In a recent update to UAE corporate tax regulations, natural persons engaged in business activities within the country have received clarifications on taxable income and exemptions. According to the guidelines, corporate tax applies to residents and non-residents with a permanent establishment or income sourced from the UAE.
For natural persons, the definition of taxable income hinges on revenue generated specifically from business or business activities conducted within the UAE. This excludes income from wages, personal investments, and real estate ventures. The threshold for taxable turnover is set at AED1 million annually in the Gregorian calendar. If a natural person’s turnover does not exceed AED1 million, they are not required to register for corporate tax (CT). However, if their turnover exceeds this threshold, registration becomes mandatory.
Exempted activities
Business activities encompass a broad spectrum, including industrial, commercial, agricultural, professional services, and more, provided they are conducted regularly and independently. However, windfalls such as lottery winnings or game show prizes do not fall under taxable business income.
Consider Mr. G, a physiotherapist with a clinic in the UAE. Despite operating another clinic in Country A, his business activities in the UAE classify him as a resident for tax purposes. Income generated from therapy services across Gulf countries, linked to his UAE practice, contributes to his taxable turnover. Conversely, revenue earned solely from patients in Country A remains separate from his UAE taxable income.
What’s the threshold?
Exclusions from corporate tax encompass wages, personal investment income, and real estate earnings, provided they meet specific criteria related to licensing and commercial activity laws. The tax rate for natural persons is zero up to AED375,000 in taxable income, with a 9 percent rate applying to amounts exceeding this threshold.
Interest expenditure directly related to business operations is deductible, following arm’s length pricing guidelines. Business expenditures must be wholly and exclusively for business purposes and not of a capital nature. Also, there should be no deductions allowed for losses unrelated to the business.
For small businesses, relief is available if the taxable revenue does not exceed AED3 million in consecutive tax periods.
These regulations aim to streamline taxation for natural persons while ensuring clarity and compliance in the UAE’s evolving economic landscape.
The author is a chartered accountant and a fellow member of the Institute of Chartered Accountants of India. He is the lead author of the book ‘UAE Corporate Tax: A Beginner’s Guide’.
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