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Tuesday, April 23, 2024

UAE Corporate Tax: What Real Estate Investing Means for Businesses


From a policy perspective, the introduction of corporate tax in the UAE would be a commendable effort. Given the organic growth of businesses in the UAE, certain legacy practices suddenly appear tax inefficient and could be costly in the future.

Authorities should review tax policies and clarifications regarding such legacy practices. One of these is for business owners to buy real estate in the name of their company.

Independent legal personality of the company

In the UAE, it is quite common for business owners to purchase real estate in the name of their company rather than as an individual. This practice helps consolidate assets, strengthen the company’s financial statements and facilitate future borrowing, if any.

If one or more individuals have de facto 100% ownership/control of a company, the owner and the company may actually be considered an extension of each other. However, under CT law, a mainland or free zone company is considered a “legal person”, ie an entity incorporated or otherwise recognized under UAE law.

A “legal person” has separate legal personality from its owners/shareholders. Legal persons have their own rights, obligations and responsibilities. This is a global principle established since 1896 (ref: Solomon v Solomon).

Real estate held in the name of a company should be considered the property of the company, not its owner. The impact will not change whether it is commercial property or residential, whether it is inside or outside the UAE.

all activities are commercial

Business owners usually only consider the main activities of the company, such as manufacturing/trading/services, to examine CT impact. Falsely thinking that the company is not in the real estate business simply because it holds (its owner’s) real estate. It is also assumed that lease rentals or gains on future disposals should not be taxed as profits.

However, for the purpose of applying the CT Law to companies and other legal persons, all activities carried out and assets used/held will be deemed to be carried out and used/held for “business” purposes. All activities carried out by legal persons will be considered “commercial activities” and fall within the scope of CT in the UAE, unless specifically exempted.

The CT statute does not propose a significant exemption for corporations that earn income from property. It is mentioned in the FAQ that businesses engaged in real estate management, construction, development, agency and brokerage activities will be subject to the UAE CT.

Therefore, income/gains from real estate held by the company may be taxed in the future.

Taxation of Individuals at Risk of Real Estate

Certain income earned by individuals in their personal capacity is not taxed, such as (i) interest and income from bank deposits, and (ii) dividends, capital gains and other income from owning stocks or other securities. Income earned by individuals investing in UAE property in their personal capacity is generally not subject to CT. However, further details are awaited to determine the extent of the exemption for such investments.

Is it too late?

Since personal income from real estate may not be taxable, business owners may consider transferring real estate from the company’s name to their own before the implementation of CT. Although the law will come into force on June 1, the “anti-abuse” rules have been in effect since the CT decree was published in the Official Gazette.

Under the “anti-abuse” rules, a transaction or arrangement entered into not for valid commercial reasons but for the substantive purpose of obtaining a CT advantage inconsistent with CT law may be disregarded for tax purposes. In other words, the property may still be considered the property of the company for tax purposes.

Tax Policy and Clarifications

As corporate taxation is new to the UAE, business owners need strong support and guidance on tax matters. Public clarification from the authorities on such legacy issues would go a long way.

The author is the Managing Director of AskPankaj Tax Advisors.


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