Taxation of natural persons under the UAE Corporate Tax law

22 January 2024 Consultancy-me.com 4 min. read
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The UAE’s Corporate Tax Law primarily focuses on imposing a federal tax on corporations and business profits in the UAE. While the primary target is on entities, the Corporate Tax Law also extends its reach to natural persons engaged in business activities within the UAE. Experts from Ascentia spell out the implications for natural persons.

Natural persons fall under the ambit of the Corporate Tax Law if they are involved in business activities, have a permanent establishment in the UAE, or earn income directly from the country. However, exemptions are provided for certain types of income, including employment income, personal investment income, and real estate investment income.

Noteworthy is that international agreements, particularly Double Taxation Agreements, take precedence in case of any inconsistencies with the Corporate Tax Law.

Taxation of natural persons under the UAE Corporate Tax law

Key considerations for natural persons

  1. Taxable Person Status: Natural persons engaging in business or business activities in the UAE are considered Taxable Persons and Residents.
  2. Turnover Threshold: Corporate Tax applies to a natural person only when the total turnover derived from business or business activities conducted in the UAE exceeds AED 1 million within a Gregorian calendar year.
  3. Excluded Income: Employment income, personal investment income, and real estate investment income are exempt from Corporate Tax.
  4. State Sourced Income: Natural persons deriving State Sourced Income, such as dividends, payments, royalties, and interest from UAE sources, may be subject to Corporate Tax or Withholding Tax.

Corporate Tax Rates for Natural Persons
The Corporate Tax rates for natural persons are progressive:

  • 0% on the portion of taxable income not exceeding AED 375,000.
  • 9% on the portion of taxable income exceeding AED 375,000.

Example: A natural person with a total turnover exceeding AED 1 million will be subject to Corporate Tax on the applicable portion of their taxable income.

Small Business Relief
Natural persons can opt for Small Business Relief if their total revenue from taxable business or business activities does not exceed AED 3 million for each tax period.

Deductions and Expenditures
1. Interest Deduction: Natural persons are fully eligible for interest deductions, provided the expenditure is incurred exclusively for the business and meets the arm’s length principle.

2. General Deduction Rules: Business-related expenditures that are not capital in nature are deductible, subject to certain limitations.

3 Non-deductible Expenditure: Certain types of expenditure, such as amounts withdrawn from a business by a natural person, are not deductible for Corporate Tax purposes.

Related Parties and Connected Persons
Transactions with related parties must adhere to the arm’s length principle. Connected persons, defined as owners, directors, officers, or partners in an unincorporated partnership, are subject to specific rules.

Interaction with Other Business Forms
Natural persons engaging in business activities may interact with juridical persons, sole proprietorships, and unincorporated partnerships, each requiring adherence to specific rules and principles.

Tax Registration, Deregistration, and Tax Period
Natural persons must register for Corporate Tax if their turnover exceeds AED 1 million in a calendar year. Deregistration is applicable in cases of business cessation or death, and the tax period for natural persons aligns with the Gregorian calendar year.

Accounting Standards and Financial Statements
Taxable persons must prepare financial statements based on International Financial Reporting Standards (IFRS) or IFRS for SMEs if their turnover is below AED 50 million. Audited financial statements are mandatory for turnovers exceeding AED 50 million.

Tax Return
Natural persons must file Corporate Tax returns within 9 months of the end of the relevant tax period, providing a comprehensive overview of all businesses and business activities subject to Corporate Tax.

Conclusion

The UAE’ss Corporate Tax Law extends its reach to encompass natural persons engaged in business activities within the country, ensuring a level playing field between incorporated and unincorporated businesses. While introducing tax obligations, the law also provides relief measures and considerations to ease the compliance burden on small businesses.

Natural persons must navigate these regulations carefully, ensuring adherence to taxation requirements and leveraging available relief provisions.