Natural Person - Corporate Tax

WHO IS A NATURAL PERSON?

It refers to a living human person of any age, whether resident in the UAE or elsewhere. A natural person would only be subject to Corporate Tax insofar as he/she conducts a Business or Business Activity in the UAE.

This includes sole establishments and individual partners in Unincorporated Partnerships that conduct a Business or Business Activity in the UAE.

The turnover should not be derived from:

Wage
Personal Investment, or
Real Estate Investment

RESIDENT NATURAL PERSON

Corporate Tax residency for natural persons is not contingent upon physical presence, citizenship, or residency visa status in the UAE. Rather:

A natural person living in the UAE and engaging in business or business activities within the country is deemed a Resident Person and thus a Taxable Person for Corporate Tax purposes.

Conversely, a natural person residing outside the UAE but conducting business or business activities in the UAE also qualifies as a Resident Person for Corporate Tax purposes.

NON-RESIDENT NATURAL PERSON

A natural person residing in a country with a Double Taxation Agreement (DTA) with the UAE, who, under the DTA, is not considered a UAE resident but operates a Permanent Establishment in the UAE with a turnover exceeding AED 1 million in a Gregorian calendar year, is classified as a Non-Resident Person for tax purposes. As per Article 11(4) of the Corporate Tax Law, such individuals are subject to taxation in the UAE on the income attributable to their Permanent Establishment.

What is a Business and a Business Activity?

The concept of “Business Activity” within the context of Corporate Tax is
broadly defined to encompass any transaction, activity, or series of transactions
or activities undertaken by a Person in the course of its Business.

“Business” is characterized as any regularly, ongoing, and independently conducted activity, with examples including industrial, commercial, agricultural, vocational, professional, service, or excavation activities, as well as the utilization of tangible or intangible properties.
In simple terms, just because the word “ongoing” is used, it doesn’t mean short-term projects can’t be seen as businesses for tax reasons. This means even short-term business activities can count as businesses when it comes to taxes. This broad way of defining a business focuses more on what the business does rather than how long it has been doing it
However, things like winning the lottery or game show prizes aren’t usually considered as business activities. But, deciding if a business is considered “ongoing” is something that needs to be looked at individually in each situation.

Business or Business Activities that are subject to CT

Business or Business Activities undertaken by a natural person within the UAE fall within the purview of Corporate Tax, provided the aggregate turnover from such activities surpasses AED 1 million within a Gregorian calendar year. In instances where the Business or Business Activity meets the criteria for Corporate Tax liability, the natural person engaged in these activities is obligated to register for Corporate Tax purposes.

If a person’s turnover in the UAE doesn’t exceed AED 1 million in a Gregorian
calendar year, they don’t have to pay corporate tax or register for it.

Calculation of Turnover

To calculate a person’s turnover, all the income earned from their businesses or activities in the UAE during a calendar year should be considered. This includes income from sole proprietorships and unincorporated partnerships.
To determine if a person’s turnover exceeds AED 1 million, the total turnover of the Gregorian calendar year is considered. The accrual basis of accounting is used, except if the cash basis is applied.

Would it have any impact on an individual who intends to apply for Small Business Relief?

The eligibility for Small Business Relief does not alter a Person’s responsibility to register for Corporate Tax purposes. Registration obligations for Corporate Tax commence immediately upon a natural person’s total Turnover exceeding the AED 1 million threshold. Subsequently, the natural person may choose to utilize Small Business Relief for the applicable Tax Period, provided they fulfill the relevant conditions.

Cessation of Business or Business Activity

When a person’s business or business activity ceases, they must deregister from Corporate Tax. They should apply to the FTA within 3 months of cessation. The date of deregistration will be the date, the business or activity ended.
If a natural person’s business or activities are still active, they should not file a tax deregistration application, even if their turnover falls below AED 1 million. Instead, they should retain their tax registration status. If their turnover is below AED 1 million, they only need to file a ‘nil’ tax return.
To complete Tax Deregistration, one must file all the required Tax Returns and pay all due Corporate Tax and Administrative Penalties. If a person starts a new business in the same Tax Period, the previous Tax Deregistration application would be invalidated.

OTHER RELEVANT POINTS:

Where a natural person is subject to Corporate Tax, the General Interest Deduction Limitation Rule does not apply which means no cap of AED 12,000,000 or 30% of their taxable
Transfer pricing rules will be applicable, meaning that they must follow arm’s length principles when conducting transactions through their related parties transaction.
A natural person who is a Taxable Person shall prepare standalone Financial Statements in accordance with International Financial Reporting Standards (“IFRS”).
Business owners no longer deduct salary withdrawals as business expenses to prevent a reduction of taxable income. These withdrawals will be treated as non-deductible distributions to align taxable income with economic performance.

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