The Federal Tax Authority (FTA) has announced that businesses must complete Corporate Tax registration within 90 days from the Date of Incorporation / MOA.
The UAE Corporate Tax applies to financial years starting on or after 1 June 2023, so companies should understand the regime (including exempt income) for any affected tax periods. As the name suggests, the proposed regime would exclude some types of income from taxes to prevent instances of double taxation.
The Corporate Tax rules provide several distinct exemptions - for example, domestic dividends/profit distributions, a Participation Exemption for qualifying equity interests (dividends, capital gains and related income where specific tests are met), and a Foreign Permanent Establishment (foreign branch) exemption (available subject to conditions and an election). Other limited exemptions (for example for certain international shipping/aircraft income under reciprocity) also apply. Now that we know what the main exemptions are, it’s time to take a look at the various types of income that are categorized as exempt income under the UAE corporate tax regime.
Foreign-based companies dividends
The Participation Exemption can exempt dividends and capital gains on qualifying shareholdings, but taxpayers must satisfy several statutory conditions - for example, an ownership interest of 5% or more (or acquisition cost ≥ AED 4 million), an uninterrupted holding period (or intention to hold) of at least 12 months, an entitlement to at least 5% of profits and liquidation proceeds, and for foreign participations a subject-to-tax test (the participation must be subject to tax applied on a similar basis and at a rate not less than 9%, or otherwise meet the alternative tests in the Ministerial Decision). Expenditure related to exempt income is generally non-deductible. This is to prevent income from being transferred to a subsidiary in a nation with no or low taxation.
Domestic income derived from UAE companies
The UAE corporation tax will not be applied to any domestic dividends received from UAE-based companies. Dividends paid by a Free Zone Person who benefits from the 0% corporate tax regime are included in the exempted domestic dividends.
Foreign branch profit exemption
A UAE resident juridical person may either claim a foreign tax credit for taxes paid on foreign branch income or elect to exempt its foreign branch (permanent establishment) profits from UAE CT. That election applies to all foreign branches of the same taxable person and is irrevocable, and it is subject to the foreign PE meeting the applicable conditions (including adequate foreign taxation); importantly, electing the exemption generally means losses attributable to the foreign PE will not be deductible in the UAE.
Exemption for dividends and capital gains
A UAE corporate shareholder will typically be excluded from corporation tax on dividends received and capital gains earned from the sale of shares of a subsidiary firm under the proposed corporate tax regime. UAE corporate shareholders will be generally exempt from corporate tax on dividends received and capital gains earned from the sale of shares of subsidiary companies under the proposed corporate tax regime. The exempt status of dividends and capital gains can be better understood with the help of corporate tax advisors in Dubai.
Other exempt income
In addition to the types of exempt income we previously mentioned, the revenue generated by a non-resident who operates or leases ships or aircraft (and related equipment) utilized in international transportation shall be given the exempt status. However, following the reciprocity principle, a UAE firm must have the same tax treatment in the pertinent foreign country to benefit from this exemption.
Need Professional Help?
Doesn’t matter what kind of business you are dealing with, Reyson Badger can help you handle your financial needs and be prepared for the UAE corporation tax. Reyson Badger, one of the top accounting and auditing firms in Dubai, can help you with tax registration and submitting returns. Reyson Badger has teams of expert accountants who can help businesses with every financial aspect. If you need more information about the types of exempt income, our team of experts can help you.
