Real Estate In the Emirates: A Cornerstone Of Growth

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by Ashas Bukhari

Real Estate In the Emirates: A Cornerstone Of Growth

7 May 2024

With its strong economy and advantageous global location, the Emirates remains a top destination for both investors and entrepreneurs. In this ever-changing economic environment, the real estate sector serves as a crucial foundation, driving the nation's growth forward.

Breaking down real estate taxes

For individual investors seeking personal gain through real estate ownership, there is a tax advantage. In the UAE, income earned by a person from investing in land or real estate without holding a licence issued by a local authority is not subject to the nine percent tax rate. Only those involved in business activities with a commercial licence are liable for corporate tax in the UAE. This means that individuals who own multiple commercial properties and earn rental income, even if it exceeds Dh1 million, can be exempt from UAE corporate tax as long as their activities do not require a licence.

Image: Midjourney x The Sandy Times

It is worth mentioning that these regulations are applicable to all investors, regardless of their residency status. This helps create an equal and fair environment for both local and international investors. On the other hand, individuals engaged in activities requiring a trade license will be subject to a nine percent corporate tax on earnings over Dh375,000, but this only applies if their annual revenue goes over Dh1 million.

To further clarify, if an individual holds a licence for a business unrelated to real estate income, any real estate income earned directly by that individual would be exempt from taxation. This also applies to split income situations, where an individual may hold a licence for certain properties (such as holiday homes) but not others. In this scenario, only the properties requiring a licence would be subject to taxes.

In addition, if an individual hires a management company to handle their properties and does not require a license for this purpose, any income earned from these properties will be exempt from the nine percent tax. However, if the individual sets up a sole proprietorship or a corporation to manage their properties, the income will become subject to corporate tax. Another option is for the individual to own a company that manages their properties and pays them a management fee; in this case, the net real estate income will still be exempt from tax in the hands of the individual. Additionally, utilizing family foundations as holders of properties also presents a tax-free choice.

Complicated real estate tax laws? Let us simplify them!

Due to the complicated tax laws surrounding real estate investment income, it is vital to not only carefully choose which property to invest in but also carefully manage those investments in order to take full advantage of the tax benefits available.

For companies, also known as ‘juridical persons,’ the law regarding real estate is quite straightforward. They are required to pay a 9% tax on their income above Dh375,000 from their properties. It is explicitly stated that businesses involved in real estate management, construction, development, agency, and brokerage will be subject to corporate tax in the UAE. However, companies operating within free zones may receive a benefit of a 0% tax rate if they meet certain conditions.

Image: Midjourney x The Sandy Times

To clarify, "commercial properties" must be defined as they are the only ones eligible for the zero per cent tax rate when located in free zones. As stated by the law, a commercial property is solely used for conducting business and cannot be used as a residence or lodging. It should be noted that hotels, although operating as businesses, may not meet this definition and therefore not qualify for the tax benefit.

International taxes

When considering the international tax aspect, non-resident businesses that own real estate in the UAE or earn income from UAE property may create a taxable connection in the country, making them liable for corporate tax. As a result, these foreign companies would also need to register for corporate tax in the UAE.

Image: Midjourney x The Sandy Times

Parting thoughts

In conclusion, while the UAE’s tax system aims to facilitate investment in its thriving real estate market, it ensures that businesses contributing to its development are duly taxed except the ones who are set-up in free zones post complying certain conditions. Favourable tax norms for individual investors, coupled with the enticing residency golden visa scheme, emphasize the government’s commitment to positioning real estate as a key industry, aimed to attract global interest in the years ahead.

by Ashas Bukhari