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Corporate Tax on Sole Proprietorships in the UAE: Common Misconceptions Debunked
tax

Corporate Tax on Sole Proprietorships in the UAE: Common Misconceptions Debunked 

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The introduction of Corporate Tax (CT) in the UAE has led to several questions, especially concerning sole proprietorships and sole establishments. Many business owners remain unclear about how these structures are treated under the new tax regime.  At Maats Auditors and Consultants, we aim to clarify these misconceptions and provide accurate guidance to ensure compliance with UAE tax laws.  Sole Proprietorships and Sole Establishments  A sole proprietorship (or sole establishment) is a business owned and operated by a single natural person in their own name. Unlike a company with a separate legal identity, the owner and the business are considered the same legal entity under UAE law.  Key Characteristics of Sole Proprietorships:  This distinction is crucial because it affects how income, expenses, and liabilities are treated under the UAE’s Corporate Tax regime.  Common Misconceptions About Sole Proprietorships and Corporate Tax  Misconception 1: Sole Proprietorships Are Automatically Exempt from Corporate Tax  Reality: While sole proprietorships are not separate legal entities, they are not automatically exempt from Corporate Tax.  Misconception 2: Real Estate Income from Sole Proprietorships Is Always Tax-Free  Reality: The UAE’s Corporate Tax law excludes income from real estate investment (such as rental income from owned properties) from taxation. However, if a sole proprietorship actively manages real estate under a business license, the income may be taxable.  Example from the UAE CT Law:  A natural person owns multiple properties in Dubai and Abu Dhabi and sets up a sole establishment with a property management license. Since the business is actively managing the properties (rather than passively earning rental income), the revenue may be subject to Corporate Tax if the annual turnover exceeds AED 1 million.  Misconception 3: Business Expenses Are Always Deductible for Sole Proprietorships  Reality: If a sole proprietorship earns tax-exempt income (such as passive real estate rental income), related expenses cannot be deducted for Corporate Tax purposes.  Misconception 4: Sole Proprietorships Must File Separate Tax Returns  Reality: Since the owner and the business are the same legal entity, the individual reports business income in their personal tax return (if required). However, if the turnover exceeds AED 1 million, the owner must register for Corporate Tax and file accordingly.  Key Corporate Tax Implications for Sole Proprietorships  1. Tax Registration Requirements  If the annual turnover exceeds AED 1 million, the business owner is required to register for Corporate Tax in the UAE. Freelancers and small business owners should closely monitor their revenue to ensure they accurately determine their tax obligations and remain compliant with regulatory requirements. 2. Real Estate Income Considerations  Passive rental income earned without a business license is exempt from Corporate Tax in the UAE. However, if a property owner is actively managing real estate and holds a trade license for this activity, the income may be considered taxable under Corporate Tax regulations. 3. Expense Deductions  Only expenses directly related to taxable income streams are eligible for deduction under Corporate Tax regulations. Costs associated with exempt income, such as those linked to real estate investments, cannot be claimed as deductions. 4. Unlimited Liability Risk  Since the owner is personally liable for business debts, tax liabilities also fall on the individual. Proper financial planning and compliance are essential.  How Maats Auditors Can Help  As a trusted financial advisory firm, Maats Auditors and Consultants enhances client services by conducting automation audits to identify manual processes that can be streamlined for greater efficiency.  Comprehensive training and ongoing support are provided to ensure teams can effectively adopt and utilize new technologies. Additionally, Maats ensures full compliance by automating key functions such as VAT filings, financial reporting, and maintaining audit trails in line with regulatory requirements. Conclusion  Sole proprietorships in the UAE are not exempt from Corporate Tax by default. Owners must assess their turnover, income sources, and licensing structure to determine tax obligations. Misunderstandings about real estate income, expense deductions, and registration thresholds can lead to non-compliance risks.  Maats Auditors and Consultants is here to guide you through the UAE’s Corporate Tax landscape. Contact us today for expert advice tailored to your business needs. 

tax

Is Your Rental Income Taxable? Understanding the Rules for Natural Persons

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With the introduction of the Corporate Tax regime in the UAE, natural persons engaging in both business and real estate activities may be unsure of how their income is taxed. One common area of confusion is whether rental income becomes subject to Corporate Tax if the individual already conducts a licensed business activity. To provide clarity, the Federal Tax Authority (FTA) released the Corporate Tax Guide for Real Estate Investment by Natural Persons (CTGREI1). This guide outlines when real estate income earned by individuals is considered a taxable business activity and when it is not. This blog post explores these rules in detail, especially in cases where a natural person operates a licensed business and separately owns income-generating property. Corporate Tax and Real Estate Income: What the CTGREI1 Says According to the CTGREI1 guide, rental income derived by a natural person in their personal capacity is generally not subject to Corporate Tax, provided that this income is not earned through a licensed business activity. The Corporate Tax regime is designed to apply to business income. If an individual’s rental income stems from personal ownership of property, where no commercial license is required, that income is considered passive and outside the scope of Corporate Tax. This remains true even if the individual simultaneously carries on an entirely separate licensed business activity, such as retail, hospitality, or consulting. Key Conditions for Non-Taxable Rental Income To ensure rental income remains non-taxable under Corporate Tax, the following conditions must generally be met: As long as these conditions are satisfied, rental income is not regarded as business income, and thus, not subject to Corporate Tax, even if the person is otherwise registered for tax due to another business. What Is Taxed and What Is Not? It’s important to distinguish between taxable business income and non-taxable passive income. Business income that is earned through a licensed activity is subject to Corporate Tax in the UAE. This includes any income generated from activities that require a commercial license, such as operating a shop, consultancy, or other formal business operations. On the other hand, rental income earned by a natural person from property held in their personal name—where no commercial license is required—is not subject to Corporate Tax. This type of income is considered passive and falls outside the scope of taxable business activities under the current guidelines.                                The licensed activity may require the individual to register for Corporate Tax, but this does not automatically affect the tax treatment of unrelated rental income from property held in a personal capacity. When Does Rental Income Become Taxable? Although most personal real estate income is exempt, there are certain conditions under which it could become taxable: The key distinction lies in intent, scale, and licensing. Leasing one or two residential units generally does not qualify as a business. However, managing multiple properties, operating short-term rentals, hiring staff, or running a formal real estate operation could cross the threshold into taxable activity. What Are the Compliance Obligations? For natural persons who only derive rental income passively and do not engage in real estate as a business, there is: However, if the individual is conducting another business under a license (e.g., retail, consulting, etc.), they must: Maintaining this separation is crucial for compliance and for avoiding confusion during audits or reviews. Summary and Final Thoughts The UAE’s Corporate Tax regime is designed to be clear and business-focused. The CTGREI1 guide reinforces the principle that passive real estate income earned by natural persons in their own name, and without the need for a license, is not subject to Corporate Tax. Key takeaways: As the tax landscape evolves, business and real estate individuals should periodically review their structure and ensure they remain aligned with the latest FTA guidance. Staying informed, organized, and compliant will protect against unnecessary tax exposure while taking full advantage of the UAE’s investor-friendly framework.

tax

Grace period – To Update Information In Tax Records

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Grace period – To update information in tax records GRACE PERIOD Starting on 1 January 2024 & Ending on 31 March 2025 Registrants are required to inform the Federal Tax Authority within 20 business days of the occurrence of any event that might require the amendment of information related to their tax records kept by the FTA. Failing to comply it, attracts the administrative penalties. A grace period is implemented to encourage the registrants to update their records with the FTA, in which registrants will not be imposed administrative penalties that update the information during the grace period starting on 1 January 2024 and ending on 31 March 2025.Administrative penalties already imposed for failing to update information by the registrants during the period from 1 January 2024 until the implementation of the grace period will be reversed. Registrants are not required to contact the FTA to obtain a reversal of the administrative penalty, as this will be done automatically. Where the registrants have settled the administrative penalty, the result of the reversal is that the reversed administrative penalty amount (refund) shall be added back to the persons’ tax account within 90 days from the decision to approve the refund of the administrative penalties. Registrants are required to inform the FTA of any event that might require the amendment of information related to their tax record kept by the FTA, including the following changes:Name, address and email address. Trade license activities. Legal entity type, partnership agreement for unincorporated partnerships and articles of association or its equivalent. Nature of the business of the registrant. The address from which any business is conducted by the registrant. New trade license of the newly opened branch. Change in business address. VAT/Excise Tax registered person to update records within the prescribed timelines before attempting to register for Corporate Tax. Registering for Corporate Tax with the incorrect details and failing to correct the information within the prescribed timelines Administrative Penalties: Failure of the registrant to inform the Authority of any circumstance that requires the amendment of the information pertaining to its tax record kept by Authority is: AED 5,000 for the first time AED 10,000 in case of repetition Failure of the person to inform the Authority of any case that may require the amendment of the information pertaining to his tax record kept by Authority is: AED 1,000 for each violation AED 5,000 in each case of repeated violation within 24 months from the date of the last violation

small business relief in uae
tax

Small Business Relief in the UAE

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Small Business Relief In The UAE The provisions of the Corporate Tax Law shall apply to Tax Periods commencing on or after 1 June 2023. The Corporate Tax Law includes a specific relief for small Businesses Who can elect for small business relief Any eligible Taxable Person with Revenue below or equal to AED 3,000,000 in a relevant Tax Period and all previous Tax Periods that end on or before 31 December 2026 can elect to be treated as having no Taxable Income in that period, and will not be obliged to calculate its Taxable Income or complete a full Tax Return Revenue threshold To elect for Small Business Relief, an eligible Taxable Person’s Revenue must be below or equal to AED 3,000,000 for the relevant Tax Period and all previous Tax Periods. They will need to keep records of their Revenue to demonstrate their eligibility for the relief   How to elect for Small Business Relief First register with the FTA for Corporate Tax and obtain a TRN Elect for the relief through the filing of a simplified Tax Return Election must be made in each Taxable Period Once the Tax Return for the relevant Tax Period has been submitted with no election, there would be no possibility to claim this benefit at a later stage Who is not eligible for Small Business Relief If business is a member of a Multinational Enterprise that operate in more than one country having a total consolidated group revenue of more than AED 3.15 billion and are required to prepare a Country-by-Country Report under the UAE’s Country-by-Country Reporting legislation Qualifying Free Zone Persons who already benefit from a 0% Corporate Tax rate on their Qualifying Income What if elected for Small Business Relief Required to register for Corporate Tax Can file a simplified Tax Return No Corporate Tax to pay Can carry forward unutilized Tax Losses and Excess Interest Expenditure from previous Tax Periods and not from the relevant Tax Period Must comply with the Arm’s Length Principle Not required to maintain transfer pricing documentation Rules on Exempt Income do not apply Restriction to Tax Periods Small Business Relief will be available for : Tax Periods that begin on or after 1 June 2023, and End before or on 31 December 2026 Records required to be kept to demonstrate Revenue Under the Corporate Tax Law, all Businesses are required to maintain records and documentation that support the information provided in a Tax Return or in any other document to be submitted to the FTA and Enable the Taxable Person’s Taxable Income to be readily ascertained by the FTA Examples of documents which need to be kept includes (but is not limited to) Bank statements Sales ledgers Invoices or other records of daily earnings, such as till rolls Order records and delivery notes Other relevant Business correspondence Implications for Resident Persons that are VAT registered Small Business Relief is a Corporate Tax relief. It does not change the Resident Person’s compliance requirements for VAT or any other purpose in any way. This means that while some Taxable Persons can benefit from Small Business Relief for Corporate Tax purposes and therefore have simplified Corporate Tax compliance requirements, their VAT compliance requirements will continue as before   Implications on General Interest Deduction Limitation Rule If a Business has Net Interest Expenditure carried forward from a previous Tax Period, this will be carried forward to future Tax Periods, and can be utilised in future Tax Periods in which the Business does not elect for Small Business Relief. However, the Tax Periods in which Businesses elect for Small Business Relief will continue to be counted for the purposes of limiting the carry forward to ten subsequent Tax Periods from the Tax Period in which the Net Interest Expenditure was disallowed. The limitation on the deductible Net Interest Expenditure shall not apply where the Net Interest Expenditure for the relevant Tax Period does not exceed AED 12,000,000 Other points Permanent Establishments of Non-Resident Persons in the UAE would be eligible for the Small Business Relief, if the Double Taxation Agreement in force includes provisions dealing with non- discrimination of a Permanent Establishment based on the OECD Model Tax Convention or the UN Model Double Tax Convention

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