How is income arising from an investment in real estate taxed and can these taxes be reduced or offset in any way?
The UAE has introduced Corporate Income Tax (CIT) for financial years starting on or after 1 June 2023.
Under the new CIT regime, income from immovable property, whether derived from sale or through leasing, will typically be subject to a 9% tax rate for ‘regular taxpayers’ who are subject to the standard tax regime (taxable income up to AED375,000 is taxed at 0%).
Under the Free Zone tax regime, entities that are considered Qualifying Free Zone Persons (QFZPs) are eligible for a 0% CIT rate on certain types of income (ie qualifying income), provided specific criteria are met. The regulations with respect to the Free Zone tax regime are relatively complex, but in essence, in a real estate context, only income from commercial properties located in the Free Zone may qualify for the 0% rate, provided the transaction is conducted with an entity registered within a Free Zone (ie a Free Zone Person). Conversely, revenue from residential properties does not qualify for the 0% rate. It is important to note that properties such as hotels, motels, bed and breakfasts, serviced apartments, and similar establishments are not categorized as commercial properties for the purposes of the Free Zone tax regime.
Individuals who conduct a business or business activity in the UAE will also be subject to CIT if their turnover exceeds AED1 million within a calendar year. However, income that individuals earn from real estate investments including profits from selling, leasing, sub-leasing, or renting out land or property is exempt from CIT. This exemption applies provided these activities do not require a license or are not conducted through a license. Additionally, this type of real estate income does not count towards the AED1 million threshold that determines CIT liability for individuals.