Natural Person - Corporate Tax

What is a Natural Person?

The term natural person takes its ordinary meaning and refers to a living human person of any age, whether resident in the UAE or elsewhere. This includes sole establishments and individual partners in Unincorporated Partnerships that conduct a Business or Business Activity in the UAE.

A sole establishment is a commercial business owned by a natural person, where the proprietor is not separate from the Business. This is because of the direct relationship and control of the natural person(s) over the Business and his/her unlimited liability for the Business’s debts and other obligations. In such circumstances, the natural person carries on the Business in his/her name, as opposed to owning an interest in a separate legal entity that carries on the Business.

As opposed to a natural person, when a corporation like L.L.C, Trust, PJSC, etc. is formed, any natural person holding shares in the said corporation loses his identity and would not be considered a taxable person for corporate tax purposes insofar as it is related to activities and business of the said corporation. However, such a natural person (holding shares in a corporation) shall continue to be considered a taxable person if he conducts any business in UAE either directly or through permanent establishment subject to certain conditions and exemptions available in the corporate tax law.

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Resident Natural Person

A natural person either residing in UAE or outside UAE shall be considered a resident person for corporate tax purposes if he carries on business activity in UAE either directly or through permanent establishment (PE) irrespective of his physical stay in UAE, his residential status, or nationality.

Example: A natural person providing consultancy services (employed)

A natural person, Miss C, is employed by Company A, a company incorporated and effectively managed and controlled outside the UAE. Miss C provides consultancy services to an unrelated company also based outside the UAE. Miss C does this while being physically present in offices rented by Company A in the UAE. Company A gets paid AED 2 million for the consultancy services rendered by the natural person.

In this case, Miss C is not considered to be a Taxable Person as she is an employee of Company A and not conducting Business Activity on her account and her physical stay in UAE is irrelevant. However, Company A may be subject to Corporate Tax as a Non-Resident Person, if it is considered to have a Permanent Establishment in the UAE.

Yes, you get it right! A natural person carrying on business activities in UAE is a resident person in almost any case, but here is a catch. In the following two cases, a natural person can be considered a Non-Resident taxable person:

1.????? Natural person residing outside UAE and earning state-sourced income* (without business activity in UAE) which is currently subject to withholding tax at 0%,

2.????? Natural person with a PE in UAE but considered to be a Non-resident by virtue of a double taxation agreement, in which case his PE would be taxable in UAE as normal business.

?*State Sourced Income is defined as income which is:

? derived from a UAE Resident Person,

? derived from a UAE Permanent Establishment of a Non-Resident Person, or

? accrued in or derived from activities performed, assets located, capital invested, rights used, or services performed or benefitted from in the UAE.

Taxability of Natural Person

A natural person is subject to corporate tax only if he generates a taxable revenue of more than AED 1 million in a tax period (refer to the relevant section below) excluding the following incomes:

1.????? Income from Salary / Wage,

2.????? Income from Personal investment not conducted through license and not considered as a business under Commercial Transaction Law; and

3.????? Income from real estate (through sale, purchase, rent, or lease) not conducted or required to be conducted through a license.

These incomes are also not taken into account in determining if a natural person has derived a turnover over AED 1 million in a Gregorian calendar year from Business or Business Activities conducted in the UAE.

If the real estate income or income derived through investment is earned through a business license e.g., establishment of the natural person(s), it can no longer be considered as an exempt income and shall be combined with other business incomes of the natural person for corporate tax purposes.

Once registered, the natural person must file a nil return every year irrespective of the yearly turnover of less than AED 1 million in subsequent years. Taxable revenue includes all taxable business incomes before adjustment of any expense or charge.

Worldwide income of a natural person

A resident natural person shall be chargeable to tax for its worldwide business income directly associated with a business activity conducted in UAE (e.g., consulting, or advisory business) irrespective of the fact that income is earned from outside UAE. However, generally, if a person is residing outside the UAE or is not present in UAE and carries on another business outside the UAE in addition to business activity in UAE, he shall be not be charged to tax for the income derived from outside UAE unless it is directly attributable to business activities inside UAE.

Example: A natural person conducting Business overseas with Business Activity in the UAE

?A natural person, Mr. E, conducts a Business in Country A as an architect and generates the equivalent of AED 950,000 in providing architectural services. Mr. E travels to the UAE regularly to establish himself as an architect in the UAE, and whilst in the UAE, he provides architectural services to the value of AED 100,000.

Mr. E is considered to be a Resident Person in the UAE, as he is conducting a Business or Business Activity in the UAE. His worldwide Turnover for the year is more than AED 1 million, however, he is not subject to Corporate Tax as the Turnover derived from Business or Business Activity in the UAE does not exceed AED 1 million. The income derived from activities conducted in Country A does not result from the use of assets or other resources located in the UAE. Accordingly, that income is not related to the Business or Business Activity conducted in the UAE.

When calculating the Turnover, Mr. E should only include income derived from the UAE or related to the Business or Business Activity in the UAE. Accordingly, wholly separate Business and Business Activities that are not related or connected to the Business conducted in the UAE will not be taxable in the UAE and, therefore, will not be considered for the AED 1 million threshold. Thus, Mr. E will not have to register for Corporate Tax purposes.

If the income of AED 950,000 was related to the Business or Business Activity conducted in the UAE, then Mr. E would be required to register for Corporate Tax purposes as the AED 1 million threshold would be exceeded.

Example: Natural person deriving income from consultancy services

A natural person, Mrs. F, provides consultancy services in the UAE, and is, therefore, considered a Resident Person for Corporate Tax purposes. While based in the UAE, Mrs. F visits another country to provide consultancy services for a foreign company based in that other country. The consultancy services do not form part of a separate business.

The income earned from the foreign company shall be included in Mrs. F’s Taxable Income as it is not derived from a separate business that she conducts outside the UAE.

?From the above two examples, it is clarified that the foreign income of a resident person is subject to corporate tax if it is associated with a business in the UAE.

In the next example, it must be observed that although the business conducted outside UAE is similar to the one conducted within UAE, it is not associated with the business activities in UAE and thus, not subject to corporate tax for a natural person.

Example: A natural person practicing as a physiotherapist in the UAE

A natural person, Mr. G, works as a physiotherapist in Country A, where he has established his clinic and has employed a secretary and a clinic assistant.

Mr. G comes to the UAE and establishes a physiotherapy clinic after receiving the necessary license from the relevant UAE Licensing Authority. Mr. G also continues to provide therapy sessions to his regular patients in his clinic in Country A while he is back home.

Mr. G is considered to be a Resident Person in the UAE, as he is conducting Business or Business Activity in the UAE. Due to his work in the UAE and reputation for providing high-quality services, Mr. G receives requests to provide treatment sessions from therapy centers in various Gulf countries.

In this scenario, when calculating Mr. G’s Turnover, both the income derived from the UAE and from other Gulf countries (not being considered as Wage) should be included as they relate to Business or Business Activities conducted in the UAE. The income derived from the Gulf countries relates to the Business or Business Activity in the UAE because those services are attributable to the UAE practice.

As for the income derived in Country A, it is not related to Mr. G’s Business in the UAE since it was solely earned from regular patients of the separate Business in that Country.

Registration & Compliance with FTA

A natural person must register for corporate tax if he is engaged in business activities inside UAE either directly or through permanent establishment while remaining outside UAE and maintain financial records and file nil returns every year in accordance with corporate tax law unless he is not generating a taxable revenue of AED 1,000,000 or above in any tax year.

The Non-Resident natural person is not obliged to register for corporate tax and comply with other requirements as stipulated in corporate tax law, if he is earning only state-source income and is not carrying on any business activity in UAE.

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Tax Period

Tax period for a natural person must align with the Georgian Calendar (Jan to December) and in case of new business commencement, it will be considered to start from the day on which business is commenced till the end of the same Georgian year. For example, a natural person who commences business activities in UAE in the month of April 2024 would calculate taxable income for the period from April 2024 till December 2024 (9 months for first year) and it would be treated as the first tax period.

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Exempt incomes of a natural person

1.????? Income from Salary / Wage,

2.????? Income from Personal investment not conducted through license and not considered as a business under Commercial Transaction Law; and

3.????? Income from real estate (through sale, purchase, rent, or lease) not conducted or required to be conducted through a license.

Example: A natural person investing in listed securities

A natural person, Mrs. J, based in the UAE, invests (using personal savings) in listed securities on a stock exchange where she earns income from her investment. She does not require a License to make such an investment. The income derived by Mrs. J is Personal Investment income and accordingly is not subject to Corporate Tax.

Example: A natural person selling his personal car

A natural person, Miss K, based in the UAE, sells her personal luxury car for AED 1,500,000. The car is rare, and she makes a profit of AED 200,000. The income derived by Miss K due to the sale of the car is not subject to Corporate Tax as the sale of the car is on the personal account of the natural person and does not require a License.

Example: A natural person selling a residential apartment

A natural person, Mr. M, based in the UAE, sells his residential apartment for AED 2,500,000. As the value of the apartment had increased since he bought it, Mr. M made a profit of AED 500,000. The income Mr. M derived from the sale of their apartment is not subject to Corporate Tax as he was not required to obtain a License to execute the sale.

Example: A natural person earning rental income

A natural person, Mrs. N, based in the UAE, owns several properties located in the UAE and rents them out for AED 1,200,000 per calendar year. As long as such activity is not required to be conducted through a License from a Licensing Authority, the income derived by Mrs. N is not subject to Corporate Tax as the activity is a Real Estate Investment.

If any of the above activities is conducted as an occupation to earn business income through ongoing business activities in UAE e.g., through establishment or unincorporated partnership, it will be considered as taxable business income and shall be subject to corporate tax. However, it is interesting to note here that negligence of obtaining a license to carry on this business on the part of the natural person does not ward off the implications of corporate tax and similarly, does not absolve the natural person's obligation to register for corporate tax and file the corporate tax return in accordance with the law.

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Interaction with Small Business Relief

A natural person can elect for Small Business Relief under Article 21 of the Corporate Tax Law. The relevant conditions need to be satisfied, including that the Revenue from the taxable Business or Business Activity of the natural person in the relevant Tax Period and previous Tax Periods does not exceed AED 3 million for each Tax Period.

This election has to be made while filing the corporate tax return and if elected, the taxable person will be considered to have no taxable income in the relevant tax period and consequently, will not be required to pay corporate tax in the relevant tax period.

It is interesting to note that this tax holiday is available for tax periods up to December 2026 and there are certain restrictions attached to this relief that will be discussed separately in another article dedicated to this holy topic of Small Business Relief (SBR). It is also worth noting here that once the corporate tax return is filed without electing for SBR, the option to elect for SBR is lost and this process is not reversible.

Example: Natural person electing for Small Business Relief

A natural person, Mr. Q, based in the UAE, is self-employed and earns the following income during a calendar year:

? Real Estate Investment income: AED 2,300,000

? Income derived from providing consulting services: AED 1,900,000

Only the income derived from providing consulting services should be considered when calculating Turnover. The Real Estate Investment income is not derived through a License and, thus, is not considered to be a Business or Business Activity for Mr. Q and, therefore, is not included in the Turnover.

The Turnover is AED 1,900,000. This exceeds the AED 1 million threshold but is below the AED 3 million threshold for Small Business Relief. In this case, Mr. Q will have to register with the FTA for Corporate Tax purposes; and he may elect for Small Business Relief as his Turnover does not exceed AED 3 million assuming that the Turnover from previous Tax Periods does not exceed AED 3 million and all other requirements for this relief are met.

I have tried to elaborate and explain complex and tricky issues associated with the taxation of a natural person. However, there are plenty of other issues associated with the taxation of a natural person in the corporate tax domain which can be discussed in other articles to be issued.

See you in the next article!