Impact of Corporate Tax on Real Estate sector

Impact Of Corporate Tax On Real Estate Sector
(Establishment Vs LLC)

Establishment

Establishment refers to a form of business organisation which is owned, managed controlled by an individual who is the recipient of all profits and bearer of all risks.

Features

Salient characteristics of the Establishment form of organisation are as follows:

(i) Liability: Establishment have unlimited liability. This implies that the owner is personally responsible for payment of debts in case the assets of the business are not sufficient to meet all the debts. As such the owner’s personal possessions such as his/her personal car and other assets could be sold for repaying the debt. Suppose the total outside liabilities of XYZ dry cleaner, an establishment are Rs. 80,000 at the time of dissolution, but its assets are Rs. 60,000 only. In such a situation the proprietor will have to bring in Rs. 20,000 from his/her personal sources even if he/she has to sell his/her personal property to repay the firm’s debts.

(ii) Sole risk bearer and profit recipient: The risk of failure of business is borne all alone by the sole proprietor. However, if the business is successful, the proprietor enjoys all the benefits. He receives all the business profits which become a direct reward for his risk bearing.

(iii) Control: The right to run the business and make all decisions lies absolutely with the sole proprietor. He can carry out his plans without any interference from others.

Establishment is a type of business unit where a person is solely responsible for providing the capital, for bearing the risk of the enterprise and for the management of business.

The individual proprietorship is the form of business organisation at the head of which stands an individual as one who is responsible, who directs its operations and who alone runs the risk of failure.

(iv) No separate entity: In the eyes of the law, no distinction is made between the sole trader and his business, as business does not have an identity separate from the owner. The owner is, therefore, held responsible for all the activities of the business

(v) Lack of business continuity: The establishment business is owned and controlled by one person, therefore death, insanity, imprisonment, physical ailment or bankruptcy of the sole proprietor will have a direct and detrimental effect on the business and may even cause closure of the business.

Merits

Establishment offers many advantages. Some of the important ones are as follows

(i) Quick decision making: A sole proprietor enjoys considerable degree of freedom in making business decisions. Further the decision making is prompt because there is no need to consult others. This may lead to timely capitalisation of market opportunities as and when they arise

(ii) Confidentiality of information: Sole decision making authority enables the proprietor to keep all the information related to business operations confidential and maintain secrecy.

(iii) Direct incentive: A sole proprietor directly reaps the benefits of his/her efforts as he/she is the sole recipient of all the profit. The need to share profits does not arise as he/she is the single owner. This provides maximum incentive to the sole trader to work hard.

(iv) Sense of accomplishment: There is a personal satisfaction involved in working for oneself. The knowledge that one is responsible for the success of the business not only contributes to self-satisfaction but also instils in the individual a sense of accomplishment and confidence in one’s abilities

(v) Ease of formation and closure: An important merit of sole proprietorship is the possibility of entering into business with minimal legal formalities. As sole proprietorship is the least regulated form of business, it is easy to start and close the business as per the wish of the owner

Limitations

Not with standing various advantages, the sole proprietorship form of organisation is not free from limitations. Some of the major limitations of sole proprietorship are as follows:

(i) Limited resources: Resources of a sole proprietor are limited to his/ her personal savings and borrowings from others. Banks and other lending institutions may hesitate to extend a long term loan to a sole proprietor. Lack of resources is one of the major reasons why the size of the business rarely grows much and generally remains small.

(ii) Limited life of a business concern: The sole proprietorship business is owned and controlled by one person, so death, insanity, imprisonment, physical ailment or bankruptcy of a proprietor affects the business and can lead to its closure

(iii) Unlimited liability: A major disadvantage of sole proprietorship is that the owner has unlimited liability. If the business fails, the creditors can recover their dues not merely from the business assets, but also from the personal assets of the proprietor. A poor decision or an unfavourable circumstance can create serious financial burden on the owner. That is why a sole proprietor is less inclined to take risks in the form of innovation or expansion.

(iv) Limited managerial ability: The owner has to assume the responsibility of varied managerial tasks such as purchasing, selling, financing, etc. It is rare to find an individual who excels in all these areas. Thus decision making may not be balanced in all the cases. Also, due to limited resources, sole proprietor may not be able to employ and retain talented and ambitious employees.

Though Establishment suffers from various shortcomings, many entrepreneurs opt for this form of organisation because of its inherent advantages. It requires less amount of capital. It is best suited for businesses which are carried out on a small scale and where customers demand personalised services

Limited Liability Company

A limited liability company is a company whose number of partners is at least two and does not exceed fifty [50]. Any partner thereof shall be liable only to the extent of his capital contribution. Any single natural or legal person may incorporate and own a limited liability company. The capital owner of the company shall be liable for the obligations of the company only to the extent of the capital set out in its MOA. The provisions of the limited liability company contained in this Decree Law shall apply to such a person, without contradicting the nature of the company.

Features

Definitions given above point to the following major characteristics of the partnership form of business organisation.

(i) Formation: The partnership form of business organisation is governed by the Federal Decree Law No. (32) of 2021 on Commercial Companies. It comes into existence through a legal agreement wherein the terms and conditions governing the relationship among the partners, sharing of profits and losses and the manner of conducting the business are specified.

(iii) Risk bearing: The partners bear the risks involved in running a business as a team. The reward comes in the form of profits which are shared by the partners in an agreed ratio. However, they also share losses in the same ratio in the event of the firm incurring losses

(iv) Decision making and control: The partners share amongst themselves the responsibility of decision making and control of day to day activities. Decisions are generally taken with mutual consent. Thus, the activities of a partnership firm are managed through the joint efforts of all the partners.

(v) Number of Partners: The minimum number of partners needed to start a partnership firm is two. According to Article (71) of Federal Decree Law No. (32) of 2021, maximum number of partners in a partnership firm can be 50.

Merits

The following points describe the advantages of a partnership firm.

(i) Balanced decision making: The partners can oversee different functions according to their areas of expertise. Because an individual is not forced to handle different activities, this not only reduces the burden of work but also leads to fewer errors in judgements. As a consequence, decisions are likely to be more balanced

(ii) More funds: In a partnership, the capital is contributed by a number of partners. This makes it possible to raise larger amount of funds as compared to a sole proprietor and undertake additional operations when needed.

(iii) Sharing of risks: The risks involved in running a partnership firm are shared by all the partners. This reduces the anxiety, burden and stress on individual partners.

(iV) Limited liability: The capital owner of the company shall be liable for the obligations of the company only to the extent of the capital set out in its MOA. The provisions of the limited liability company contained in this Decree Law shall apply to such a person, without contradicting the nature of the company

Limitations

A partnership firm of business organisation suffers from the following limitations:

(i) Possibility of conflicts: Partnership is run by a group of persons wherein decision making authority is shared. Difference in opinion on some issues may lead to disputes between partners. Further, decisions of one partner are binding on other partners. Thus an unwise decision by some one may result in financial ruin for all others. In case a partner desires to leave the firm, this can result in termination of partnership as there is a restriction on transfer of ownership.

(ii) Lack of continuity: Partnership comes to an end with the death, retirement, insolvency or lunacy of any partner. It may result in lack of continuity. However, the remaining partners can enter into a fresh agreement and continue to run the business.

(v) Lack of public confidence: A partnership firm is not legally required to publish its financial reports or make other related information public. It is, therefore, difficult for any member of the public to ascertain the true financial status of a partnership firm. As a result, the confidence of the public in partnership firms is generally low.

Basis	Establishment	Limited Liability Company
Ownership	A Single Owner	Two or more owners upto 50
Profit or losses	All profits go to the sole owner	Profits split equally, or by pre-determined terms amongst the owners in MOA
Liability	The owner has unlimited liability	Partners has limited liability upto their capital specified in MOA
Decision-making	All decisions for the firm are made by one owner	Owners in the partnership are responsible for the decisions
Corporate Tax	Owner is taxed on his income/profit from the company if income exceeds AED 1 million	Company is liable to pay 9% tax above net profit of AED 375000.

Corporate Tax is a form of direct tax levied on the Taxable Income of corporations and other Businesses. Corporate Tax is sometimes also referred to as ‘Corporate Income Tax’ or ‘Business Profits Tax’ in other jurisdictions.

Corporate Tax is charged on a wide range of Business profits, and those subject to Corporate Tax in the UAE include not only companies but also certain partnerships, unincorporated entities and natural persons conducting a Business or Business Activities.

Corporate Tax is paid on an annual basis with reference to the Tax Period of a Taxable Person. A Tax Period is the Financial Year or part thereof for which a Tax Return needs to be filed. The Financial Year is the period of 12 months for which Financial Statements are prepared. Payment of Corporate Tax is due within nine months from the end of the applicable Tax Period.The UAE Corporate Tax regime applies to Tax Periods commencing on or after 1 June 2023.

How does Corporate Tax work?

Taxable Persons are subject to Corporate Tax on their Taxable Income – this is their Accounting Income with certain adjustments made for Corporate Tax purposes.

Generally, Corporate Tax is imposed on Taxable Income at the following rates:

0% (zero percent) on the portion of the Taxable Income not exceeding AED 375,000.
9% (nine percent) on the portion of the Taxable Income exceeding AED 375,000.

Calculation of Corporate Tax

A LLC is a company incorporated in the UAE. In the Tax Period ending March 2025, A LLC generated Revenue of AED 8 million and incurred expenses of AED 2 million, resulting in a net profit of AED 6 million per its Financial Statements.

A LLC’s Taxable Income for its Tax Period will be the accounting net profit (or loss) of the business, after making tax adjustments for certain items specified in the Corporate Tax Law. For the purposes of this example, A LLC does not need to make any tax adjustments, thus its Taxable Income will be AED 6 million for the Tax Period.

A LLC’s Corporate Tax liability will be calculated as follows:

The first AED 375,000 of Taxable Income will be subject to Corporate Tax at 0%: AED 375,000 x 0% = AED0
The portion of the Taxable income exceeding AED 375,000 will be subject to Corporate Tax at 9%: (AED 6,000,000 – AED 375,000) x 9% = AED 5,625,000 x 9% = AED 506,250

A LLC’s UAE Corporate Tax liability for the Tax Period will be AED 506,250.

Taxation of Natural Persons under the Corporate Tax Law

Who is a natural person?

The term natural person takes its ordinary meaning, and refers to a living human person of any age, whether resident in the UAE or elsewhere. For minors or incapacitated individuals, the Corporate Tax obligations shall be fulfilled by their Legal Representative.

Corporate Tax only applies to natural persons who are engaged in Businesses or Business Activities in the UAE and earn Turnover from these Businesses or Business Activities in excess of AED 1,000,000 in a Gregorian calendar year. This includes sole establishments and individual partners in Unincorporated Partnerships that conduct a Business or Business Activity in the UAE. A sole establishment is a trading Business owned by a natural person, where the proprietor is not separate from the Business. This is because of the direct relationship and control of the natural person over the Business and their unlimited liability for the Business’ debts and other obligations. In such case the natural person trades in his own name instead of through a separate legal entity.

Whilst Business includes vocational, commercial, industrial and professional activities, it does not include employment, and Corporate Tax does not apply to a natural person’s salary, wages and other employment income. It also does not include income from Personal Investments and Real Estate Investments.

Real Estate Investment income

Real Estate Investment income is not subject to Corporate Tax when derived by natural persons if it is related, directly or indirectly, to the selling, leasing, sub-leasing, and renting of land or real estate property in the UAE that is not through a Licence nor requiring a Licence from a Licensing Authority.

Example 1: A natural person selling a residential apartment A natural person, Mr. M, based in the UAE, sells his residential apartment for AED 2,500,000. As the value of the apartment had increased since he bought it, Mr. M makes a profit of AED 500,000. The income derived by the Mr. M due to the sale of their apartment is not subject to Corporate Tax as he was not required to obtain a Licence to execute the sale.

Example 2: A natural person earning rental income A natural person, Mrs. N, based in the UAE, owns several properties located in the UAE and rents them out for AED 1,200,000 per calendar year. As long as such activity is not required to be conducted through a Licence from a Licensing Authority, the income derived by Mrs. N is not subject to Corporate Tax as the activity is Real Estate Investment.

Family Foundations : Whilst some of these structures and arrangements are by default treated as fiscally transparent for Corporate Tax purposes, some types of trusts and foundations have a separate legal personality, such as foundations established in ADGM or DIFC. These types of entities are treated the same as any other juridical person, with their income being within the scope of Corporate Tax. Where these types of entities are merely used to hold and manage personal assets and wealth on behalf and for the benefit of beneficiaries who are natural persons, this will result in an inconsistent Corporate Tax treatment compared with if instead the natural persons were to hold and manage the assets directly.

Therefore entities that are considered as “Family Foundations” for Corporate Tax purposes can, subject to meeting certain conditions, apply to the FTA to be treated as an Unincorporated Partnership.If the application is approved, the Family Foundation will be treated as tax transparent and the beneficiaries would be seen as directly owning or benefiting from the activities and assets of the Family Foundation. Where the FTA approves this application, the Family Foundation shall be treated as an Unincorporated Partnership effective from the commencement of the Tax Period in which the application is made, or from the commencement of a future Tax Period, or any other date determined by the Authority.

Unincorporated Partnerships

The Corporate Tax Law defines an Unincorporated Partnership as a relationship established by contract between two or more Persons, in accordance with the applicable legislation of the UAE. This can be to carry on a Business or a project and share its profits and losses, such as a partnership, trust, joint venture, consortium, association of persons, etc. The contract can be verbal or written. The reference to a contractual relationship in the definition of Unincorporated Partnership means that, legally, the Business of the Unincorporated Partnership and its owners is or can be considered the same. Certain illustrative factors that may indicate that an entity or an arrangement is an Unincorporated Partnership include:

A contract (written or verbal) entered into by all the Persons concerned.
The intention to share the profits and losses of the Business.
The partners are conducting the Business Activities jointly.
The partnership does not have a separate legal personality, distinct from its partners. The above factors are merely illustrative and are not conclusive to determine whether an Unincorporated Partnership exists.

Unincorporated Partnerships and Corporate Tax

The default position in the Corporate Tax Law is that an Unincorporated Partnership is treated as fiscally transparent, meaning that it is not treated as a Taxable Person, and is not subject to Corporate Tax. Instead, each partner is treated as conducting the Business of the Unincorporated Partnership and subject to Corporate Tax on their distributive share of assets, liabilities, income and expenditure in the Unincorporated Partnership. Therefore, it is the partners, not the fiscally transparent Unincorporated Partnership, that must consider their Corporate Tax position.

Where a partner is a natural person A natural person that is a partner in a fiscally transparent Unincorporated Partnership, will be subject to Corporate Tax in proportion to their distributive share if they fall within the scope of Corporate Tax. The Corporate Tax Law treats partners in an Unincorporated Partnership as conducting the Business of that partnership. Thus, for a natural person, when considering if they fall within the scope of Corporate Tax, they must consider the nature of the Business or Business Activity conducted by the Unincorporated Partnership and whether it would constitute Personal Investment or Real Estate Investment. If so, the income from such activities is disregarded by the natural person as it falls outside of the scope of Corporate Tax.

In relation to any other Business or Business Activity conducted by the Unincorporated Partnership, the natural person must include their distributive share of the Turnover of such partnership with any other Turnover of such natural person to determine whether it exceeds AED 1 million in a Gregorian calendar year. Turnover is defined as the gross amount of income (before adjusting for any expenses) derived during a Gregorian calendar year.

Therefore, the gross amount of income they receive from the Unincorporated Partnership is aggregated with all of their income from other Business or Business Activity conducted in the UAE when considering the AED 1 million threshold.

If their Turnover does not exceed AED 1 million, the natural person is not required to register for Corporate Tax purposes. In addition, and where all the relevant conditions are met, Small Business Relief may be available for Resident Persons where the Revenue threshold is not exceeded (currently AED 3 million).For a fiscally transparent Unincorporated Partnership, Small Business Relief will be considered for each of the partners separately.