Exempt Income
[Based on the Public Consultation Document released by the Ministry of Finance, UAE on 28 April 2022.]
The UAE Corporate Tax regime will exempt certain forms of income from taxation.
The main exemptions relate to income earned by UAE companies from:-
- investments in other companies, and
- operations conducted outside the UAE through foreign subsidiaries or foreign branches.
Taxability on Dividend & Capital Gain
Income from Investments (Termed as Participation Exemption)
I. Dividend
| Dividend Earned by UAE Legal Person from | Taxability | Conditions to be met |
|---|
| UAE mainland company | Exempt | NA |
| Freezone Person | Exempt | NA |
| Foreign company | Exempt | - Own at least 5% shares in the foreign subsidiary &
- The foreign subsidiary should be subject to CT (or an equivalent tax) at a rate of a minimum of 9%
|
II. Capital Gains [CG]
| CG Earned by UAE Legal Person from the sale of shares of | Taxability | Conditions to be met |
|---|
| UAE Mainland Company | Exempt | Own at least 5% shares in the subsidiary |
| Freezone Person | Exempt | - Free Zone Person is a holding company &
- Its substantial income is from shareholdings in subsidiary companies
- It holds a minimum of 5% shares in each subsidiary
|
| Foreign company | Exempt | - Own at least 5% shares in the foreign subsidiary &
- The foreign subsidiary should be subject to CT (or an equivalent tax) at a rate of a minimum of 9%
|
Foreign branch profit exemption
UAE businesses may structure their foreign operations through a foreign subsidiary or a foreign branch.
A foreign subsidiary is a separate legal entity and will have its own books and records
A foreign branch is an extension of its parent company and would typically constitute PE in the foreign Country and therefore subject to taxes. However, a foreign branch may not have separate financials.
Recognizing the potential complexities associated with attributing income and expenses to foreign branches, UAE companies have been given the irrevocable option to select one of the following:
- Claim Tax credit – can claim a foreign tax credit for taxes paid in the foreign branch country,
- Claim Exemption – can opt to claim an exemption for their foreign branch profits. Such exemption may not be available if the foreign branch profits are not subject to a sufficient level of tax in the foreign jurisdiction.
Income from operating or leasing aircraft or ships
Income earned by a non-resident from operating or leasing aircraft or ships (and associated equipment) used in international transportation will be exempted, if the same exemption is provided to a UAE business in the relevant foreign jurisdiction under the reciprocity principle.
Our comments:
It will be essential to analyze whether to adopt an option to claim credit or exemption depending on the jurisdiction the branch is located and local tax liability, especially when the jurisdiction in which the branch is located levies taxes on the income earned by the branch.
In case the jurisdiction does not levy any tax then exemption for the branch income cannot be availed. The income earned by such a branch shall be taxable in the UAE.
