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UAE Corporate Tax Exemptions & Deductions

In two of our previous blogs on UAE Corporate Tax, we have discussed the basics of Corporate Tax UAE and who is subject to UAE Corporate Tax. In this article, we will discuss some additional elements of the corporate tax in the UAE that will affect the ability of UAE businesses to pay taxes. 

Whether a business profit is subject to corporate tax in UAE largely depends on its residency. Let’s examine the differences between resident and non-resident persons.

UAE Residents

  • UAE residents will be subject to tax in the UAE on the worldwide income they receive. Although some exemptions may apply. 
  • Natural Person is taxable if he or she engages in business or commercial activity in the UAE. The natural person can be of any nationality.
  • In the UAE, legal persons (UAE companies) are taxable. 
  • Foreign corporations under effective management and control within the UAE will be taxable.

Non-UAE Residents

As a non-resident of the UAE, you will be subject to UAE CT on the taxable income that originates from your Permanent Establishment in the UAE as well as from any income that originates in UAE.

What is Taxable Income?

In determining a corporation’s tax liability, it is the net profit of the business that is taxable. Using the UAE corporate tax rate, the company is liable for paying taxes based on its net profit.

Which Income Will Be Taxable To UAE Corporate Tax?

A business’ accounting net profit or loss, as shown in its financial statements, is taken into account to calculate its taxable income under UAE CT regime to reduce complexity and compliance costs.

It is common in the UAE to use International Financial Reporting Standards (IFRS). This helps limit the book-tax differences between taxable income and accounting profits. It also avoids businesses having to keep two sets of financial accounting records, one for financial reporting and one for tax purposes.

Treatment Of Unrealised Gains And Losses

The unrealised gains or losses are resulting from a change in the value of an asset or liability held by a business without a transaction generating those gains or losses yet. The gain on the sale of a business property, for example, becomes unrealised when the value of the property is increased, but the property is not sold. There might be gains or losses that are recorded even though they have not yet been realized for accounting purposes. 

A specific rule will be laid out in the corporate tax in UAE as to whether such gains or losses will be taken into account in calculating taxable income. The gain or loss relates to capital items or revenue items. 

Capital items include property, plant, and equipment (as per IAS 16) and long-term liabilities such as loans to purchase plant, equipment, and property. Among the revenue items are items such as inventory that a business sells, or operating expenses incurred by the business on a day-to-day basis. Calculating taxable income involves revenue items, not capital items.

UAE Corporate Tax Exemption

The corporate tax in UAE applies to income that companies based in the UAE earn worldwide, including capital gains.

A CT regime in the UAE, however, will exempt certain forms of income from taxation in order to prevent double taxation. This is to take advantage of the UAE’s status as an international business hub and holding company location.

Income Exempt From Taxes

There are mainly two types of exemptions from UAE CT. These are the earnings made by UAE companies from investments in other companies, and the earnings from operations run by foreign subsidiaries or foreign branches outside of the UAE.

Capital Gain And Dividend Tax Exemption

UAE corporate shareholders who receive dividends and capital gains from the sale of subsidiary shares are generally exempt from corporate tax.

All dividends paid by UAE companies will be exempt from UAE CT. This includes dividends from Free Zone Persons that are beneficiaries of the 0% UAE corporate tax rate.

There will also be an exemption from CT in respect of dividends received by foreign companies and capital gains from the sale of shares in both UAE companies and foreign companies, provided they meet certain conditions: 

  • The UAE shareholder company must own at least 5% of the shares of the subsidiary company. 
  • Foreign companies’ CT rate of at least 9% is necessary to qualify for the participation exemption.

Other Exemptions

Non-residents are exempt from UAE CT if they operate, lease or own international transportation aircraft or ships. This is as long as the UAE business in that foreign jurisdiction receives the same tax treatment.

Expense Deduction Limitations

There will be many accounting rules that govern the calculation of taxable income. However, the UAE CT regime will be disallowing or restricting the deduction of specific expenses in some cases. The purpose is to avoid situations of abuse or excessive deductions by ensuring that only expenses necessary for the purposes of generating taxable income can be eligible for relief.

Interest Capping Rules 

The UAE CT treats interest and other financing costs as costs of doing business. However, UAE CT shall limit the net interest expense to 30% of earnings before interest, tax, depreciation and amortization (EBITDA). For example, if the interest payments amount to 100 AED, only 30 AED may be deductible as an interest expense. 

Loans to related parties can only be deductible if they have a valid commercial purpose. The lender of such a loan must be subject to corporate tax of at least 9%.

Non-Deductible Expenses

For CT purposes, related party payments made to a Free Zone entity cannot be deductible. However, payments made to a mainland branch of the Free Zone entity can be deductible. A deduction will not be available for administrative penalties, recoverable VAT, and donations. Tax deductions of up to 50% will apply to entertainment expenses.