Corporate tax impacts on Real estate

How Corporate Taxation Affects the Real Estate Market in Dubai

The UAE Federal Corporate Tax on firms’ net earnings will go into effect on June 1, 2023, as announced by the Ministry of Finance. The purpose of this article is to explain the extent of the UAE Corporate Tax on real estate.
Corporate Taxation Companies in Dubai – DCD Dubai

UAE’s corporate tax “Will have a positive effect on real estate in the long run”

The UAE said on January 31, 2022, that companies with taxable net income of more than AED 375,000 will have to pay a 9% corporate tax. The rules will apply to financial years that start on or after June 1, 2023. The proposed tax rate is competitive and about the same as other places in the world with low tax rates. The report said that multinational companies that meet the criteria for the global minimum effective tax rate under the Base Erosion and Profit Shifting initiative of the Organization for Economic Co-operation and Development (OECD) would have a different tax rate.

Looking at how the proposed corporate tax would affect the UAE’s real estate market. It says that businesses, including those in the real estate market, would be directly affected because they would have to pay a share of their income to the federal government.

However, real estate investments made by individuals will not be taxed. It also wouldn’t apply to income from investments made by foreigners or from real estate owned by an individual. But because businesses would make less money after taxes, they could take steps to lessen the effect, or the effect could be spread across the value chain, with some of the cost being passed on to end users.

Inspecting more closely at what could happen in the real estate market and thinks that demand for residential properties is likely to stay stable because investments made by individuals are not subject to corporate tax. But since the demand for residential space has recently gone up, developers could choose to raise prices to help their business deal with the effects of the corporate tax.

In the short term, business decisions about office space and rentals, among other things, could be affected by the introduction of tax in the office segment. On the other hand, the low tax rate might not have much of an effect on the UAE’s likeability as a place to do business in the long run. The demand for office space would also be helped by things like the recent weekend switch.

On the other hand, corporate tax is expected to have a big effect on the retail sector because it affects how businesses can pay their rent and how much demand there is for retail real estate. Retailers are slowly getting over the effects of Covid-19, but the uncertain economy has led to requests for rent-free periods and revenue share options, according to the market. With all of this going on, it might be hard for mall owners to raise rents. The move could also cut down on capital investments in the industrial sector, which could affect demand, the report said.

It is also being said that the project costs would go up because of second-order effects, which could cause the prices of materials, construction, and labor to go up. Interest rates are expected to go up in 2022, which could make it harder to get money for new real estate projects. Together with lower profits and cash flow, these factors could slow the rate at which a project grows. It said that property prices could go up if developers decide to raise unit prices to make up for the effects of corporate tax.

In the meantime, putting in place a corporate tax could make business operations clearer. This would be a big step in the right direction for banks because it would help them evaluate credit better, and in the long run, it could lower the cost of capital for different business operations.

Even though putting the tax in place would be good for the state’s finances (the money it would bring in is estimated to be 14–15% of the government’s total non-oil income), it could hurt businesses’ profits and make them less likely to invest. But since the UAE’s proposed tax rate is similar to that of other low-tax hubs in the GCC, the change might not have a big effect on how attractive it is as a place to invest.

Also, the government could spend more on capital, especially on infrastructure, if its finances were better. This could help increase both domestic and foreign investments, which would increase demand for real estate, the report said.

What the UAE corporate tax means for real estate

The Federal Corporate Tax of the UAE will be imposed on taxable income. The taxable income refers to a company’s accounting operational revenue after deducting certain things referred to as deductions, as specified by the UAE corporation tax law. The Corporate Tax Regime applies to firms engaged in commercial operations, which covers all types of activities conducted in the UAE that fall under a commercial/trade license or permission, as well as revenue obtained through online freelancing licenses (if income meets the threshold). Businesses in the UAE with taxable revenue above AED 375,000 per year are subject to a 9% corporation tax rate.

Capital Gain from the Sale of Real Estate

When inflation and demand are strong, corporate investors and individuals who own commercial and/or residential properties in the UAE stand to profit from the assets’ appreciation. Companies operating on the mainland of the United Arab Emirates are obligated to pay capital gains tax on the sale of real estate (if the gains meet the threshold).

Income from real estate development

Real estate development, management, and construction corporations are subject to the UAE Corporate Tax. Real estate and land are included in this category as rental, renovation, purchase, and sale revenues. With the exception of free zone corporations that are confined to doing business entirely inside UAE free zones, the corporate income tax legislation includes a broad range of UAE-registered firms’ construction, development, provision, and ownership of real estate.

Income from Real Estate Agency Operations

The new UAE Corporate Tax law applies to brokerage fees, commissions, and other revenue made by UAE real estate brokers. The UAE Corporate Tax applies to businesses that offer services such as advising, judgment issuance, planning, conception, preservation, sale, acquisition, use, and disposal of properties or projects.

Income from Real Estate Investment Trusts and Crowdfunding Platforms for Individuals

Crowdfunding platforms attract a variety of investors, including individuals with established revenue streams (like Real Estate Investment Trusts). The new corporate tax legislation excludes individual income; it does not apply to such sources. However, it does apply to shareholders in UAE real estate investment portfolios (not exempt). Individuals’ real estate income is free from corporation taxes since it is regarded to fall under dividends or income initially from ownership of shares, as well as commissions from property sales, tenant fees, rent, and the sale of properties derived through Real Estate Investment Trusts.

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