Taxability of side-business/casual incomes of natural persons under the #UAECorporateTax
A vast majority of expats and locals in the UAE indulge into casual, vocational and side-business typed income generating activities such as buying and then letting out of residential and commercial properties, teaching/training as faculty in after-office hours, buying and selling of commodities in the open market (not by way of financial instruments trading but the trading of physical commodities), etc. Whether or not such incomes constitute Taxable Income under the #UAECorporateTax Decree is determined by an analysis of the relevant provisions of the Decree in the ensuing paragraphs.
Taxable Income
Taxable Income has been defined under the #UAECorporateTax Decree as "the income that is subject to Corporate Tax under this Decree-Law". The definition requires explanation of the term "Corporate Tax " under the Decree, which is stated as "the tax imposed by this Decree-Law on juridical persons and Business income". This further requires an understanding of the concepts of "juridical person" and "Business" discussed below.?
Juridical persons:
While the term "juridical person" has not been defined in the Decree, there's an apparent conflict between the intent of #UAECorporateTax Decree and the meaning upheld by the companies law of the UAE. For instance unincorporated partnership comprises of at least two natural persons but granted a singular fiscal person's status which by common rationale cannot be a natural person, and therefore by process of elimination, is a juridical person under the UAE Corporate Tax law. The same unincorporated partnership is referred as general partnership under the companies law of the UAE and does not carry the status of a separate and distinct person.?
Business:?
This term has been defined in the UAE Corporate Tax law as "any activity conducted regularly, on an ongoing and independent basis by any Person and in any location, such as industrial, commercial, agricultural, vocational, professional, service or excavation activities or any other activity related to the use of tangible or intangible properties."?
#UAECorporateTax yardsticks of what constitutes the expression "Business":
Key elements of this definition of "Business" are -?
- "regularly" which indicates to a pattern repetition,
- "ongoing (basis)" which refers to the activity being a going concern,
- "independent" which refers to the activity not depending economically, legally and financially on another person such as an employer. The concept of dependency here takes the same meaning as is also upheld by the Model Tax Convention of the OECD when discussing constitution of a Permanent Establishment by way of a dependent agent.?
- "Person" which has been defined by the UAE Corporate Tax Decree as "any natural person or juridical person", which brings natural persons also in the scope of earning Taxable Income,?
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- "any location" removes the precondition of conducting the activity within the geographical confines of the UAE, which becomes relevant in context of worldwide revenues of UAE Resident juridical persons being taxable under the UAE Corporate Tax law,?
- "industrial, commercial, agricultural, vocational, professional, service or excavation activities" which brings into scope just about all of the possible for-profit business activities one can imagine.
- "any other activity related to the use of tangible or intangible properties" further aims to scope in all possible profit-purposed activities through the use of movable or immovable tangible properties as well as intangible properties such as software, patents, technical know-how, brands, etc.
From the above it is clear that for a type of income to be Taxable Income it must be Business income, which means whether earned by a natural person or juridical person, that income generating activity must fulfill the criteria of being regularly conducted, on an ongoing basis and independently.?
Is a Commercial/Trade License from a licensing authority provided as a mandatory criterion for taxability of income of a natural person under #UAECorporateTax Decree?
There have been allusions to another taxability yardstick of whether a natural person has obtained a commercial or trade license from an approved licensing authority or not, which would purportedly determine the fate of such Business Activity as being taxable or not, in that such income is being presumed to be taxable only if the individual has obtained a trade license for conducting it. This is not congruent with the true spirit and actual intent of the Corporate Tax law of subjecting Business incomes to Corporate Tax on a fair basis. If such liberty is given, then investors in sectors such as real estate would immediately shift the proprietary title to the their multi-billion-dollar high-rise buildings to individuals they can control and go scot free without paying a dime in Corporate Tax on their property incomes. We should warn you that the Corporate Tax Decree law has made absolutely no reference to the existence of such a yardstick of a natural person's income being taxable only if earned under a trade or commercial license, and even if it were mentioned on the FTA website as a possible interpretation (which is not the case), such interpretations do not constitute law of the land, and can be easily challenged in the court of law.?
Moreover, tax laws around the world are structured to tax the economic substance of transactions, activities and arrangements and not their legal forms. UAE Corporate Tax law is no exception to that rule. There are quite a few examples of provisions in the Decree that have a tax stance, which is different from the one taken by the corporate commercial law e.g juridical person (Unincorporated Partnership is a juridical person under the UAE Corporate Tax law but not in the corporate law), or Tax Group (which must exclude subsidiaries enjoying exemption or Qualifying Free Zone Person's status in order for that Tax Group to constitute), etc. UAE Corporate Tax law endeavors to establish in every possible scenario if such income has arisen that constitutes Taxable Income irrespective of whether corporate commercial law was complied or not, and if it can be established under the UAE Corporate Tax law that such income has arisen which fulfills the criteria to qualify that income as Taxable Income, such income would be subjected to UAE Corporate Tax, the said tax liability would be recovered from the natural or juridical person earning that income and the Federal Tax Authority would be indifferent as to whether corporate commercial law was complied by the said Taxable Person.?
From the standpoint of our interpretation, it would be beneficial for natural persons, whether Resident or Non-Resident under the UAE Corporate Tax framework, to evaluate if such side-business/casual incomes earned by them are subject to the UAE Corporate Tax under the above mentioned yardsticks. It is more likely than not that if such incomes exceed the exemption threshold of AED 375,000 p.a, it would be irrelevant if those natural persons earned those incomes under a commercial or trade licence or not. Those incomes WILL BE subject to UAE Corporate Tax. This interpretation of ours is based on the information available to date, and does not reflect the views of the FTA or the government of the UAE. The Cabinet of the UAE may issue decision(s) or information, which may clarify, modify or retract our understanding of the above.?