UAE corporate tax: How will it apply to owners of mixed-use buildings?

Al Khalidiya neighbourhood in Abu Dhabi. Owners of mixed-use buildings must ensure they separate the financials of each space for tax purposes. Khushnum Bhandari / The National

If you look at any tall building in the UAE, regardless of the number of floors, the vast majority share one commonality. The ground floor, at a minimum, is usually set aside for commercial use. Typically, these are retail outlets. Immediately above them are often a few floors of office space and, above that, comes residential accommodation.

These are mixed-use buildings. The words "mixed" and "tax" are not always an easy combination. In complex matters, you do not want to be subject to all the scenarios in a category tangled within myriad exceptions that inevitably come with them.

There is good news for entities who have, for some time, been owners or managers of such assets. The UAE’s VAT regime operates a bifurcated environment requiring strict segmentation of revenue, direct and shared costs for submission purposes.

The reported expenses vary based on the reporting period, which should have long put in place an ongoing discipline.

Remember that when the Federal Tax Authority comes to audit – and all organisations will be audited at some point – it will demand supporting documentation for all those numbers you have been submitting. VAT audits normally interrogate a test sample of periods rather than all of them. Such randomness means you should not gamble on which ones might be reviewed.

Finally, keep in mind that both VAT and corporate tax audits will be conducted by the same regulatory body. Will it be the same team? I do not know.

Let us set some ground rules first. An immovable property is a physical building that is defined by a registrable address. Where it is located is subject to the designation given to it, be it a free zone or onshore.

We know the likelihood of an owner of such mixed-use buildings having just one location is highly unlikely. Therefore, management should consider the issues that will face an entity that is likely to conduct myriad activities, related and unrelated.

The UAE's corporate tax law explained: Business Extra

12:56

Some have taken the approach of opening additional entities to manage non-related activities. There is an opportunity cost, not just financial, in utilising this approach to tax planning.

The owners could be UAE or foreign juridical entities, as well as local or foreign-based people.

The first two have the possibility of being either a qualifying or non-qualifying free zone person. This means corporate tax may or may not apply to the entity by virtue of their choosing. This outcome is self-assessed. Natural persons cannot be a qualifying free zone person.

The rental income of commercial real estate that resides in a free zone that is leased to another free zone entity is not subject to corporate tax.

Interestingly, if the lessee is not a qualifying free zone person, this does not affect the treatment. The test is only that the leasing party is a free zone person leasing a property in a free zone.

Keep in mind that there are free zones that contain plots of land that are designated onshore. It is not uncommon for investors to own several locations in the same development.

This gives rise to a critical piece of missing information. We still do not know what free zones are considered tax-free for corporate tax purposes – our VAT experience tells us that certain parts of a free zone might not be considered such.

For VAT, the list was communicated through a legislative instrument.

On that note, for those registered for corporate tax on the Federal Tax Authority portal, you should have received an email at the weekend just passed on changes to the initial fiscal year for some entities. This is the period for which you will report your financial performance under corporate tax rules.

• 

  The UAE issued its federal corporate tax law that will levy a headline 9 per cent rate on taxable income exceeding Dh375,000. Silvia Razgova / The National

• 

  Taxable income below the aforementioned threshold will be subject to a 0 per cent rate of corporate tax. Chris Whiteoak/ The National

• 

  No corporate tax will apply on salaries or other personal income from employment — be it in the government, semi-governmental, or private sector, the Ministry of Finance said. Chris Whiteoak/ The National

• 

  Businesses will become subject to the UAE corporate tax from the beginning of their first financial year that starts on or after June 1, 2023. Victor Besa / The National

• 

  The UAE corporate tax regime builds from best practices globally and incorporates principles that are internationally known and accepted. Victor Besa / The National

Until now, all periods were 12 months long. The changes mean the initial year is now seven months. However, this only applies to certain entities.

To discover whether your entity has been affected, when you log on to the portal, select corporate tax on the menu on the left-hand side of the screen. Then select and open the main screen option called corporate tax filings.

On the screen that opens, check to see when you need to report. Take careful note of the date for submission. If it shows no information at all, then that is also OK. It is important for entities where the reporting date has changed to take note.

If you are unsure, get support. Make your opening experience with corporate tax one without penalties.

David Daly is a partner at the Gulf Tax Accounting Group in the UAE