corporate Tax when it isn’t part of a licensed business activity. Conversely, income from properties that require a business license falls under taxable income. This distinction hinges on whether the property activities align with a licensed business.

Below are some examples of excluded vs. taxable income:

• Selling a personal residence: Income from the sale of a personal residence is excluded from Corporate Tax, provided it isn’t connected to a business activity.
• Rental income without a license: Rental income earned without a business license is considered real estate investment income and is therefore excluded.
• Rental income with a license: If rental income is part of a licensed real estate business, it is considered taxable.

For expenses related to both taxable business and non-taxable real estate investment activities, fair apportionment is essential. Consistent methods—such as basing allocation on property value or usage—help ensure accurate and fair allocation of shared costs, aligning with tax reporting standards.

How about jointly owned real estate?

According to the FTA’s guide, when real estate is co-owned, income from the property is divided proportionally among the owners. Each owner must independently assess whether their share of the income is taxable or excluded, depending on their specific circumstances and any applicable licensing requirements.

Below are some examples of joint ownership and tax implications:

• Licensed holiday rental: If a co-owned holiday rental requires a business license, each owner’s share of the income is considered taxable.
• Unlicensed residential property: Income from a jointly owned residential property that doesn’t require a license qualifies as excluded income, meaning it falls outside the Corporate Tax scope.

Conclusion

All in all, the introduction of Corporate Tax in the UAE marks a significant shift in the taxation landscape, particularly for real estate investors. For private individuals engaging in rental or sale activities without a commercial license, their income from real estate remains outside the scope of corporate income tax, thus promoting investment in the sector. However, legal entities must navigate a more complex framework, with tax implications hinging on turnover thresholds and the location of their operations.

Ultimately, the UAE’s tax regime aims to foster real estate investment while ensuring that corporate profits are fairly taxed. Investors must carefully assess their business activities and the associated licensing requirements to understand their tax obligations fully. By doing so, they can capitalize on the favorable investment environment while remaining compliant with the new tax regulations.

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