Taxability of Natural Persons in the UAE: A Simplified Overview

Introduction

The UAE's introduction of Corporate Tax (CT) has led many individuals to question its implications on their personal business activities. According to the law, individuals—referred to as natural persons—will only be subject to this tax if they operate a business or conduct business activities within the UAE and earn over AED 1 million in gross annual income. To clarify the details, the Federal Tax Authority (FTA) released an official guide explaining how CT applies to individuals. Below is a straightforward summary based on that guidance.

Who Must Pay Corporate Tax?

The FTA makes it clear: Corporate Tax applies to individuals only if they carry out business or related activities inside the UAE. Additionally, if a person has a permanent establishment in the country or earns income sourced locally, they may fall under the tax net. On the other hand, income from businesses or services conducted entirely outside the UAE is not subject to this tax. Unless an individual's UAE-sourced turnover exceeds AED 1 million in a calendar year, there's no requirement to register or file for CT. In cases involving minors or persons unable to manage their finances, the legal guardian will be responsible for fulfilling tax obligations. It’s also important to note that individuals earning income through employment—such as salaries or director fees—are not considered business operators and are exempt from Corporate Tax on those earnings.

Understanding Turnover for CT

Under CT rules, a sole proprietorship and its owner are considered a single taxable entity. This means the individual is directly liable for tax purposes, not the registered business name. For example, if a healthcare professional operates a clinic in the UAE and occasionally travels to nearby countries for consultations through UAE-based referrals, that income will be taxed. However, income from unrelated foreign operations remains outside the UAE tax scope. Turnover includes both cash and non-cash payments (such as goods or services received), which must be recorded at fair market value. Freelance income earned in the UAE is also counted as business income and may be taxed if thresholds are crossed.

Types of Income Not Subject to CT

Certain income types are always excluded from the scope of Corporate Tax for natural persons:

• Salary and wages from employment
• Investment returns (e.g., dividends and capital gains) earned personally
• Rental income from real estate, if not part of a business activity

Residency under CT law is not determined by visa status. Even a visitor earning more than AED 1 million annually through local business activities would be considered a resident for tax purposes.

What Business Expenses Are Allowed?

Expenses related to business operations are generally deductible when calculating taxable income. However, if a person withdraws money from the business for personal use—even if labeled as salary—it cannot be claimed as a deduction. There is no cap on interest expense deductions, as long as the interest is tied exclusively to business operations.

Small Business Relief Explained

Natural persons may qualify for Small Business Relief if their total turnover does not exceed AED 3 million. This exemption relieves them from paying Corporate Tax. However, once an individual crosses AED 1 million in annual turnover, they are required to register and fulfill all compliance obligations—even if no tax is ultimately payable.

Transfer Pricing & Related Parties

Transfer pricing rules also apply to natural persons who engage in transactions with Related Parties. In the case of unincorporated partnerships, partners may be treated as Connected Persons. These rules are primarily applied to the party making the payment, not the one receiving it.

Deregistration Rules

Once an individual is registered for CT, they cannot deregister simply because their turnover drops below AED 1 million. They must first completely cease all business activities. A formal deregistration application must be filed within three months of stopping operations. Even when no tax is due, a NIL return must be filed annually as long as the business continues. If the person runs multiple businesses, all must be shut down before deregistration is permitted.

Conclusion

The FTA’s detailed guide provides much-needed clarity on how Corporate Tax affects individuals in the UAE. Whether you're a freelancer, consultant, or small business owner, knowing when and how the law applies can help you stay compliant and avoid unnecessary penalties. Professional guidance is key to understanding your tax status under the new rules.

Need expert advice on UAE Corporate Tax for individuals?

Reach out to AKW Consultants your trusted partner in tax planning and compliance tailored to your business needs.