Overview
On 24 October 2024 the UAE's Federal Tax Authority (FTA) issued a new Corporate Tax (CT) guide on Real Estate Investment for Natural Persons (the Guide). The Guide provides general guidance to natural persons on the taxation of Real Estate Investment income.
Background
In terms of Federal Decree Law 47 of 2022 (the CT Law), a natural person will be subject to corporate tax in the UAE to the extent that he or she carries on a business or business activity in the UAE and the total turnover derived from such business/business activity exceeds AED 1 million within a Gregorian calendar year. Where this is the case, the person would be required to register for corporate tax and file an annual tax return.
However, Cabinet Decision No. 49 of 2023 (CD49) specifically excludes three categories from the ambit of business or business activities, namely (i) Wages, (ii) Personal Investment Income and (iii) Real Estate Investment income. Revenue derived by a natural person from any of these three categories would not be subject to corporate tax, regardless of the sum of the revenue derived from such activity. For the purposes of this note we consider the Real Estate Investment category in further detail.
Real Estate Investment Income
A 'Real Estate Investment' is defined in CD49 as:
"Any investment activity conducted by a natural person related to, directly or indirectly, the sale, leasing, sub-leasing, and renting of land or real estate property in the State that is not conducted, or does not require to be conducted through a Licence from a Licensing Authority."
There are a number of elements to the definition of 'Real Estate Investment' that have to be considered by a natural person seeking to rely on this exclusion. These include:
- the natural person must carry on an investment activity;
- directly or indirectly;
- in relation to land or real estate;
- in the State;
- that is neither conducted through nor requires a Licence.
We briefly consider each of these elements with reference to the recent FTA Guide.
Investment Activity
The Guide provides that this would include the activities of selling, leasing/renting and/or sub-leasing of land or real estate property. Importantly the Guide considers this list to be exhaustive and, unless otherwise directly or indirectly related to one of these activities, the activity would not qualify. This contemplates earning income from utilizing the land/real estate itself as opposed to rendering services in relation to the land or property (for example, through property management services).
Directly or Indirectly carried on by the Natural Person
The investment activities can be conducted either directly by the natural person or through an agent or intermediary (i.e. through a property management company). The Guide gives the example of a natural person that appoints a third-party agent to manage his rental enterprise on his behalf (for example through placing advertisements, sourcing tenants, and recovering rental on behalf of the owner). In this scenario, the rent received by the natural person is still considered income derived from Real Estate Investment activity, notwithstanding the use of a rental agent. Furthermore, even where the rental agent might be required to or already holds a Licence to conduct its Business, this would not disqualify the natural person owner from qualifying for the Real Estate Investment exclusion, provided the owner himself does not hold a Licence personally.
In relation to Land or Real Estate
Real Estate is defined in the Guide (presumably with reference to the definition of Immovable Property as contained in Cabinet Decision 56 of 2023) to include any of the following:
- an area of land over which rights or interests or services can be created.
- a building, structure or engineering work attached to the land permanently or attached to the seabed.
- a fixture or equipment which makes up a permanent part of the land or is permanently attached to the building, structure or engineering work or attached to the seabed.
Regardless of the size, quantity or value of land or real estate property owned and the amount of income derived, such income would not be subject to CT as long as it meets the requirements for being a Real Estate Investment.
In the State
This requirement demands that the investment activities be conducted in the UAE, albeit the concerned real estate might be located inside or outside the UAE.
Licence Requirement
Finally, the investment activity must neither be conducted through a Licence nor require a Licence from a Licensing Authority (defined in the CT Law as a competent authority concerned with the licensing or authorizing a Business or Business Activity in the State).
By way of example, the Guide provides that a document issued by the Dubai Department of Economy and Tourism (DET) that allows a natural person to engage in leasing holiday homes on a short term basis would constitute a Licence in this context. On the other hand, a tenancy registration certificate issued by the relevant Emirate (for example, Ejari for Dubai, Tawtheeq for Abu Dhabi, etc.) would be regarded as an administrative record rather than a permission to conduct Business, and would therefore not constitute a Licence.
Where a natural person fails to apply for a Licence to carry out a particular investment activity despite being mandated to do so by the relevant legislation or Licensing Authority, such activity would not qualify for the Real Estate Investment exclusion.
Concluding Remarks
Natural persons deriving income from real estate in the UAE should be careful not to assume that their sales or rental income will automatically be excluded from the ambit of CT. They should consider their particular facts to determine whether they meet all the requirements to qualify under the Real Estate Investment exclusion.
For example, a natural person that rents out a villa on a short term basis might find that he is required to obtain a License from the DET to carry out the activity. If so, he would not be eligible for the Real Estate Investment income exemption and he would need to assess whether the revenue derived from such property exceeds the AED 1 million threshold and whether he would be required to register for CT.
On the other hand, where a natural person rents out his property through a rental agency and the agency is required to obtain a Licence in relation to the property management services, but the natural person owner does not require or hold any Licence in relation to the letting enterprise himself, this could still qualify under the Real Estate Investment exclusion.
Finally it should also be noted that where real estate is held by a Foundation that has obtained Family Foundation status, failure to qualify under the Real Estate Investment exclusion could potentially taint the Foundation's status as a Family Foundation under Article 17 of the CT Law.
Our Tax Services
Our Tax Team can assist you in evaluating your particular circumstances to determine whether you qualify under the Real Estate Investment exclusion. In addition we provide clients with specialist tax advice, planning and implementation support to achieve optimal tax outcomes for their personal and business interests in the UAE.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.