UAE: Real Estate Investors and Taxes – what are the consequences of the introduction of corporate income tax

Fundamentally, income derived from immovable property, such as real estate, generated by private individuals (natural persons) who are not required to hold a trading license under the law is not categorized as business income, regardless of its amount. However, corporate income tax shall only apply to business profits. Con­sequently, individuals who engage in the rental or sale of real estate without the necessity of a commercial license, thereby abstaining from commercial activities, typically do not fall within the scope of corporate income tax in the UAE. This principle is applicable to both UAE residents and foreign private individuals.

In situations where a commercial license is indeed mandatory, taxation of profits only occurs if the annual turnover surpasses AED 1 million. Conversely, legal entities (as opposed to individuals) are generally subject to UAE taxation if their annual turnover exceeds AED 375,000. Nevertheless, specific scenarios exist in which income generated from immovable real estate may be exempt from taxation for legal entities, particularly when the annual turnover is at or below AED 375,000.

The geographical location of the company's registered office plays a pivotal role in the case of legal entities, particularly whether the company is situated in a free trade zone or on the mainland of the UAE. Income derived from real estate located on the UAE mainland is subject to a standard tax rate of 9 percent for legal entities. However, if the real estate is situated in a UAE Free Zone (FTZ) and the owner resides outside of a UAE FTZ, the standard 9 percent tax rate is likewise applied. For legal entities based in a free trade zone, income from real estate may be eligible for tax exemption under certain conditions. However, the tax exemption of income does not necessarily imply an exemption from the obligation to register for corporate income tax purposes.

In summary, the UAE has a complex system of tax exemptions and their applicability to real estate investments, depending on the type of business and its turnover. The goal is clear: to encourage real estate investment while ensuring that corporate profits are taxed appropriately.