Revealed: Tax strategies for high-net-worth individuals in the UAE

Shamma Al Falahi Partner, Head of Tax shamma.alfalahi@bsabh.com

The UAE strategic location with access to international markets and a strong legal framework that supports business operations and wealth management enhance 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 optimization of their wealth under the new tax regime. This article explores the implications of the corporate tax law on High Net Worth Individuals and will outline key strategies and considerations for effective tax planning.

Applicability of Corporate Tax on High Net Worth Individuals:

Under UAE corporate tax laws, a 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 is considered a Taxable Person and a Resident Person under the Corporate Tax Law.

The corporate tax therefore as per the law 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 business activities' total turnover exceeds AED 1 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 AED 1 million.
• If a Natural Person earns income from multiple businesses or business activities, the aggregate income of all these businesses will be calculated. If this aggregate annual income exceeds AED 1 million, they will need to pay corporate taxes.

Tax on UAE Sourced Income:

Under the UAE Corporate Tax Law, high net worth individuals 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 AED 1 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 high net worth individuals.

Tax on Foreign Sourced Income:
The taxation of foreign-sourced income for natural persons is governed by specific regulations under the Corporate Tax Law. A natural person is considered a Resident Person if they conduct a business or business activities in the UAE, and their turnover exceeds AED 1 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 participations or permanent establishments may be exempt, provided specific conditions are met. If taxes are paid in the foreign jurisdiction, 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 & Estate Planning:

Tax-efficient investment strategies are crucial for preserving wealth. In the UAE, capital gains are not taxed, incentivizing long-term investments. HNWIs should consider holding investments for extended periods to maximize returns without incurring tax liabilities. It is also very important for HNWI to have properly structure estate planning to ensures a smooth transfer of wealth to future generations. The UAE's legal framework allows for trusts and foundations, protecting assets from liabilities and providing tax-efficient wealth transfer mechanisms. These entities have a special standing and enable families to structure their inheritance and manage tax liabilities on their assets effectively ensuring smooth transition and continuity across generations, while also leveraging favourable tax treatments under the UAE's legal framework. 

Conclusion

Tax planning for high-net-worth individuals in the UAE requires a multi-layered approach, including income structuring, investment strategies, estate planning, and compliance. Understanding the corporate tax obligations for HNWIs in the UAE is crucial for compliance and financial planning. By recognizing 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. 

This article was originally published by Finance Middle East

This article was written by Shamma Al Falahi, Partner, highlighting the UAE's new corporate tax regime requires high-net-worth individuals to reassess their financial strategies to ensure continued wealth optimization, with a focus on compliance, investment strategies, and estate planning.

BSA is a regional Law Firm in the Middle East with offices in the UAE, Oman and Saudi Arabia. As a full-service law firm our practice areas include litigation, arbitration and corporate services, including M&A, banking & finance, Intellectual Property, TMT, Fintech, employment and insurance.

Published on 8 July, 2024.