What are the Exempt Income Categories Under UAE Corporate Tax Regime?

Overview

The UAE Corporate Tax (CT) regime, as per the Public Consultation Document released by the Ministry of Finance (MOF) on 28 April 2022 proposes to exempt certain forms of income from taxation to prevent incidences of double taxation.

For the UAE-based companies, the Income generated from investments in other companies and income earned from operations undertaken outside the UAE, either through foreign subsidiaries or foreign branches is primarily exempted from UAE CT.

The exempt income scheme to be administered by the Federal Tax Authority shall include participation exemption or similar principles followed in international markets.

Exempt Incomes Under UAE CT

The following income shall be in general exempt from income tax. There will be no UAE withholding tax on domestic and cross-border payments.

Dividend Income

UAE companies earning dividend income from their qualifying shareholding shall not be liable to pay income tax. This would help prevent double taxation as profit money paid as dividends are already taxed once. All the domestic dividends earned from UAE companies will be CT exempt including dividends paid by a Free Zone entity enjoying CT holidays.
Dividend incomes from foreign companies will also be CT-exempt.

Capital Gains

UAE corporate shareholders will be exempted from CT on capital gains earned from the sale of shares of a subsidiary company as it would avoid double taxation of corporate profits.

Capital gains from the sale of shares in a Free Zone Person will be exempt from corporate tax in the event of the Free Zone Person being a holding company and most of its income being earned from shareholdings in subsidiary companies.

Capital gains from the sale of shares in both UAE companies and foreign companies are CT exempt subject to fulfilling certain conditions such as the UAE shareholder company owning a minimum of 5% of the shares of the subsidiary company and the CT rate of foreign companies being at least 9%.

Profit of Foreign Branch

UAE companies can avail of CT exemption either through the credit method or through the exemption method. They can claim a foreign tax credit for taxes paid in the foreign branch country or claim an exemption for their foreign branch profits.

Claiming for foreign branch profit exemption will be irrevocable and will apply to all foreign branches of the UAE company. The exemption for foreign branch profits can’t be availed if the foreign branch doesn’t come under a tax jurisdiction with a sufficient level of tax. Better insights on availing foreign branch profit exemption become possible when a company prefers to outsource the professional services of a corporate tax advisory in UAE.

Other Incomes

Profits made from a reorganization of groups and intra-group transactions shall be CT-exempt. Exemption can also be availed for income earned by a non-resident operating or leasing aircraft or ships as well as any associated equipment for international transportation. However, the such exemption can only be sought if similar tax treatment, as reciprocation, is granted to a UAE business in the relevant foreign jurisdiction.

The Bottom Line

The UAE companies must evaluate if they can fulfill the prescribed conditions, as and when appropriate, to avail the exempt income scheme and an understanding of the types of income exempt from the UAE corporate tax regime will help businesses prepare better.

Seeking professional help from corporate tax consultants in Dubai will enable you to assess the potential impact of corporate tax on your business. You can consult with the best corporate tax advisors in Dubai such as Jitendra Chartered Accountants (JCA) to prepare effectively for the corporate tax.

IMC Group is one of the leading corporate tax services providers in UAE and can help companies with smooth and seamless transition to the new tax regime. The services mainly include corporate tax assessment, corporate tax compliance and corporate tax agency.