Application of corporate tax on the individuals and legal persons

The persons subject to corporate tax (CT), can be classified into natural persons and legal persons. The natural persons who fulfil the criteria would fall under the scope of CT, and in the same way, the legal persons that satisfy the specific conditions would be subject to CT. On the other hand, natural and legal persons who do not meet the criteria would be exempt from CT. In this article, we have covered the proposed treatment of CT on natural persons and legal persons.

Application of CT on the natural person:

The application of the CT on the individual depends upon the activity in which the individual is involved. For example, some activities conducted in the UAE require a license/permit from the respective authorities, while others do not. If the individual is conducting any commercial activity which requires a licence from the related authorities, the individual would be required to take the permit, and the UAE source income of the individual would be subject to CT. For example, income from sole establishments, proprietorships, and individual partners' income from an unincorporated partnership that conducts business in the UAE and where the liability of any partner is unlimited.

The individuals can conduct some activities in the UAE without taking a commercial licence/permit, and such income of individuals would not be subject to CT. For example, individuals’ employment income, dividend income, rental income from the investment in the property and other investment income.

If the investments in the real estate and other areas are held through a private or family trust on behalf of individual beneficiaries, the trust would be subject to the same CT treatment like for a natural person. If the individual family members own the property/properties, they can create trust and shift all their properties under the trust. The trust would be managing all such properties on behalf of the individuals who would be beneficiaries of the income. Such income of the trust will not be subject to CT.

Application of CT on the legal person:

The legal persons can be classified into incorporated persons like limited liability companies (LLC), public joint-stock companies (PJSC), private shareholding companies etc. and unincorporated persons like partnerships, joint ventures (JVs) and associations of persons (AoP). The incorporated persons may be incorporated in the UAE or out of the UAE. If the legal persons are incorporated in the UAE, their worldwide income will be subject to CT, and if the businesses are incorporated out of the UAE, still their income would be subject to CT in the UAE if these businesses:

• are being controlled and managed in the UAE (worldwide income will be subject to CT).

• have Permanent establishment in the UAE (UAE source income will be subject to CT)

• earn any UAE source income (UAE source income will be subject to CT)

Like incorporated persons, unincorporated persons like partnerships, JVs, and AoP may be in the UAE or out of the UAE. If these are in the UAE, businesses would be required to assess whether their partners have limited or unlimited liability. If any of the partners have unlimited liability, these entities are called “transparent” and their income would be subject to CT in the hands of the partners or members. This means that these entities will not be subject to CT but their net taxable income will be subject to CT in the hands of the partners or members. On the other hand, where the liability of all partners is limited, such partnerships will be treated like an incorporated company in the UAE.

If the partners or members are living in the UAE, and unincorporated persons are located out of the UAE, then some countries may treat them as “transparent” entities and others may treat them as a company. Such non-resident unincorporated persons will have the same CT treatment in the UAE like these will have in their respective countries.

The businesses and natural persons are required to assess their status and be prepared for the CT accordingly.

Mahar Afzal is a managing partner at Kress Cooper Management Consultants. The above is not an official but a personal opinion of the writer. For any queries/clarifications, please write to him at compliance@kresscooper.com.