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Incomes Exempt from Corporate Tax in the UAE: A Guide

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According to recent developments in the UAE, businesses are going to be taxable for corporate tax (CT) starting June 1, 2023. The guidelines are set out in Federal Decree-Law No. 47 of 2022. The general CT rate will be 9%; however, this rate will apply only to the taxable income of over AED 350,000. Taxable income of up to AED 375,000 will be taxed at 0%. Furthermore, there are reliefs and exemptions available for certain incomes and organizations from corporate tax set out in the law. This article provides a quick guide to incomes exempt from corporate tax in the UAE.

What is a Corporate Tax Exemption?

A corporate tax exemption is a provision in the law that allows specific organizations or businesses to eliminate or reduce their tax liability on all or a portion of their income. The purpose of tax exemption is to promote certain economic activities and investments that result in job creation and the overall economic growth of a country. In the UAE, there are several incomes or organizations that are exempt from corporate tax. Let’s discuss it in detail below.

Incomes Exempt from Corporate Tax in the UAE

Article 4 of the corporate tax law highlights the exemptions for corporate tax in the UAE. We are discussing these exemptions one by one.

Government Entities and Government-Controlled Entities:

A government entity and a government-controlled entity are automatically exempt from corporate tax in the UAE. However, under the provisions of the corporate tax law, these entities should not engage in business activity under a license issued by the licensing authority. Any business activity that is not a “mandated activity” will be subject to corporate tax.

Extractive Businesses and Non-Extractive Natural Resource Businesses:

Extractive businesses and non-extractive natural resource businesses are exempt from corporate tax. However, the exemption is only available if they meet certain conditions and notify the Ministry of Finance. Article 7 and Article 8 mention the conditions for extractive and non-extractive businesses, respectively. Actually, these businesses are already taxable at the Emirate level; therefore, they are not within the scope of corporate tax. However, if there is income from other than extractive and non-extractive natural resource sources, then the other income or business might be taxable under corporate tax laws.

Qualifying Public Benefit Entities:

As per Article 9 of the CT law, a qualifying public benefit entity is exempt from corporate tax. These entities work solely for the benefit of the public and are registered and operate exclusively in the following fields:

1) charitable, religious, scientific, athletic, educational, environmental, and any other field working for similar purposes.

2) a professional entity or similar entity working exclusively for the promotion of social welfare.

It is worth noting that exemption from corporate tax is only applicable to entities listed in a Cabinet Decision.

Qualifying Investment Funds:

An investment fund may get an exemption from corporate tax if it applies to the Authority as a qualifying investment fund. However, there are certain conditions that the investment fund has to meet in full as per Article 10. These are:

a) The fund has to be under regulatory oversight by a competent authority in the State.

b) The investment fund’s interests are traded on a recognized stock exchange or available to investors for trading through other means.

c) The purpose of the investment fund is not to avoid corporate tax.

d) Any other conditions set by the Minister

The Authority may request additional information and records in order to monitor the conditions of a qualifying investment fund. The exemption should be applied to and approved by the Federal Tax Authority.

Public or Private Social Security Funds:

A public pension or social security fund, or a private pension or social security fund, may also get an exemption from the corporate tax. However, they must be subject to the regulatory oversight of the competent authority in the State. Furthermore, they should meet the conditions recommended by the Minister. The exemption should be applied to and approved by the Federal Tax Authority.

Wholly-Owned and Controlled UAE Subsidiaries of Exempt Organizations:

A wholly owned and controlled subsidiary of the above-mentioned exempt organizations is also exempt from corporate tax. However, there are conditions. The exemption applies if any one of the following is present in the subsidiary:

a) The subsidiary is responsible for undertaking a portion or the entire activity of the exempt person.

b) The subsidiary’s exclusive purpose is to hold assets or invest funds on behalf of the exempt person.

c) The subsidiary exclusively performs activities that are supplementary to those conducted by the exempt person.

Conclusion:

The UAE provides exemptions for various categories of income and organizations. These include government entities and government-controlled entities. Extractive and non-extractive natural resource businesses are also exempt subject to specific conditions. Others include qualifying public benefit entities working for the public good, qualifying investment funds fulfilling criteria, and public or private social security funds subject to regulatory oversight. Furthermore, wholly owned and controlled UAE subsidiaries of exempt entities may also qualify for corporate tax exemption. However, they need to satisfy conditions related to their activities in holding assets or investing funds for the exempt entities. These exemptions aim to support economic activities, encourage investment, and foster overall growth in the UAE.

CZTA can assist you with corporate tax exemptions:

Saving tax while remaining compliant with the laws is something that every business wants to achieve. However, it might be challenging for certain businesses. Therefore, seeking assistance from a qualified and skilled accounting firm will be beneficial. Creative Zone Tax Accounting has a team of well-versed tax experts who can help seek exemptions as per UAE law. Contact us now for a quick assessment.

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