The UAE’s strategic location, with access to international markets and a strong legal framework that supports business operations and wealth management, enhances its appeal as a premier destination for wealthy individuals seeking a dynamic and secure place to grow and protect their wealth. High-net-worth individuals (HNWIs) living in the UAE enjoy a favourable economic environment, robust financial services and a high standard of living. However, with the introduction of corporate tax, HNWIs should reassess their financial strategies to ensure continued wealth optimisation under the new tax regime. This article explores the implications of the Corporate Tax Law on HNWIs and will outline key strategies and considerations for effective tax planning.
Applicability of corporate tax on HNWIs
Under UAE Corporate Tax Laws, an HNWI would be classified as a “Natural Person,” which refers to any living human being, regardless of age or residence, conducting a business or business activity in the UAE. Under the Corporate Tax law, a HNWI is considered a Taxable Person and a Resident Person.
Therefore, the corporate tax applies to natural persons conducting a business or business activity in the UAE, having a Permanent Establishment in the UAE, or deriving State Sourced Income. Corporate tax applies only if the total turnover of business activities exceeds Dh1 million within a Gregorian calendar year. Key points regarding corporate taxes for a Natural Person include:
• A Natural Person must pay corporate tax in the UAE if their annual turnover from a business or business activity in the country exceeds Dh1 million.
• If a Natural Person earns income from multiple businesses or business activities, the aggregate income of all these businesses will be calculated. They must pay corporate taxes if this aggregate annual income exceeds Dh1 million.
Tax on UAE-sourced income
Under the UAE Corporate Tax Law, HNWIs are subject to taxation on income derived from any business or business activities conducted within the UAE. This includes regular, ongoing, and independent activities, provided the total turnover exceeds Dh1 million within a Gregorian calendar year. However, certain types of income are excluded from the calculations of the taxable income, such as wages, personal investment income not requiring a license, and real estate investment income from properties not needing a license. Consultancy and freelance income is taxable if conducted on a personal account and exceeding the turnover threshold. Additionally, income from foreign sources related to UAE business activities is also taxable. This clear framework ensures that while business income is taxable, personal and real estate investments retain favourable conditions, aligning with the UAE’s attractive fiscal environment for HNWIs.
Tax on foreign-sourced income
Specific regulations under the Corporate Tax Law govern the taxation of foreign-sourced income for natural persons. A natural person is considered a Resident Person if they conduct a business or business activities in the UAE and their turnover exceeds Dh1 million in a Gregorian calendar year. For such individuals, the UAE taxes both domestic and foreign-sourced income related to their business activities. If a natural person conducts a separate business in a foreign jurisdiction unrelated to their UAE activities, that foreign income is not taxable in the UAE. Furthermore, the UAE Corporate Tax Law provides mechanisms to mitigate double taxation on foreign-sourced income through exemptions and foreign tax credits. For instance, income from foreign participation or permanent establishments may be exempt, provided specific conditions are met. Suppose taxes are paid in the foreign jurisdiction. In that case, a foreign tax credit may be claimed to offset the UAE tax liability, thereby reducing the overall tax burden on the natural person.
Investment strategies and estate planning
Tax-efficient investment strategies are crucial for preserving wealth. In the UAE, capital gains are not taxed, incentivising long-term investments. HNWIs should consider holding investments for extended periods to maximise returns without incurring tax liabilities. It is also very important for HNWI to properly structure estate planning to ensure a smooth wealth transfer to future generations. The UAE’s legal framework allows for trusts and foundations to protect assets from liabilities and provide tax-efficient wealth transfer mechanisms. These entities have special standing and enable families to effectively structure their inheritance and manage tax liabilities on their assets, ensuring smooth transition and continuity across generations while leveraging favourable tax treatments under the UAE’s legal framework.
Tax planning for HNWIs in the UAE requires a multi-layered approach, including income structuring, investment strategies, estate planning, and compliance. Understanding the UAE’s corporate tax obligations for HNWIs is crucial for compliance and financial planning. By recognising who qualifies as a Natural Person and what income is taxable or exempt, individuals can better navigate the UAE’s corporate tax landscape, ensuring long-term preservation and efficient management of family wealth.