Taxation of Natural Persons under the Corporate Tax Law
Under Federal Decree-Law No. 47 of 2022, which handles corporate taxes in the UAE, a “taxable person” is any individual or business that has to pay corporate tax in the UAE. This includes both companies and natural people who run businesses or carry out business activities here. The guide says that “natural people” means any living, breathing human beings, like they and me, even if we’re minors or can’t take care of ourselves.
Now, if they’re a natural person who makes money from business or business activities in the UAE, they might have to pay corporate tax. The guide lays out who counts as a natural person for tax purposes and explains what factors decide whether they need to pay corporate tax. One important thing to remember is that the law only covers income from business or business activities here in the UAE. Income from salaries, personal investments, and real estate isn’t counted when they figure out how much tax they owe.
Who are Natural Person?
Under the Corporate Tax Law, a “natural person” is just another way of saying an individual. they know, a real, live human being, not a company or any other legal entity. So if they’re a freelancer, running their sole establishment, or operating as a civil company, they’re a natural person according to the UAE’s Corporate Tax Law. In plain English, that means they’re taxed just like any other person would be.
Types of Defined Persons
- Person: A natural or legal person.
- Resident Person: A person is considered a resident of the UAE if he has a place of living there. Refer to Tax Residency Law for further information.
- Non-Resident Person: Anyone who does not possess a Place of Establishment or Fixed Establishment in the UAE and does not generally live there. Refer to Tax Residency Law for further information.
Corporate Tax Law and Natural Person
Corporate Tax Law covers natural persons if they’re running a business or business activity in the UAE, have a permanent establishment here, or earn income from the UAE. But don’t worry, there are some exceptions.
Income Exceptions
The good news is that not all their income is taxed under this law. they’re exempt from Corporate Tax on three types of income:
1. Employment income: Basically, their salary from working a job. So if they’re just earning a regular paycheck from an employer, they don’t have to worry about this part of the law.
2. Personal investment income: This is money they make from investments, like stocks, bonds, or real estate. So if they’re a savvy investor, they’re in the clear.
3. Real estate investment income: Any income they make from renting out property or flipping real estate also falls under this exemption. So if they’re thinking about getting into the real estate game, they might want to keep this in mind.
But what about those other things?
Now, what about any income they make from their business or business activity that doesn’t fall into those categories? Well, in that case, the Corporate Tax Law might apply to them. But don’t panic just yet. There are still some international agreements and treaties that could come into play, like Double Taxation Agreements. These can help sort things out if there’s any confusion about where they should pay taxes or how much.
Just to recap:
1. If they’re running a business or business activity in the UAE, have a permanent establishment here, or earn income from the UAE, the Corporate Tax Law might apply to them.
2. they’re exempt from Corporate Tax on employment income, personal investment income, and real estate investment income.
3. Double Taxation Agreements can help clear up any confusion about where they should pay taxes or how much.
Key Considerations for Natural Person
1. Taxable Person Status: If they’re a natural person doing business or any other kind of business activity in the UAE, they’re considered a Taxable Person and Resident.
2. Turnover Threshold: Corporate Tax only applies to them when the total amount of money they make from business or business activities in the UAE goes over AED 1 million in a single Gregorian calendar year.
3. Excluded Income: The money they make from employment, personal investments, and real estate investments doesn’t count towards Corporate Tax.
4. State-Sourced Income: If they get any income from UAE sources, like dividends, payments, royalties, or interest, they might have to pay Corporate Tax or Withholding Tax on it.
Non-taxable Income for Natural People
As a natural person (that’s just a fancy way of saying “regular person” or “them and me”), there’s some income that doesn’t count toward their business turnover. In other words, it’s not subject to corporate tax. This list includes:
- Wage and Compensation:
Their regular old-fashioned salary or any other kind of payment they get from their employer as an employee is not taxable. That includes bonuses, benefits, and even perks. No matter how much they earn, it’s all theirs to keep.
Now, if they’re a director or on a board of directors, they might get fees or other payments for that too. Good for them! But don’t worry, those extra earnings stay in their pocket, tax-free.
- Personal Investment Income:
The money they make from investments, like stocks, bonds, or real estate, is also tax-free if it’s for personal use and not part of a business. So, if they’re not running a big investment firm or anything like that, they can keep their profits and spend them on fun stuff like vacations or new shoes. Just remember to keep it separate from their business investments.
- Real Estate Income:
Profits they make from buying, selling, leasing, or renting out real estate are also tax-free, as long as it’s not part of their business and they don’t need a special license for it. So, if they’re just a regular person who happens to own some property and want to make a little extra cash on the side, they don’t have to worry about paying taxes on that income.
Business or business activities that count towards Corporate Tax
If they’re a natural person living in the UAE and their business brings in more than AED 1 million in revenue during a single Gregorian calendar year, they’ll have to pay Corporate Tax.
What counts as a business activity?
A business is considered any activity that’s carried out regularly, consistently, and independently. Examples include industrial, commercial, agricultural, vocational, professional, service, and excavation work. If they’re using tangible or intangible property in any way to make money, that’s a business. Even short-term gigs can count, but the government will look at each case individually to decide if it’s ongoing or not.
What’s considered “turnover” when it comes to taxes?
Turnover is the total amount of income they earn before any expenses are deducted. It’s calculated based on the accrual method unless they choose to use the cash method. This income can be in the form of money or goods and services, and it can come from both inside and outside the UAE. It doesn’t include income from wages, personal investments, or real estate investments.
So, if they’re a resident natural person, they’ll have to pay taxes on all their turnover, both within and outside the UAE, as long as it’s related to their business. Non-resident natural persons only have to pay taxes on income earned from business activities within the UAE.
When it comes to determining if income earned outside the UAE is related to their business, the government looks at a few different factors:
- Are the people who contribute to making or selling their goods or services managed, working from, or living in the UAE?
- Is any contracting or business development work for their goods or services happening in the UAE?
- Are any of the assets used to produce their goods or provide their services located in the UAE?
So, if they have a lot of income from outside the UAE, but they can show that it’s not related to their business activities here, they might not have to pay taxes on it. But it’s always best to talk to a tax professional to make sure.
Related Parties for a Natural Person:
When it comes to other people, two or more of them are Related Parties if they’re related by blood or close enough to be considered family, like cousins or adopted siblings.
With Juridical Persons:
If a natural person has a close connection to a business or organization (like a company or a charity), then those organizations are Related Parties. This can happen if the person owns at least 50% of the business or has control over it (either directly or through other people or businesses they’re connected to).
Unincorporated Partnerships:
When it comes to unincorporated partnerships, the partners are considered Related Parties.
Trusts and Foundations:
A person who’s a trustee, founder, settlor, or beneficiary of a trust or foundation is considered a Related Party of both the trust or foundation and all its other Related Parties.
Compliance Requirement For Natural Persons
Registration / Deregistration under Corporate Tax
When they’re running a business or doing business stuff in the UAE that comes with Corporate Tax, they only gotta register for that tax once their total income for the year (Gregorian calendar, mind them) passes the one million dirham mark.
Partners in a partnership that’s not a separate taxable entity gotta figure out if they need to register themselves.
They’ll only ever have one Tax Registration Number for all their businesses and business stuff. And once they’re in, they’re in. They can’t just deregister if their income drops below a million bucks. They gotta keep that registration until they stop doing the business stuff, either by closing up shop or selling everything off. Then, they gotta give the tax people a heads-up within three months.
So, just to recap: keep track of their income, figure out if their partners need to register, and don’t get too excited about deregistering. Oh, and if they’re planning on leaving the business world behind, make sure they let the tax people know at least three months beforehand. Easy peasy!
Accounting Standards and Financial Statements
• Taxable Persons who are Natural Persons must produce self-contained financial statements prepared in line with International Financial Reporting Standards (IFRS), but where their turnover is below AED 50 million they may use the “IFRS for SMEs” instead.
• Should Natural Persons earn revenue exceeding AED 50 million, they will be required to prepare and keep Audited Financial Statements relating to the corresponding Tax Period.
Tax Return
• Every taxable person who is a Natural Person shall file a Corporate Tax Return to the FTA not later than nine months from the end of that relevant tax period.
• All businesses and business activities subject to corporate tax should submit a single tax return together for natural persons.
• For subsequent Tax Years if the turnover of a registered natural person drops below AED 1 Million, an NIL Return should be filed by a taxable person.
* After becoming a taxable person, natural persons have to comply with all other laws binding on corporate entities such as the submission of information regarding their registration, financial statements based on IFRS standards, audit procedures, provisions of tax law, and payment of Corporate Tax.
Conclusion
The introduction of the UAE Corporate Tax Law is a big deal, and it’s going to change a lot for people making money in the UAE. All of us need to understand the ins and outs of this law so we can stay on top of our game and make sure we’re doing things right. With the right information, we can all navigate these new waters with ease.
Managing taxes in the UAE can be a real headache, but luckily, our team of experts at Bizdaddy is ready and waiting to help you out. We’ve got years of experience dealing with all sorts of tax situations, and they’re more than equipped to guide you through every step of setting up and managing your tax. They’ve got your back when it comes to making sense of the UAE’s tax laws.
