Exempt income provisions under UAE corporate tax

The UAE has introduced a new era of corporate tax laws through the enactment of Corporate Tax Law No. 47 of 2022, these are effective from June 1, 2023.

Accompanying this significant change, Ministerial Decision No. 116 and the Corporate Tax Guide on Exempt Income provided detailed insights into dividend income and participation exemption. These regulations are set to reshape the UAE’s tax landscape, impacting individuals and businesses across the nation.

Exemptions for natural persons

The UAE’s corporate tax law grants natural persons, both residents and non-residents, exemptions for personal investment activities, excluding them from the domain of business or the business activities. Corporate tax only applies to natural persons when their annual turnover from a UAE-based business or business activity exceeds Dh1 million. Furthermore, dividend income categorised as personal investment income remains non-taxable for corporate tax purposes.

Juridical persons and their taxation

Juridical residents are subject to tax on their worldwide income, while non-residents are liable for taxation on income related to their permanent establishment (PE) in the UAE and income sourced from the UAE. The calculation of taxable income begins with the accounting net income as stated in the financial statements following International Financial Reporting Standards (IFRS), adjusted for deductions (exempt income) and additions (non-deductible expenditures). The corporate tax schedule states the corporate rate as 0 per cent for income under Dh375,000 and 9 per cent for income exceeding Dh375,000.

Exemptions for corporate entities

To prevent double taxation and acknowledge the UAE’s position as a global business hub and a primary location for holding companies, the UAE’s corporate tax regime provides comprehensive exemptions for various forms of income, including dividends and other profit distributions. These exemptions encompass: Dividends or profit distributions received from a resident juridical person; Dividends or profit distributions received from a foreign juridical person, provided certain participation exemption criteria are met. Any other income received from participating interests; income earned from a foreign permanent establishment; income from non-resident persons operating aircraft or ships in international transportation.

Participation exemption criteria

The participation exemption criteria for foreign entities involves conditions including a 12-month holding period (or the intention to hold for 12 months), a foreign entity subject to tax in its country of residence at a rate not lower than 9 per cent, and not more than 50 per cent of the foreign entity’s assets consist of ownership interests or entitlements that wouldn’t qualify for the exemption if held directly by the taxable person. Notably, ownership interests of less than 5 per cent can qualify for the exemption if the acquisition cost exceeds Dh4 million.

Expenditure related to exempt income

Expenditure related to exempt income cannot be considered when determining taxable income, except for interest expenses. This means that expenses related to the acquisition, sale, transfer, or disposal of a participating interest are not tax-deductible. Instead, these expenses are capitalised as part of the cost of the participating interest.

Tax groups

The UAE now permits parent companies to establish tax groups with resident subsidiaries, consolidating them into a single taxable entity. This process involves merging financial results, assets, and liabilities and preparing consolidated financial statements. Notably, income from a participating interest within the same tax group, like dividend income, is disregarded.

When a tax group member receives income from a participating interest outside the group, the participation exemption remains applicable. Adjustments are made when calculating consolidated taxable income to account for any remaining income and losses that qualify for exemption, including associated expenses. This strategic approach offers a valuable means for businesses and individuals to optimize their tax positions in the evolving UAE tax landscape.

The writer is Partner, MI Capital Services.

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