The UAE CIT Impact on Natural Persons

The UAE CIT Law (Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses) provides the legislative basis for imposing a federal tax on corporations and business profits in the UAE. The CIT rate is set at 9%, the lowest within the Gulf Cooperation Council (GCC) region. A 0% CIT rate is also available for Free Zone (FZ) Persons under certain conditions.Noteworthy, the UAE CIT applies not only to incorporated businesses but also to unincorporated businesses, including those operated by individuals, reflecting a comprehensive approach to CIT in the country.

We have already covered tax issues relating to natural persons extensively. We refer to the following resources for further information:

• 30 Highlights about CT Guide for Non-Resident Persons: https://aurifer.tax/30-highlights-about-ct-guide-for-non-resident-persons/
• Tax Residency Criteria for Individuals: https://aurifer.tax/uae-tax-residency-criteria/
• Tax Planning Strategies for Individual Business Owners in the UAE: https://aurifer.tax/tax-planning-strategies-for-individual-business-owners-in-the-uae/
• CIT in the UAE: the PE Clause for Individuals: https://aurifer.tax/cit-in-the-uae-the-pe-clause-for-individuals/

This article continues the analysis focusing on the UAE CIT implications for natural persons and discusses the applicable regulatory framework and compliance requirements.

UAE CIT and Natural Persons 

To ensure tax neutrality between incorporated and unincorporated forms of business in the country, the UAE CIT Law applies to both legal entities and individuals resident and carrying on a business in the UAE.

Certain types of income earned by natural persons are regarded as private (i.e., non-business) activities and, therefore, fall outside the scope of UAE CIT. These types of income are employment income, personal investment income, and real estate income, which will be discussed in more detail later in this article.

A natural person becomes a taxable person for UAE CIT purposes if the person conducts a Business or Business Activity in the UAE. More specifically, as soon as the total turnover of a natural person’s Business or Business Activity exceeds AED 1 million within a Gregorian calendar year (i.e., the solar year), the natural person is required to comply with the UAE CIT laws, register with the FTA, submit CIT returns and pay the tax due. On the other hand, if the total turnover from a business or business activities does not exceed AED 1 million, a natural person does not have to register for or pay CIT on their income.

It is important to highlight that natural persons can conduct a Business or Business Activity in the UAE via a sole establishment or a civil company. For UAE CIT purposes, these entities will be disregarded and treated as the natural person or persons owning them because of their direct relationship and control over the Business and their unlimited liability for the debts and other obligations of the Business.

Business and Business Activity under UAE CIT

As per Article 1 of UAE CIT Law, a “Business” is defined as any activity conducted regularly, on an ongoing and independent basis by any Person and in any location, such as industrial, commercial, agricultural, vocational, professional, service or excavation activities or any other activity related to the use of tangible or intangible properties. This definition has been borrowed from the UAE’s VAT law and is, therefore, broad.

Nevertheless, “ongoing” should not be understood in a way that excludes short-term activities. Short-term activities also fall within the scope of UAE CIT if they constitute a “transaction or activity, or series of transactions or series of activities”. Examples of activities by a natural person typically not considered a Business or Business Activity include lottery winnings or game show prizes. However, whether a Business is conducted on an ongoing basis needs to be assessed on a case-by-case basis.

“Business Activity” is instead a term encompassing any transaction or activity, or series of transactions or series of activities conducted by a Person in the course of its Business, as defined above, which may be carried out entirely or partially within the UAE.

By default, all activities conducted and assets used or held by companies and other juridical persons are considered activities conducted and assets used or held for the purpose of a Business or Business Activity. For natural persons, instead, it is necessary to verify whether the activities conducted and assets used or held pertain to the business or private sphere since, as explained further below, non-business activities are excluded from the scope of UAE CIT.

Income Excluded from UAE CIT

As anticipated, income from specific activities like personal investments, real estate investments, or employment is not subject to UAE CIT for a natural person even if the AED 1 million threshold is exceeded, as these income items are not considered arising from a Business or Business Activity under UAE CIT Law. We discuss those further below

1. Wage: As per the UAE CIT Law, salaries or any other form of remuneration received by a natural person as an employee from their employer does not fall within the scope of this tax. Therefore, if a natural person works in a company as an employee or also as a member of its board of directors (BoDs), both his salary for his executive role in the company and the fees received for attending board meetings in the company are considered as Wage and accordingly are not subject to UAE CIT.
2. Personal Investment Income: If a natural person derives income from personal investments that he/she conducts for their personal account, it is not considered business income and, therefore, not subject to CIT. The exception to this is where the activity is conducted through a license or requires a license or where the activity is considered a commercial business in accordance with the commercial transactions law.
3. Real Estate Investment Income: If a natural person derives income from real estate by directly or indirectly selling, leasing, sub-leasing and renting land or real estate property in the UAE, which does not require a License from the Licensing Authority, this income is not subject to UAE CIT. On the contrary, activities such as real estate management, construction, development, agency, and brokerage are treated as business activities that fall within the scope of UAE CIT.

UAE CIT Rate for Natural Persons

A Natural Person is subject to UAE CIT if, in a Gregorian year (i.e., the solar year), the person generates turnover exceeding AED 1 Million. As mentioned, the person is required to register for CIT purposes and subject to obligations under the UAE CIT Law. This person is then taxed on net income exceeding AED 375,000. If the Taxable Income is below AED 375,000, then the natural person will effectively be subject to a rate of 0% CIT.

A Natural Person may also be eligible for the so-called Small Business Relief (SBR) if the Revenue from the current and previous Tax Periods does not exceed AED 3 Million for each Tax Period. The Taxable Person will then be treated as having no Taxable Income in respect of each relevant Tax Period where the conditions of the SBR are satisfied. However, UAE CIT compliance obligations (e.g., filing a tax return) will still apply.

UAE CIT Deductions for Natural Persons

A natural person can deduct the following expenses for UAE CIT purposes:

1. Interest Deduction: If an individual is subject to CIT, the General Interest Deduction Rule may apply to him/her. This rule limits interest deductions greater than AED 12,000,000 or 30% of taxable earnings before interest, tax, depreciation, and amortization (EBITDA).
2. General Deduction relating to Business Expenditure: A business expenditure is deductible from UAE CIT liabilities if the expenditure incurred by the Natural Person is exclusively for the purposes of his/her business and is not capital in nature. Expenditures that are not incurred for the purposes of the Natural Person’s Business, not incurred in deriving Exempt Income and Losses that are not connected with the Natural Person’s Business are not deductible for UAE CIT purposes.

Non-Deductible Expenditure under UAE CIT

Certain expenditures cannot be deducted by a natural person for UAE CIT purposes. This includes:

1. Amounts withdrawn by a Natural Person from his/her business: The amounts withdrawn by a Natural Person from his/her own business, even if described as Wage or Salary, cannot be deducted for UAE CIT purposes. When a Natural Person operates a Sole Proprietorship business in UAE and withdraws money from the business and records it as Annual Salary cost, the Natural Person is not eligible for UAE CIT deduction as both the Natural Person and Sole Proprietorship are considered as the same taxable person even if the salary was deducted at arm’s length principle.
2. Transactions with Connected Persons to Natural Persons and Related Parties: To be deductible under UAE CIT, the transactions of a Natural Person with a Connected Person have to follow the arm’s length principle. Also, the application of the arm’s length principle requires the results of transactions or arrangements between Related Parties to be consistent with the results that would have been realised if the transactions or arrangements were conducted with Non-Related Parties. Natural Persons are also considered to be Related Parties if their Relationship is of kinship or affiliation, including by way of adoption or guardianship. A Natural Person’s relationship with a Juridical Person is based on Ownership and Control. Partners of an unincorporated partnership are considered Related Parties due to the partner’s shared control over the business of the partnership.

UAE CIT Compliance for Natural Persons

1. Tax Registration: All Natural Persons who are subject to UAE CIT by conducting Business or Business Activities in the UAE are required to register for UAE CIT purposes when the total turnover from conducting the Business or Business Activities exceeds the AED 1 Million threshold within a Gregorian calendar year. If a Natural Person conducts a new Business or Business Activity after their Initial Tax Registration, the same Tax Registration Number (TRN) will be utilised for the activities, and the Natural Person will not be required to register again with the FTA for UAE CIT purposes. Also, if a Natural Person who has registered for UAE CIT with FTA finds that his/her Turnover does not exceed the AED 1 million threshold, he/she will still retain their Tax Registration status, but they will not be permitted to deregister from UAE CIT unless they have ceased conducting their Business or Business Activities.
2. Tax Deregistration: A Natural Person can file for Tax Deregistration Application with the FTA in the case of cessation of Business or Business Activity, whether by Dissolution, Liquidation or otherwise. When a Natural Person conducting the Business or Business Activity passes away, he/she is no longer considered as a Taxable Person. All outstanding UAE CIT liabilities must be settled as per the Tax Procedures Law. Unless a clearance certificate from the FTA has been obtained, the heirs and legatees are required to settle the outstanding tax liability.
3. Tax Period: The Gregorian Calendar, which runs from 1 January until 31 December, is the Tax Period for which the Natural Person who conducts a Business or Business Activity is subject to UAE CIT.
4. Accounting Standards and Financial Statements: A Natural Person should prepare standalone Financial Statements in accordance with the International Financial Reporting Standards (IFRS). If the Turnover does not exceed AED 50 million, the Natural Person may apply the IFRS for small and medium-sized (SME) industries. If the Turnover of the Natural Person does not exceed AED 3 million, the Natural Person may prepare the Financial Statements using the Cash Basis of Accounting. If the Natural Person derives a Turnover which exceeds AED 50 million, the Natural Person must prepare and maintain audited Financial Statements for the relevant Tax Periods.
5. Tax Return: A Natural Person who is a Taxable Person must file his/her CIT Return to the FTA no later than 9 months from the end of the relevant Tax Period. Natural Persons are required to submit a single Tax Return for all their Business and Business Activities, which are subject to CIT.