Taxability of Natural Persons in UAE
There is a lot of buzz in businesses and industries in UAE with the introduction of Corporate Tax Law (‘CT Law’) in the country. The CT Law when introduced, had prima facie cleared the buzz on the applicability of the Corporate Tax provisions for Natural Persons wherein it was clarified that CT Law will be applicable to natural persons only if they conduct business or business activities in the UAE and the gross turnover from such activities conducted in UAE exceed AED 1 million in a calendar year.
In order to further address the prevailing ambiguity, FTA (Federal Tax Authority) has released a detailed guide on the Taxability of Natural Persons in the UAE clarifying various aspects with detailed examples on the applicability of CT Law to Natural Persons. We have summarised the key takeaways from the guide below:
Scope & Applicability
- The guide reiterates that CT is applicable to Natural Persons only to the extent they are conducting business or business activities in the UAE, have a Permanent Establishment in UAE, or derive state source income (i.e., income that is accrued or derived from UAE).
- Therefore, a Natural Person will not be taxable for any business or business activities conducted in any other country outside UAE and taxability will be limited only to business activities in UAE.
- A Natural Person is taxable if conducting business or business activities only if gross turnover from business in UAE exceeds AED 1 million in a calendar year. If turnover does not exceed this limit, CT registration and compliance is not required.
- For minors and incapacitated individuals, CT obligations shall be fulfilled by their Legal Representatives.
- An owner or director of a joint stock company or LLC etc., will not be treated to be conducting business in his individual capacity. Any remuneration, salary, director fees, etc., received by such person will be considered to be his salary income by virtue of his employment with the company and will not be covered under the CT Law.
Calculation of Turnover
- The guide clarifies that for CT purposes, a Natural Person and Sole Proprietorship will be treated as one and the same and the Natural Person conducting business will be the Taxable Person and not the Sole Proprietorship.
- It is interesting to note that the guide gives an example wherein a Natural Person works as a physiotherapist in Country A where he has his own clinic. Such a person comes to UAE and establishes a clinic in UAE and also provides services back in home country when he visits there. Due to his work and clinic in UAE, he also receives requests to provide treatment sessions in other Gulf countries. In such a scenario, income derived from other Gulf countries will be treated as part of its business income as it is attributable to its UAE practice. However, income derived from the home country will not be included in turnover for UAE tax purposes.
- The turnover will also include payments received “in kind” which are to be valued at market value. Further, freelance income in UAE will also be considered as income from business or business activities in UAE.
- Certain types of income that are always exempt for Natural Persons are employment/salary income, personal investment income (like dividends, capital gains, etc.,) or real estate income.
- Whether a Natural Person is a resident in the UAE or not is not affected by immigration, work permit or business licensing requirements. E.g., A Natural Person on a visit visa to UAE sets up a small workshop for antique jewellery and generates a turnover of AED 1,700,000 will be considered to be a Resident Person as he is conducting business activities on his own account.
- The limitation on interest deduction does not apply to a Natural Person and the entire interest expenditure is allowable as a deduction provided it is incurred for business purposes.
- The guide clarifies that only expenses incurred for the purpose of business will be allowable as a deduction while calculating taxable income. However, certain types of expenses are disallowed. E.g., Amounts withdrawn from a business by a Natural Person from their Sole Proprietorship business even if described as a wage or salary cannot be allowed as a deduction in calculating the taxable income from the business.
Small Business Relief
- If all the conditions of Small Business Relief are fulfilled by the Natural Person, they can claim the relief wherein there will be no taxability if gross turnover is up to AED 3 million. However, CT registration and other compliance are required once turnover exceeds AED 1 million.
Interplay with Transfer Pricing
- Transfer Pricing principles will apply for a business conducted by a Natural Person as per the definition of Related Parties as applicable. The guide further clarifies that unlike Related Party rules, the provisions for Connected Persons provisions only apply to the Taxable Person making the payment and not the recipient. (In the case of Natural Persons, the only time when Connected Persons principles will apply is in the case of partners of unincorporated partnership which will be treated as Connected Persons).
- In case a Natural Person who has registered for CT finds their turnover not exceeding AED 1 million threshold in any subsequent year, the Tax Registration status should be retained. They are not permitted to deregister for CT unless they have ceased conducting business or business activity. If the turnover does not exceed AED 1 million in subsequent years, a NIL Tax Return is still required to be filed.
- In cases where the Natural Person ceases to conduct business, the application for deregistration shall be filed within 3 months of cessation of business or business activity. The deregistration request can be filed only if the Natural Person ceases all its business or business activities and not if only 1 business activity is ceased in cases where the Natural Person conducts multiple business activities.
The FTA has clarified a lot of ambiguity on the taxability of Natural Persons in the UAE. However, with the complexities involved in the law, it is imperative that Natural Persons conducting business activities in their personal capacity or as Sole Proprietors get a thorough evaluation done on the applicability of Corporate Tax provisions and compliance requirements to avoid any difficulties later.