Dubai real estate - mitigating liability for UAE corporation tax

Dubai has emerged as a prime destination for property investment in recent years due to its thriving economy, favourable business environment and enviably high standard of living. 

Many investors have sought to structure their real estate acquisitions through corporate vehicles, typically a local free zone offshore company owned by an overseas offshore company, which in turn is owned by the individual investor and their family members. 

The recent introduction of corporation tax in the UAE means that those structures could well be liable for UAE corporation tax, even where the underlying property is a residential villa occupied by family members. 

This article explores the benefits of such structures and the potential to avoid liability for UAE corporation tax through simple restructuring.

Structuring

Before 2011 it was possible to own Dubai real estate directly in the name of an overseas offshore company. Since then, it has been necessary to interpose a local free zone entity between the property and any overseas company.

There are various reasons why investors use corporate structures to buy Dubai real estate. It may be for reasons of anonymity, or perhaps with asset protection in mind. A significant driver certainly used to be to move the applicable inheritance regime to a jurisdiction outside the UAE. Regulating the succession piece through overseas shareholdings was viewed as being more secure, and also avoided the local application of Sharia law (for non-Muslim investors). 

UAE corporate income tax

The UAE has historically maintained a tax-friendly environment with limited federal corporate income tax levied on businesses. However, earlier this year it was announced that with effect from 1 June 2023 there will be a 9% tax levy on profits derived by individuals and companies engaged in commercial activities in the UAE.

It’s important to note that UAE corporate income tax will also apply to companies that own real estate in Dubai, regardless of whether:

• the property is income earning
• the property is commercial or residential
• the company is incorporated in Dubai or anywhere else in the world. 

This appears to be the case even where the property holding company is not engaged in a commercial activity.

UAE corporate income tax is payable on annual profits over a threshold of AED375,000. In the case of companies owning property, this would include profits derived not only from rental income (whether on residential or commercial units), but also on capital gains calculated at the time of sale of the property. 

Mitigating UAE corporate income tax

To avoid the burden of UAE corporate income tax, property-owning companies may consider restructuring their ownership model. One approach could be a simple de-enveloping – namely to transfer the legal ownership of the underlying properties from the corporate structure to the names of the individual shareholders. 

By transferring property ownership to individual shareholders, the tax liability is shifted from the corporate entity to the shareholders themselves. The UAE currently does not impose individual income tax, making this an attractive proposition for shareholders.

Challenges and considerations

While the transfer of ownership from a corporate vehicle to the individual shareholders may be advantageous from a local (UAE) tax perspective, there are some challenges and considerations to bear in mind:

• Legal and regulatory compliance: The transfer of property ownership must comply with local laws and regulations. Companies should seek legal advice on the content and form of the documentation required by the Dubai authorities.
• Financial: Restructuring may incur costs, such as legal fees, property transfer fees, and other associated expenses. Companies should carefully assess the financial impact of the restructuring against potential tax savings.
• Gift transfers: The transfer fee payable to the Dubai Land Department (DLD) is currently 4% of the value of the property. However, if the property is being transferred from a company to the shareholders of that company, the DLD can apply the gift rate of 0.125%. 
• Potential future changes: Tax laws and regulations are subject to change. What is a tax-efficient strategy today may not remain so in the future. Companies must monitor legislative developments and adapt their approach accordingly.

Conclusion

Restructuring companies that own property in the UAE by transferring the underlying properties to the individual shareholders can be an effective strategy to mitigate liability for UAE corporation tax.

However, careful planning, adherence to legal requirements, and a thorough consideration of the financial implications are vital for successful implementation. As with any tax-related decision, it is essential for businesses to seek professional advice to ensure compliance and optimise tax savings.