In recent years, the United Arab Emirates (“UAE”) has embarked on a significant shift in its fiscal landscape by implementing a federal tax on corporations and businesses. Central to this development is the Federal Decree-Law No. 47 of 2022, known as the Corporate Tax Law. Effective from June 2023, this legislation has broad implications not just for juridical persons (entities with a separate legal personality) but also for natural persons, including high net worth individuals(“HNWI”). This article aims to further clarify the application of the Corporate Tax Law to HNWI providing a comprehensive overview of its provisions and practical implications.
Understanding the Scope:
The Corporate Tax Law applies to natural persons, including HNWI, to the extent they conduct a business or business activity in the UAE. This includes individuals who operate unincorporated businesses, have a permanent establishment in the UAE, or derive UAE sourced income. Certain types of income are exempt from corporate tax, including employment income, personal investment income, and real estate investment income.
Key Considerations for High Net Worth Individuals
HNWI often have diverse income streams and substantial financial
activities. A natural person becomes subject to the Corporate Tax
in the UAE if their business activities generate a turnover
exceeding AED 1 million within a Gregorian calendar year. Turnover,
in this context, refers to the gross income derived from all
business activities before any deductions.
The taxable income is the accounting income after necessary
adjustments per the Corporate Tax Law. The applicable tax rates are
0% on the first AED 375,000 of taxable income and 9% on the portion
exceeding AED 375,000.
Residency and Permanent Establishment
Individuals often wonder about the tax obligations of non-Emirati individuals. The citizenship or residency status of a Natural Person does not affect their corporate tax obligations if their annual turnover exceeds AED 1 million for businesses conducted in the UAE.
The law distinguishes between resident and non-resident natural persons. A resident person is someone who conducts business or business activities in the UAE, regardless of their physical residence status. Conversely, a non-resident person may be subject to corporate tax if they have a permanent establishment in the UAE or derive UAE sourced income.
For example, an HNWI consultant based in the UAE who travels abroad to provide services remains a resident person for tax purposes, and their foreign income related to the UAE business activities would be subject to corporate tax.
Reliefs and Deductions available to HNWI
HNWIs with a turnover not exceeding AED 3 million can elect for Small Business Relief. This relief allows eligible taxable persons to be treated as having no taxable income for the relevant tax period, simplifying their tax obligations.
Certain expenditures, such as interest incurred wholly and exclusively for business purposes, are deductible. However, personal expenses or amounts withdrawn from a business by a natural person are not deductible. Related party transactions must adhere to the arm's length principle, ensuring that they reflect market value and are consistent with transactions between unrelated parties.
Strategic Tax Planning for HNWIs
For HNWIs, strategic tax planning is essential to optimize their tax positions. This includes leveraging allowable deductions, understanding the implications of related party transactions, and considering the impact of international tax treaties. HNWIs often have complex financial arrangements and multiple income streams, making it crucial to seek expert advice to navigate the intricacies of the Corporate Tax Law effectively.
Family foundations have long been a favoured vehicle for asset protection, succession planning, and managing family wealth. With the introduction of the UAE Corporate Tax Law, the landscape for these entities has evolved, impacting how HNWIs manage and optimize their tax liabilities.
Compliance and Reporting
Natural persons subject to corporate tax must comply with various obligations, including tax registration, submission of tax returns, and maintaining accurate financial records. Failure to comply can result in administrative penalties, reinforcing the importance of understanding and adhering to the Corporate Tax Law provisions.
Conclusion:
As the UAE continues to evolve its tax landscape, Understanding the corporate tax obligations for HNWIs in the UAE is crucial. By recognizing who qualifies as a Natural Person and what income is taxable or exempt, individuals can better navigate the UAE's corporate tax landscape. Additionally, considering Family Foundations can offer strategic benefits for succession planning and tax optimization, ensuring long-term preservation and efficient management of family wealth. Strategic tax planning and expert advice will be essential tools for HNWIs to manage their tax liabilities effectively.
This article was originally published by One Arabia.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.