Compliance corner: Is your business exempt from UAE corporate tax law?

By considering the scope of the corporate tax law (“the law” or “UAE CT law”) of the United Arab Emirates (UAE); the persons can be grouped into taxable, exempt and out-of-scope persons. In our previous article, we covered resident and non-resident taxable persons, and in this article, we discussed the persons exempt from the UAE CT law.

Government entities and government controlled entities

As per the law, government entity includes the federal government, local government, government departments, government agencies, authorities and public institutions of the federal government or local governments. Any juridical person, directly or indirectly, wholly owned and controlled by a government entity has been defined as a government-controlled entity in the law.

The income of government entities conducting non-commercial activities for the social welfare of the public is exempt from CT, and the income of government-controlled entities is exempt if such entities carry mandated activities.

If government entities conducting any business activities or government-controlled entities engage in activities for which they are not mandated under the trade licence, then such entities will be subject to the provision of the law.

The business activity of the government entity and the activity for which the government-controlled entity is not mandated; will be considered a standalone and independent business. Such entities must prepare separate financial statements for this segment. The taxable income of this segment shall be calculated, and entities will be liable to pay tax related to this.

Extractive and non-extractive natural resource businesses

Extractive business includes the activities of exploring, extracting, removing, or otherwise producing and exploiting the natural resources of the UAE; while the non-extractive natural resource business contains the activities of separating, treating, refining, processing, storing, transporting, marketing, or distributing the natural resources of the UAE.

The provisions of the law shall not apply to extractive and non-extractive natural resource businesses as they are subject to tax at the emirates’ level and have a right, concession, or licence from the local government to undertake such businesses in the respective emirate. To fall under the exempt category, the persons must have notified the Ministry of Finance (MoF). For the non-extractive natural resource businesses, in addition to the above, it is compulsory to derive income solely from persons that undertake a business or business activity.

If such businesses are conducting any commercial activity other than extractive and non-extractive natural resource businesses, the income of other commercial activity will be subject to tax at the federal level, and such businesses will be liable to prepare separate financial statements. The common expenditures will be shared between the two businesses based on revenue unless another appropriate basis is available. Transactions between these businesses will be treated like transactions between the related parties. However, if the income from the other business is utmost 5 per cent of the total revenue of that person, then it will be treated ancillary business.

Qualifying public benefit entity

Qualifying public benefit entities are established for the welfare of the public, and they are not involved in commercial activity, unless incidental, to earn profits, so the income of the qualifying public benefit entity is exempt if the entity is established and operated exclusively for religious, charitable, scientific, artistic, cultural, athletic, educational, healthcare, environmental, humanitarian, animal protection or other similar purposes like the promotion of social welfare or public benefit. It is mandatory that an entity does not conduct a business or business activity except required for the main purpose, and its income or assets are used exclusively in the furtherance of its main purpose. Moreover, it is compulsory that the income or assets of this entity are not available or payable for the personal benefit of any shareholder member, trustee, founder, or settlor except for qualifying public benefit entity, government entity or government-controlled entity.

Qualifying investment fund

Investment funds raise funds from the investor, pool it and invest in various sectors. The core objective of the investment fund is to earn profit for the investor. The main activity of the investment funds is the acquisition, holding, management or disposal of investments.

An investment fund may apply to the FTA to be exempt from CT as a qualifying investment fund where the investment fund or the investment fund’s manager is subject to the regulatory oversight of a competent authority, Interests in the investment fund are traded on a recognized stock exchange or are marketed and made available sufficiently widely to investors and the principal purpose of the investment fund is not to avoid CT.

Pension and social security funds

Pension and social security funds, either private or public, may claim exemption from CT if the funds are subject to regulatory oversight of the competent authority in the UAE, and meet the conditions as prescribed by the MoF.

Juridical persons

Any limited liability, public shareholding, or public joint stock company or any other juridical person that is wholly-owned and controlled by the government entity, government-controlled entity, qualifying investment fund, pension fund or social security fund as mentioned above may apply for the exemption from CT if it undertakes or supports the activities of these exempt persons or is engaged exclusively in holding assets or investing funds for the benefit of these exempt persons.

Any other person, as may be determined in a decision issued by the cabinet at the suggestion of the MoF may apply for exemption from CT.

Government entities, government-controlled entities, extractive businesses, non-extractive natural resource businesses and qualifying public benefits entities, as mentioned above, are exempt from CT upon fulfilling the conditions, while the other persons described above are required to apply to the FTA to be exempt from CT.

Mahar Afzal is a managing partner at Kress Cooper Management Consultants. The above is not an official but a personal opinion of the writer based on the UAE corporate tax law. For any queries/clarifications, please write to him at compliance@kresscooper.com.

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