A Comprehensive Guide to Taxation in the UAE Real Estate Industry

10 October 2023 / Dubai

The real estate sector encompasses various participants, including developers, contractors, sub-contractors, and brokers, each assigned specific roles. These entities can be categorized as either resident or non-resident individuals. Resident parties can be further subdivided into resident juridical entities and resident natural persons.

Any developer, contractor, sub-contractor, or broker registered as a limited liability company, public joint stock company, or similar legal entities with a distinct legal identity separate from its owner is referred to as a juridical entity. If such a company is registered within a free zone, it is designated as a free zone juridical entity. A free zone entity that meets the qualifying criteria for a free zone person is termed a "Qualifying Free Zone Person (QFZP)." Resident juridical entities established either within the UAE or outside but controlled and managed from within the UAE are subject to corporate tax (CT) on their global taxable income. On the other hand, individuals operating as sole proprietors, civil companies, unincorporated partnerships, or freelancers without a separate legal identity conducting business within the UAE are considered natural resident individuals. These individuals are liable for CT on their global income derived from their UAE-based business activities only.

These represent the general rules for applying corporate tax, though exceptions and special regulations exist. Real estate professionals, such as brokers or contractors, conducting business in the UAE as natural persons, regardless of their location, are subject to the same tax obligations. They are exempt from corporate tax and are not required to register if their gross income does not exceed Dh1 million within a Gregorian calendar year. If their annual business revenue ranges up to Dh3 million in the current or preceding tax periods, they can benefit from small business relief on corporate tax for periods ending on or before December 31, 2026. If their annual business revenue exceeds Dh3 million, a zero percent corporate tax rate is applied to the first Dh375,000 of taxable income, with any income exceeding this threshold subject to a nine percent tax rate.

The aforementioned exemption for gross income up to Dh1 million is not applicable to juridical entities. However, if these entities qualify for small business relief and their annual business revenue is up to Dh3 million in the current or previous tax period ending on or before December 31, 2026, they can avail themselves of this relief. If real estate developers, contractors, sub-contractors, or brokers are not QFZPs and do not qualify for small business relief, a zero percent corporate tax rate applies to their taxable income up to Dh375,000. Any taxable income exceeding Dh375,000 is subject to a nine percent tax rate. However, for QFZPs, it is essential to consider factors such as the nature of their activity, the properties they deal with, and their counterparties within the UAE, as these aspects can affect their tax liabilities.

For QFZPs engaged in transactions with other free zone entities, income generated from such activities is considered Qualifying Income (QI) unless it falls under the category of excluded activities. In contrast, transactions with non-free zone entities result in all income being classified as non-qualifying income (NQI), except for income derived from qualifying activities that are not excluded.

The general rule mentioned earlier does not apply to income originating from domestic permanent establishments, foreign permanent establishments, or income from the ownership or utilization of immovable residential free zone property or immovable free zone commercial property when transactions involve non-free zone entities. Qualifying free zone real estate developers, contractors, sub-contractors, and brokers are subject to a nine percent tax rate on such income, without affecting the de-minimis threshold.

Article 3(1)(e) of Ministerial Decision No. 139 of 2023 specifies that the ownership or utilization of immovable property is an excluded activity. However, ownership or utilization of commercial property located in a free zone, involving transactions with other free zone entities, is not considered an excluded activity and generates QI.

The term "commercial property" is defined as immovable property or a portion thereof used exclusively for business or commercial purposes and not as a place of residence or accommodation, including hotels, motels, bed and breakfast establishments, serviced apartments, and similar establishments.

Although the law does not explicitly define "exploitation of the property," it is reasonable to assume that it refers to the property's use for economic gain. This may encompass activities such as property rental, resource extraction, commercial use, or property development.

Non-resident real estate developers, contractors, sub-contractors, and brokers with a permanent establishment (PE) in the UAE will be subject to taxation similar to UAE-based juridical entities, albeit limited to income attributable to the PE, rather than global income. If a non-resident person earns UAE-sourced income, it will be subject to a zero percent withholding tax. In the event of any nexus within the UAE, such as investments in immovable property, the non-resident person must register, submit returns, and pay corporate tax in the UAE.

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