Corporate Tax Implications for Individuals - Focus on Real Estate Referral Income and Doctors

1. Introduction

The United Arab Emirates (UAE) has traditionally been known for its tax-free environment, attracting professionals and investors globally. However, the introduction of the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses has brought corporate taxation into effect for financial years starting on or after June 1, 2023. This development necessitates a closer examination of how corporate tax applies to individuals, particularly real estate agents and doctors, based on the nature of their income and employment status.

2. Corporate Tax Overview

Under the new corporate tax regime, a standard rate of 9% is levied on taxable income exceeding AED 375,000, while income up to this threshold is taxed at 0%. Notably, individuals are subject to corporate tax if they conduct business activities and their annual turnover exceeds AED 1 million. However, certain income streams, such as wages, personal investment income, and real estate investment income (when not requiring a business license), are generally not considered business activities and thus fall outside the scope of corporate tax.

3. Real Estate Referral: Employment vs. Independent Contractors

The tax implications for real estate referral hinge on whether they operate as employees or independent contractors/ consultants:

· Employed Agents: Agents employed by real estate firms receive a salary, which is not subject to personal income tax, as the UAE does not impose such a tax. Consequently, their employment income remains unaffected by corporate tax provisions.

· Independent Agents: Agents operating independently without a proper business license or entity may face challenges:

• Legitimacy of Income: Engaging in real estate transactions without the necessary licensing can render the income illegitimate, potentially leading to non-deductibility of expenses for the payer.
  
  
• Tax Obligations: Despite non-compliance with licensing laws, independent agents may still be liable for corporate tax if their annual turnover from such activities exceeds AED 1 million. Additionally, they could be required to register for Value Added Tax (VAT) if their taxable supplies and imports surpass the mandatory registration threshold of AED 375,000.

4. Doctors: Employment Income vs. Independent Practice

For medical professionals, the distinction between employment and independent practice is crucial:

· Employed Doctors: Doctors employed by hospitals or clinics receive salaries that are not subject to personal income tax. Any additional income, such as performance-based bonuses, is generally considered part of their employment remuneration and remains outside the scope of corporate tax.

· Independent Practitioners: Doctors offering services independently without appropriate licensing or a registered entity may encounter issues:

• Legitimacy of Income: Providing medical services without the necessary permits can render the income illegitimate, affecting the deductibility of expenses for the payer.
  
  
• Tax Obligations: Independent practitioners without proper licensing may still be subject to corporate tax if their annual turnover exceeds AED 1 million. Moreover, while healthcare services are generally exempt from VAT, certain services may attract VAT depending on their nature and the specific circumstances.

5. Compliance and Licensing

Operating without the requisite licenses or permits can lead to several issues:

· For the Service Provider: Liability for taxes, penalties, and potential legal action.

· For the Payer: Risk of disallowed expense deductions and reputational harm.

6. Cubbing of income:

In the UAE, employers are not generally responsible for the tax liabilities of employees arising from unlicensed activities conducted independently of their employment. Employees engaging in such activities are personally accountable for complying with relevant licensing requirements and fulfilling any associated tax obligations, however for an employer to mitigate themselves employers may include clauses in employment contracts prohibiting employees from engaging in outside business activities without prior approval, thereby mitigating potential conflicts of interest and reputational risks.

In the event, If an employer is aware that an employee is earning income from unlicensed activities and factors this into salary negotiations, ethical and legal questions may emerge:

· Ethical Considerations: Adjusting an employee's salary based on their involvement in unlicensed activities could be perceived as tacit approval or indirect endorsement of such activities.

· Probability of clubbing of income for assessment by tax authority: there is a risk, that tax authorities, may include the value of transactions with the company where employee is legitimately employed for compliance and assessment of direct and indirect tax.

Conclusion

The introduction of corporate tax in the UAE necessitates that individuals, critically assess their business activities (i.e. where these are done independent to the employment contract) and ensure compliance with licensing and tax obligations. Engaging with tax professionals and staying updated on regulatory changes is essential for mitigating risks and optimizing financial outcomes.

Disclaimer: Content posted is for informational and knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.