Taxation of Natural Persons in UAE:
The Federal Tax Authority (FTA) has issued a guide in December 2023 explaining the impacts of Corporate Tax Registration requirements for a natural person. These are summarily addressed as under:
1. Key Concepts Relevant in the Context of a Natural Person
- Taxable Person: A natural person or a juridical person subject to UAE Corporate Tax
- Natural person: A living human person of any age, whether resident in the UAE or elsewhere.
- Juridical person: although the definition has not been provided in the Corporate Tax law, decisions or any of the guides from FTA, a juridical person for the purposes of UAE Corporate Tax includes all types of body corporates, companies, registered partnerships, even branches of companies.
- Sole establishment/proprietorship/civil company: Although these entities are registered with a licensing authority such as Dubai Economy, if these are owned by an individual they will be seen as natural persons. A civil company that has multiple partners is likely to be treated as a juridical person due to its similarity to general partnership companies that have been indicated in a Corporate Tax Guide of FTA to be treated as juridical persons.
- General partnership companies/trusts/associations: Although from a Corporate Law perspective these entities do not have a legal persona of their own, from a Corporate Tax perspective these will still be treated as juridical persons.
- Unincorporated Partnerships/Joint Ventures (JV): It is a contractual partnership between two or more natural persons (referred as partnership) or juridical persons (referred as JV) and is treated as a fiscally transparent entity under the UAE Corporate Tax Law, meaning that the taxable profits will be seen as flowing through the partnership firm or the JV without being taxed at entity level, and will be taxed in the hands of the partners. If a partnership or JV gets the legal status of a limited liability partnership (LLP) or an LLC then it has a legal persona distinct from its owners. This is not the case for general partnerships from a company law perspective and they do not have a legal personality separate and distinct from their owners. Nonetheless, for the purposes of UAE Corporate Tax, both LLPs and general partnerships have been treated as the opposite of unincorporated partnerships i.e. an incorporated partnerships and would get a TRN at the entity level.
2. Taxability of Natural Persons
- A natural person’s businesses will be taxed in UAE only to the extent of business conducted in UAE or exports made from UAE provided that his annual turnover exceeds AED 1 million.
- A natural person would be taxable if:
- he/she is a Resident Person;
- he/she is a Non-Resident Person with a Permanent Establishment in the UAE;
- he/she carries on a Business or Business Activity in respect of which he/she …
- derives a total Turnover in excess of AED 1 million.
- Turnover is defined as the gross amount of income derived during a Gregorian calendar year and does not include:
- Wage,
- Personal Investment, or
- Real Estate Investment.
- Non-resident natural persons who do not have a permanent establishment in UAE but derive State Sourced Income only through, for example, one off events, short term business visits, etc, are not required to register for UAE Corporate Tax.
- Natural persons who are partners in an unincorporated partnership will be liable to Corporate Tax in their individual capacity and not at the unincorporated firm’s level.
3. International Taxation Perspective:
- Unless the natural person has invoked the application of a Double Taxation Agreement (DTA), any natural person conducting Business or Business Activities in the UAE will be a Resident Person for purposes of the Corporate Tax Law. DTAs usually provide a “tie-breaker” clause for ascertaining the Residential status of a natural person providing criteria of place of primary economic interests, place of habitual abode, etc, which overrides domestic laws of both countries party to the DTA under the Vienna Convention.
- This means that natural persons conducting Business or Business Activities in the UAE are Resident Persons for Corporate Tax irrespective of their nationality, whether they hold a residency visa in the UAE, whether their income is sourced in the UAE or from abroad, or how much time they may physically spend in the UAE.
- In the absence of a Double Taxation Agreement, a natural person who has a Permanent Establishment in the UAE by virtue of a fixed place through which he/she carries on Business in the UAE, will be treated as a Resident Person for UAE Corporate Tax purposes.
- For those natural persons who conduct their businesses online or through ecommerce in UAE on an ongoing basis, it is likely that their digital platform may constitute UAE nexus and seen as a fixed virtual place of business making them Taxable Persons with a requirement to register with FTA subject to the condition of AED 1 million annual turnover.
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