Application of corporate tax on the real estate sector in the UAE

The real estate industry involves different players such as developers, contractors, sub-contractors, and brokers, each with specific roles. The parties can be categorised as either resident or non-resident persons. Resident parties can further be classified as resident juridical persons or resident natural persons.

Any developer, contractor, sub-contractor, or broker registered as a limited liability company, public joint stock company, etc. which has a separate legal personality from its owner is referred to as a juridical person. If such a company is registered in a free zone, it is known as a free zone juridical person. A free zone person who meets the criteria of a qualifying free zone person is called a “Qualifying Free Zone Person (QFZP).” Resident juridical parties established in the UAE or outside the UAE but controlled and managed from within the UAE are subject to corporate tax (CT) on their worldwide taxable income. A person operating as a sole establishment, civil company, unincorporated partnership, or freelancer without a separate legal personality from their owners but conducting business in the UAE is considered a natural resident person. Such individuals are liable to pay CT on their worldwide income related to their UAE business only.

These are the general rules for applying corporate tax, but there are some exceptions and special rules. Any real estate player, such as a real estate broker or contractor, conducting business in the UAE as a natural person is subject to the same taxability regardless of their location. These individuals are not liable to pay corporate tax and are not required to register if their gross income does not exceed Dh1 million within a Gregorian calendar year. If their annual business revenue is up to Dh3 million in the current and any previous tax periods, they can avail small business relief from corporate tax for tax periods that end before or on December 31, 2026. If their annual business revenue exceeds Dh3 million, a zero per cent corporate tax rate applies to the first Dh375,000 of taxable income, and any income above Dh375,000 is subject to a nine per cent tax rate.

The previously mentioned exemption, where the gross amount of income is up to Dh1 million, is not available to juridical persons. However, they can benefit from the small business relief for tax periods ending before or on December 31, 2026 if their annual business revenue is up to Dh3 million in the current and any previous tax period. If the developers, contractors, sub-contractors, brokers, etc., are not QFZPs and have not opted for or cannot opt for the small business relief, a zero per cent corporate tax rate applies to their taxable income of Dh375,000. Any taxable income exceeding Dh375,000 is subject to a nine per cent tax rate. However, if they are QFZPs, it is important to consider the activity they are performing, the property they are handling, and the party they are dealing with in the UAE, as these factors can impact their tax liability.

If the real estate developers, contractors, sub-contractors, brokers, etc., are QFZPs and engage in transactions with another free zone person, their income from such activities is considered Qualifying Income (QI) unless it falls under the category of excluded activities. On the other hand, if they conduct transactions with non-free zone persons, all their income will be non-qualifying income (NQI), except for income derived from qualifying activities that are not excluded activities.

The general principle mentioned earlier does not apply to income derived from domestic permanent establishments, foreign permanent establishments, or income from the ownership or exploitation of immovable residential free zone property or immovable free zone commercial property where the transaction is conducted with a non-free zone person. This income of qualifying free zone real estate developers, contractors, sub-contractors, brokers, etc., is subject to tax at a nine percent rate and will not impact the de-minimis threshold.

Article 3(1)(e) of the Ministerial Decision No. 139 of 2023 states that ownership or exploitation of immovable property is excluded activity, but the ownership or exploitation of commercial property located in a free zone where the transaction in respect of such commercial property is conducted with other free zone persons is not excluded activity but will generate QI.

The word “commercial property” has been defined as a property that is “immovable property or part thereof “used exclusively for business; or business activity purposes; and not used as a place of residence or accommodation including hotels, motels, bed and breakfast establishments, serviced apartments and the like”.

The word “exploitation of the property” has not been defined in the law, but we can presume that it refers to the use of property for economic benefit. This can include activities such as renting out a property, extracting resources from a property, or using a property for commercial purposes. The exploitation of property can also refer to the development of a property.

Based on the above provisions and requirements of the law, in our upcoming articles we will explore, firstly, does the used property fall under the definition of commercial property or upcoming commercial property developments in the free zone be considered commercial property? Secondly, is the inventory of developers fall under the commercial property? Thirdly, will income earned by qualifying free zone real estate developers, contractors, sub-contractors, and brokers from other free zone persons attributable to free zone commercial property that is not used for accommodation or living purposes be considered qualifying income?

The permanent establishment (PE) of the non-resident real estate developers, contractors, sub-contractors, brokers etc will be liable to tax in the UAE like a juridical person in the UAE but their income attributable to PE will be subject to tax in the UAE instead of the worldwide income of the person. If the non-resident person is earning any UAE-sourced income, it will be subject to zero per cent withholding tax, and in case of any nexus in the UAE, like investment in the immovable property, the non-resident person will be liable to register, submit the return and pay the CT in the UAE.

Mahar Afzal, a managing partner at Kress Cooper Management Consultants, has shared a personal opinion which does not represent the official stance of Khaleej Times. If you have questions or require further clarification, contact Mahar at mahar@kresscooper.com.

• Business