(MENAFN- Khaleej Times) In our previous article, we discussed the application of corporate tax on the Real estate developers, contractors, sub-contractors, brokers etc., who can be resident natural persons, resident juridical persons, and not resident persons.
By considering the requirements of the UAE Corporate Tax law (the law), in our previous article we left some key questions. Firstly, does the used property fall under the definition of commercial property or upcoming commercial property developments in the free zone be considered commercial property? Secondly, is the inventory of developers fall under the commercial property? Thirdly, will income earned by qualifying free zone real estate developers, contractors, sub-contractors, and brokers from other free zone persons attributable to free zone commercial property that is not used for accommodation or living purposes be considered qualifying income?
The word“commercial property” as given in the ministerial decision No. 139 of 2023 (the decision) is very important; and its complete understanding will be helpful to address the above questions. The decision says that a commercial property is an“immovable property or part thereof used exclusively for business; or business activity purposes; and not used as a place of residence or accommodation including hotels, motels, bed and breakfast establishments, serviced apartments and the like”.
The definition of the commercial property is clear and its restricts that a qualifying income (QI) can be generated only from the commercial property being used for business purposes, which is based in the free zone and that property is not being for residential or living purposes. Like hotel rooms will not generate QI even hotel is in the free zone and rooms are being rented out to another free zone person. The sale of upcoming development of the free zone commercial property will fall in it as well, if as per the master plan the property will be used for commercial purposes.
Though the leasing activity is part of the“excluded activities”; but special provision has been added in the article 3(1)e of the Ministerial Decision No. 139 of 2023 where ownership or exploitation of free zone commercial property by the QFZP where the transaction in respect of such commercial property is conducted with other free zone persons and property is not used for accommodation/living purposes, is excluded from the“excluded activities”. This means it is a qualifying activity and it can generate qualifying income.
The word“exploitation of the property” has not been defined in the law, but we can presume that it refers to the use of property for economic benefits. This can include activities such as development of property, renting out a property, extracting resources from a property, or using a property for commercial purposes. Based on this understanding, property development, leasing and management services will fall under the exploitation of the property; but contracting, sub-contracting, and brokerage services will not constitute the exploitation of the property. Since, the exploitation of the property has not been defined in the law; so, our understanding and interpretation may be different from the understanding and interpretation of the Authorities.
Mahar Afzal is a managing partner at Kress Cooper Management Consultants.
Based on the above understanding; income earned from the commercial property by the qualifying free zone real estate developers will be qualifying income if the property is not being for the accommodation/living purpose; and transaction is being made with another free zone person. The same treatment would be applicable for the leasing and management of the free zone commercial property where the transaction is being made with another free zone person. Like X Ltd, a DMCC company, is in the real estate development; and they developed a commercial plot of land as per the master plan and sold this land to Y Ltd, another DMCC company. The income earned by X Ltd from this transaction will be qualifying income if all other related conditions are being satisfied.
Let's have a look into another example; like T Ltd is a QFZP and the hotel operators; and any income earned by the T Ltd related to the commercial portion (not residential portion) of the hotel will be considered qualifying income where the transaction is being made with another free zone person; and related conditions are being satisfied.
In one more example, J Ltd is the owner of the commercial tower which has all offices; and the property is in the DMCC. If the J Ltd is satisfying all related conditions and qualifying as QFZP, then rental income earned by the J Ltd will be qualifying income where the offices are being given on lease to other free zone persons; and all related conditions are being satisfied.
If there is a mixed-use property; the income earned from the commercial portion will be QI for the QFZP where the transaction is being made with other free zone person; and income earned from the residential portion will be subject to tax at nine per cent where the transaction is being made with another free zone person or non-free zone person. Like TK is a Jafza based QFZP which owns hotel inside the Jafza. The hotel has shops at the ground floor; and rest are residential units. TK Ltd has given shops on lease to another Jafza companies; and hotel rooms are being given on rent. Income from the shops will be QI; and income from the rental of the room will be subject to corporate tax at nine per cent.
Contractors, sub-contractors, and brokers will be treated like normal free zone resident persons if based in the free zone; and they will not any privilege to enjoy QI.
It is recommended that free zone real estate developers, contractors, sub-contractors, brokers etc their status; and know the nature of the property to adopt proper taxability of the related transactions.
Mahar Afzal, a managing partner at Kress Cooper Management Consultants, has shared a personal opinion which does not represent the official stance of Khaleej Times. If you have questions or require further clarification, contact Mahar at .
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