Real estate investment is a key investment in Dubai. Hence UAE Federal Tax Authority gives special attention on the person who invest in Real property in UAE. The government wants to motivate real property investors by giving special exclusions for natural persons who invest in a real property in UAE. Are you a real property investor or a potential investor who looking tax impact on real property in UAE? Then this article will help you to understand the critical tax impact on this investment, the criteria to be met to get an exemption and maximum tax saving while complying with tax law.
Tax Impact on Natural Person
In UAE, natural persons are subject to corporate tax on their business or business activity total turnover exceeding AED 1Million. However, Federal tax authorities give special exemptions for certain income sources which are not considered when calculating a person’s AED 1 million revenue threshold. Such as wages, personal investment, and real estate investment income. This benefit aims to motivate certain investors and enjoy benefits without paying corporate tax in UAE.
Real Estate investment income includes
This income includes the following income sources. However, such activities must not require a license from the relevant authority. If it is required, such exemption will not apply and it is liable for corporate tax.
- Gain on selling real property
- Gain on leasing real property
- Gain on subleasing real property
- Income on renting land or property
Special criteria to be satisfied to get this exemption
Direct investment activity
The person should directly invest in a real property, Providing support services or management services to real property does not qualify for this exclusion.
The license should not be required.
As per UAE law, a license from a relevant authority must not be required to conduct such activity in UAE. If it is required, such activity does not qualify for exemption
Eg. a Person who earns rental income with ba usiness license is subject to corporate tax in UAE.
Corporate Tax Implication on Real Property Investment
A persons income that meets the criteria above is not subject to corporate tax and relevant expenditures also not deductible from his tax computation.
Eg. A person derives income from real property of AED 2Mn and other business income 1.5Mn. Related expenses for real property is AED 1Mn and business expense 0.5Mn. When calculating his taxable income, Real property income not considered as income and he cannot deduct relevant expenditures from his tax calculation.
Tax impact on combined income ( Real property income and other business Income)
A natural person derive real property income and business income which requires a business license, real property income still considered as exempt as far as real property income not connected to the business income.
Eg. A person conduct a bakery business under sole establishment license and rents out his two apartments and earn rental income. Since rental income does not connect to the bakery business, rental income still considered as exempt from corporate income tax.
Operating Real property through a real estate management company (Agent)
A person can operate his real property through a real estate management company. It will help a person to less involve in such business thus real property management company does all necessary activities on behalf of a natural person. Such as, maintenance, tenancy contract preparation, rental collection, sourcing tenants, advertising etc. This natural person will pay the management fee to the property management company. All tenancy agreements with tenant and real property owner and collected rental will transfer directly to the property owner.
Thore, natural person conduct real property business through agent, this does not have nor required license to conduct such activity. Therefore, rental income earn by natural person still exempt from corporate tax.
Common cost allocation
A person who have both taxable income and nontaxable income such real property, must select suitable basis for allocate common cost among between taxable and nontaxable income. This allocation should be fair basis which FTA also acceptable.
Eg. A person holds 20 apartments which 15 apartments operate under holiday home through a license and balance 5 operate non business license require long term renting out apartments. He has one Maintenances invoice and one DEWA bill for whole 20 apartments. He must use fair or acceptable basis when allocate common cost such as value of property or Square Feet of each property.
Income allocation among joined owners
Two or more natural person jontly earn income from property, income allocation among two persons should be fair and acceptable basis. Such as capital contribution. Income from real property from both personsis exempt from corporate tax.
Eg. X and Y earn rental income by contributing 60% and 40% value of real property respectively. A rental income for the month of January AED 20,000. Rental income for X should be 60% of AED 20,000 and 40% of AED 20,000 for Y. such AED 12,000 and AED 8,000 respectively.
Conclusion of real estate tax impact
The government of UAE providesan exemption for natural person investment in real property income under corporate tax law. This article clearly distinguish between taxable and nontaxable income for real property investment. Are you the investor or potential investor for real property in UAE. Then you must understand your taxable and non taxable income under corporate tax law. Hence Faharat & Co staff is ready serve their professional service for you to identified taxable and non taxable income and maximus investors wealth by complaint with UAE corporate tax law.
- FAQ
1.What is mean by real estate investment income in UAE under corporate tax law?
Derive income through selling, leasing, subleasing or renting real property in UAE
2.Is income derive by natural person from real property investment is subject to UAE corporate tax?
Real estate income derive by natural person is exclude from corporate tax in UAE
3. Which type of real property falls under this exclusion?
Residential property, commercial property, Holiday homes, warehouses, parking, agro land etc.
4. A person conduct real property business through a license, is exclude from UAE tax?
A license is required by law or held is not qualifying for corporate tax exclusion in UAE.
5. A person conducting a real property investment through an agent is exclude in UAE tax law?
As far as it does not have nor required license to conduct the business, yes it is exclude from UAE corporate tax law.
