Top Exemptions in UAE Corporate Tax: What You Need to Know
The UAE’s corporate tax law, implemented in June 2023, imposes a 9% corporate tax on taxable income exceeding AED 375,000. However, not all types of income are subject to this tax. The decree law provides several exemptions to encourage economic growth in specific sectors. Certain entities are also considered exempt under the law. If you’re wondering whether the income you’ve earned is subject to tax or is exempt, it’s important to understand these exemptions, especially for businesses operating in the UAE. Here are some common questions regarding exemptions:
- What specific types of income are exempt from corporate tax in the UAE?
- How do the exemptions apply to different sectors or industries?
- Who qualifies as exempt under the corporate tax law?
This article will address the first question.
As per Article 22 of the CT Law, the following income and related expenditure shall not be taken into account in determining the Taxable Income:
- Dividends and other profit distributions received from a juridical person that is a Resident Person.
- Dividends and other profit distributions received from a Participating Interest in a foreign juridical person as specified in Article 23 of this Decree-Law.
- Any other income from a Participating Interest as specified in Article 23 of this Decree-Law.
- Income of a Foreign Permanent Establishment that meets the condition of Article 24 of this Decree-Law.
- Income derived by a Non-Resident Person from operating aircraft or ships in international transportation that meets the conditions of Article 25 of this Decree-Law.
Each of the above exemption have been discussed in detail below:
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Exemption for Dividends or Profit Distributions Received from Resident Juridical Persons:
Global income is taxable for resident juridical persons. To prevent double taxation on profits earned and distributed by these entities, tax legislation offers an exemption for dividends or profit distributions made by such persons. For example, if Company ABC, which is incorporated in the UAE (a resident juridical person), declares a dividend of AED 500,000 to Company DEF, this income will be considered exempt in the hands of latter, as it is received from a resident juridical person.
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Exemption for Income from participating interest:
Certain types of income received from a juridical person in which the recipient has a participating interest are exempt. It is important to understand what “participating interest” means. Participating interest refers to an ownership interest of 5% or more in the shares or capital of a juridical person, provided that all conditions outlined in Article 23 of the Corporate Tax Law are met.
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- Dividends or profit distributions received from a non-resident foreign entity may be subject to taxation based on the ownership interest. For example, if a UAE-based company has 4% ownership in a UK-based company and 6% ownership in an Indian company, any dividends received from the UK company would be taxable to the UAE-based company, as it does not meet the threshold for participating interest in the UK company. Conversely, dividends received from the Indian company would be exempt, as the UAE company has a participating interest in that entity.
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- The incomes listed below are exempt from taxation for recipients, regardless of whether the income is received from a resident or a non-resident. This exemption applies as long as the recipient has a participating interest in the respective persons or entities:
- Gains or losses resulting from the transfer, sale, or other disposition of a participating interest (or a portion thereof).
- Foreign exchange gains or losses related to a participating interest.
- Impairment gains or losses associated with a participating interest.
- The incomes listed below are exempt from taxation for recipients, regardless of whether the income is received from a resident or a non-resident. This exemption applies as long as the recipient has a participating interest in the respective persons or entities:
For a broader understanding of UAE corporate tax and its impact on businesses and individuals, refer to this guide.
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Profits earned by Foreign Permanent Establishments:
Profits of foreign Permanent establishments of resident persons is exempt from tax, subject to fulfilment of certain conditions specified in Article 24. The major condition being, such foreign PE should be subject to a minimum 9% tax in the overseas jurisdiction. It is essential to ensure compliance to avoid penalties. Learn about corporate tax penalties for non-compliance.
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Income derived by a non resident person from International transportation by way of aircraft or ships exempt from Corporate tax provided, it is engaged in the business of:
- International transportation of Passengers, livestock, mail, parcels, goods, or
- Leasing or chartering of aircrafts or ships used in international transportation, or
- Leasing of equipment’s that are integral to the aircrafts or ships used in international transportation.
It should be noted that the resident person of UAE should be provided with similar benefits in the country in which such non-resident is resident.
Businesses operating within the UAE should carefully review these exemptions and seek professional guidance to determine their eligibility and optimize their tax positions. Feel free to reach out to us for any assistance related to UAE Corporate Tax at nikhil@bclglobiz.com.
