Understanding Corporate Tax for Natural Persons in the UAE: What You Need to Know

Who is a Natural Person?

A natural person refers to any living individual, regardless of age or residency status, whether in the UAE or abroad. For minors or individuals unable to manage their affairs, their legal representative is responsible for fulfilling Corporate Tax obligations.

Corporate Tax Law and Natural Persons

To create fairness between incorporated and unincorporated businesses, the Corporate Tax Law applies to natural persons engaged in business or business activities in the UAE, those with a Permanent Establishment in the country, or individuals earning State-Sourced Income (income generated in or derived from the UAE).

However, certain income types are exempt from Corporate Tax for natural persons. These include employment income, personal investment income, and real estate investment income, which are detailed further in relevant sections.

Additionally, international agreements, such as Double Taxation Agreements, take precedence if there is any conflict with the Corporate Tax Law. Thus, the applicable agreements between the UAE and other countries should be considered when determining a natural person's tax residency and their UAE Corporate Tax obligations.

Key Considerations for Determining Corporate Tax Applicability for Natural Persons

1. Taxable Status: A natural person conducting a business or business activity in the UAE is classified as a Taxable Person and a Resident Person under the Corporate Tax Law.

2. Turnover Threshold: Corporate Tax applies only if the person’s total turnover from UAE-based business activities exceeds AED 1 million within a Gregorian calendar year.

3. Exempt Income: Income from wages, personal investments, and real estate investments is not considered business income. Therefore, it is excluded from turnover calculations and is not subject to Corporate Tax.

If a natural person’s business turnover in the UAE exceeds AED 1 million annually, they must comply with Corporate Tax obligations, which include registering with the FTA, filing tax returns, and paying Corporate Tax.

Natural Persons: Resident and Non-Resident

For Corporate Tax purposes, a natural person's residency status is not determined by physical residence, citizenship, or residency visa. Instead, the classification depends on their business activities:

1. Residents in the UAE: A natural person living in the UAE is considered a Resident Person and a Taxable Person if they conduct business or business activities in the UAE, subject to relevant considerations.

2. Non-Residents: A natural person residing outside the UAE, such as in another country, is also deemed a Resident Person for Corporate Tax purposes if they engage in business or business activities in the UAE, as per applicable criteria.

Under the UAE Corporate Tax Law, unless a Double Taxation Agreement is applied, any natural person conducting business or business activities in the UAE qualifies as a Resident Person for Corporate Tax purposes.

Corporate Tax Implications for Natural Persons under Double Taxation Agreements

If a natural person resides in a country with a Double Taxation Agreement (DTA) with the UAE and, under the DTA, is not considered a UAE resident but has a Permanent Establishment in the UAE with turnover exceeding AED 1 million annually, they are classified as a Non-Resident Person and are taxable in the UAE under Article 11(4) of the Corporate Tax Law.

However, a natural person residing outside the UAE may also become a Non-Resident Taxable Person if they earn State-Sourced Income (income originating from or accrued in the UAE but not through a business or business activity).

Non-Resident Persons should evaluate the impact of applicable DTAs based on their specific circumstances, referencing Cabinet Decision No. 85 of 2022 and Ministerial Decision No. 27 of 2023 where relevant.

What Income is Taxable for Natural Persons?

Only income from a business or business activity conducted in the UAE by a natural person is subject to Corporate Tax. However, if their total turnover from such activities does not exceed AED 1 million within a Gregorian calendar year, they are not required to register for or pay Corporate Tax. Turnover includes "in-kind" payments, which are valued at market rates.

Income from wages (employment income), personal investments, and real estate investments is excluded from Corporate Tax and is not considered when calculating the AED 1 million threshold.

What Constitutes a Business and Business Activity?

Under the UAE Corporate Tax Law, "Business" and "Business Activity" are broadly defined to determine what falls under the scope of taxation:

· Business Activity: Includes any transaction, activity, or series of transactions or activities conducted by a person in the course of their business.

· Business: Refers to activities carried out regularly, independently, and on an ongoing basis, such as industrial, commercial, agricultural, vocational, professional, service, or excavation activities. It also includes activities related to using tangible or intangible property.

Short-term activities are not excluded, as even temporary transactions or activities can qualify as a business for Corporate Tax purposes. This is why the law emphasizes the "conduct" of a business rather than its "carrying on."

Certain activities, such as lottery winnings or game show prizes, are not typically considered a business or business activity. However, whether an activity qualifies as a business is determined case by case.

Exclusions from Corporate Tax

For natural persons, income from certain activities—such as wages, personal investment income, and real estate investment income—is not subject to Corporate Tax, as these are not considered business or business activities under the Corporate Tax Law. This income is also excluded when determining whether a natural person's turnover from business or business activities in the UAE exceeds AED 1 million within a Gregorian calendar year.

Natural Persons Earning State-Sourced Income

State-Sourced Income refers to income that is:

• Derived from a UAE Resident Person,

• Derived from a UAE Permanent Establishment of a Non-Resident Person, or

• Accrued from activities, assets, capital investments, rights, or services performed or used in the UAE.

Examples of State-Sourced Income include, but are not limited to:

• Dividends from UAE companies,

• Payments from UAE businesses,

• Royalties paid from the UAE,

• Interest from a UAE bank account,

• Income from the sale of goods in the UAE,

• Income from services rendered or benefitted from in the UAE,

• Income from contracts performed in the UAE,

• Income from UAE-based property or asset disposal,

• Income from the use or grant of intellectual property rights in the UAE,

• Interest related to loans secured by UAE property, loans to Resident Persons or Government Entities,

• Insurance premiums related to assets or activities in the UAE.

Certain State-Sourced Income earned by a Non-Resident Person (including a natural person) that is not linked to a Permanent Establishment may be subject to Withholding Tax, which is currently set at 0%.

However, if the natural person is a Resident Person or a Non-Resident with a Permanent Establishment in the UAE, their income will be subject to Corporate Tax at the applicable rate instead of Withholding Tax. In this case, they must register with the FTA for Corporate Tax purposes, in line with the key considerations outlined.

Computation of Turnover

When calculating the turnover of natural persons, the total gross income earned during a Gregorian calendar year from all business or business activities must be considered. This includes income from a sole proprietorship or the individual’s share of income from a fiscally transparent Unincorporated Partnership.

Income from wages, personal investments, and real estate investments is excluded from the turnover calculation.

To determine whether a natural person’s turnover exceeds the AED 1 million threshold, the turnover for the specific Gregorian calendar year should be used. Turnover should be calculated on an accrual basis, unless the natural person opts to use the cash basis of accounting.

Corporate Tax Rate for Natural Persons

The following tax rates apply to the total taxable income of a natural person, which is the income derived from all businesses or business activities conducted in the UAE, rather than from each business or activity individually.

When a natural person's turnover exceeds AED 1 million in a Gregorian calendar year, their taxable income will be subject to Corporate Tax at the following rates:

• 0% on the portion of taxable income up to AED 375,000

• 9% on the portion of taxable income exceeding AED 375,000

Interaction with Small Business Relief

It is possible for a natural person to elect for Small Business Relief under Article 21 of the Corporate Tax Law. The relevant conditions need to be satisfied, including the fact that the Revenue from the taxable Business or Business Activity of the natural person in the relevant Tax Period and previous Tax Periods does not exceed AED 3 million for each Tax Period.20 Note that the Small Business Relief is based on Revenue, where Revenue is defined as the gross amount of income derived during a Tax period. A natural person’s Tax Period is the Gregorian calendar year . Thus, a natural person’s Revenue will be the same as Turnover, being the gross amount of income derived during a Gregorian calendar year.

Understanding the implications of the Corporate Tax Law for natural persons is crucial for anyone conducting business or business activities in the UAE. Whether you're a resident or non-resident, knowing how turnover, taxable income, and exemptions apply to your specific situation can help you navigate the complexities of the law effectively. For personalized guidance and expert consultation, don’t hesitate to reach out to ALWAHAT Accounts and Internal Audit Services. Our team of professionals is here to assist you in ensuring compliance and optimizing your tax strategy under the UAE’s Corporate Tax framework. Contact us today for tailored support and advice!