Introduction to Real Estate Corporate Tax

Do you believe the real estate sector will be taxed similarly to other corporate businesses in the UAE? The short answer is yes, but there are some essential details to be aware of. The UAE Ministry of Finance will implement the federal corporate tax (CT) from June 1, 2023. The CT will cover a wide range of real estate businesses, such as real estate development, management, agencies, brokerage, and construction. So mark your calendars because it’s time to prepare for the new tax regime!

According to corporate tax law, corporate tax is levied on taxable income. Taxable income is the amount left over after deducting all expenses allowed by the country’s tax laws. Any commercial activity carried out on the UAE’s mainland under a commercial or trade license or a permit is subject to UAE corporate tax. Thus, the corporate tax on real estate will be imposed like other businesses in the UAE. It is important to note that income in the real estate sector can come from a variety of sources, and the vast majority of these incomes are taxable under the new CT regime. The CT rates are as follows:

• 0% for income of AED 375,000 or less
• 9% for income of AED 375,000 or more

Individual Corporate Real Estate Tax

Individuals who have invested in real estate in their personal capacity are not taxable under the corporate tax regime. Individuals make money from real estate without having to obtain a trade license. So, any income from real estate, such as capital gains from selling property or income from REITs, is not taxed.

Corporate Tax & Real Estate Investment Trusts (REITs)

Investors commonly use real estate investment trusts (REITs) as a tool for real estate investment. REITs are corporations that own, manage, or finance income-generating assets such as stores, apartments, and buildings. These companies allow investors to invest in diverse portfolios of land and buildings and earn a portion of the rental income generated by these assets. Investors purchase REITs in the form of shares or securities. Individuals’ income from REITs is generally not taxable under UAE corporate tax law. However, the guidelines for corporations are not clear at this time.

Corporate Tax and Real Estate Building and Development

Corporations in the construction industry in the UAE are subject to corporate tax. On the other hand, corporations operating solely in free zones are exempt from CT. Furthermore, corporations or agencies that provide brokerage and consulting services and building and construction are subject to corporate tax. Similarly, the government taxes real estate agencies that offer their clients services such as sale, purchase, or planning.

Corporate Tax and the Sale or Purchase of Real Estate

CT does not apply to individuals selling or purchasing real estate assets. However, a transfer tax will apply to all real estate transactions for both individuals and corporations. In Dubai, the government levies a 4% transfer tax, which is split equally between the buyer and seller. Corporates, on the other hand, must pay corporate tax on the sale or purchase of the property if the business is conducted in mainland UAE. The rate and threshold are the same as for other businesses.

CT’s Long-Term Impact on Real Estate

According to the Kuwait Financial Centre’s Markaz report, the new regime will allow businesses to conduct their operations transparently. As a result, banks will better access credit, thus lowering the cost of capital for certain operations. Furthermore, because there is no taxation on individuals, demand for residential property will remain stable. Resultantly, builders can pass on savings to customers by raising prices slightly.
There could be significant ramifications for the retail and industrial sectors. Retail businesses still recovering from the effects of COVID-19 may struggle to pay their rent and maintain profitability. As a result, there may be less demand for retail space. Mall owners may also face difficulties in raising rents. The new tax regime may reduce the amount of capital available for industrial investment, potentially affecting industrial space demand in the long run.

Conclusion

The real estate sector, like other businesses, will be subject to corporate tax. The key point is that if a business operates on the UAE mainland, it becomes subject to taxation. On the other hand, a business solely located in a free zone is exempt. For corporations, any form of income derived from the real estate business is taxable; however, individuals without trade licenses are not taxable for any form of real estate income.

How can we help?

For a lot of people, taxation in the UAE is relatively new. At Creative Zone Tax and Accounting, we can assist you in any matter related to taxation and accounting. This way, you can focus on your business and leave the rest to us. Contact us now to stay calm and build your business.