Key Insights on the Applicability of UAE Corporate Tax on Dividends & Capital Gains

As the UAE corporate tax is about to take effect from June 1st, 2023, business owners need to be clear on the impact of the tax on the types of income generated. Corporate tax consultants in Dubai can provide you with useful information in this regard. As per the Public Consultation Document, the UAE resident companies will be subject to UAE Corporate Tax on their worldwide income, including capital gains.

However, the proposed UAE Corporate Tax Law will exempt certain forms of income from taxation to avoid the issues of double taxation, and maintain the country’s status as an international business hub. In line with this, the following article will look at the applicability of UAE corporate tax on dividends & capital gains. Read ahead to know further:

Tax on Dividends and Capital Gains for Corporate Shareholders

When it comes to dividends and capital gains, the proposed UAE Corporate Tax Law is likely to follow the position adopted by other countries and major international financial centres. In line with this stance, a UAE corporate shareholder will be exempt from corporate tax on dividends received, and capital gains earned from the sale of shares of a subsidiary company. This participation exemption will help the government to avoid double taxation of corporate profits, first when they are earned by the subsidiary company and second when the profits are distributed to, or the shares in the subsidiary company are sold by, the UAE shareholder company.

Corporate Tax on Domestic Dividends

The proposed regime of corporate tax in the UAE will exempt all types of domestic dividends earned from UAE companies. This will include dividends paid by a Free Zone Person who benefits from the 0% CT regime. Corporate tax consultants in Dubai can explain in detail how the corporate tax will impact domestic dividends.

Corporate Tax on Dividends, Capital Gains by Foreign Firms

As per Section 5.1 of the UAE Corporate Tax Consultation documents, dividends paid by foreign companies will be exempt from taxation. Furthermore, capital gains from the sale of shares in both UAE and foreign companies will also be exempt if certain conditions are met. The main condition to obtain exemption is that the UAE shareholder company need to own at least 5% of the shares of the subsidiary firm.

Moreover, the exemption will apply only if the foreign subsidiary is subject to Corporate or an equivalent tax at the rate of at least 9%. This condition is imposed to stop the income from being shifted to a subsidiary in a no- or low-tax country. Avail of corporate tax services in Dubai to assess whether such income will be exempted from taxation.

Capital Gains on the Disposal of Shares in a Free Zone Person

Generally, a free zone person will benefit from 0% corporate tax in the UAE if it maintains adequate substance and complies with all the relevant regulations. Despite the 0% corporate tax benefit, the capital gains on the disposal of shares in a Free Zone Person will be exempt from corporate tax under certain conditions. Such an exemption will be available if the Free Zone Person is a holding company and substantially all of its income is derived from shareholdings in subsidiary companies that meet the participation exemption conditions detailed in the public consultation document.

Corporate Tax on Individual Shareholders

As per article 3.5 of the UAE corporate tax Public Consultation Document, employment income and other personal income earned by an individual such as dividends, rental receipts from UAE real estate investments, and other investment income will be outside the scope of the corporate tax. This provision applies to both UAE and foreign individuals. This means, dividend income and realised capital gains at the hands of individual shareholders would be outside the scope of corporate tax in the UAE. Furthermore, this exemption applies to individuals who may be located inside or outside the UAE. Individuals can consult with corporate tax advisors in Dubai before June 1st, 2023 to ensure their compliance status.

Consult with the Best Corporate Tax consultants in Dubai, UAE

Investors are positive about the fact that dividends and capital gains of a qualifying shareholding will be exempt from the scope of corporate tax in the UAE. However, businesses must consult with corporate tax consultants in Dubai to understand the conditions surrounding the participation exemptions related to UAE corporate shareholders, foreign corporate shareholders and individual shareholders. Jitendra Chartered Accountants (JCA) offers bespoke corporate tax services in Dubai using which investors can get to know the conditions related to the tax exemptions on incomes such as dividends and capital gains.

As one of the best corporate tax advisors in Dubai, JCA can advise the businesses on their tax implications, the viability of tax grouping to get benefits, and possible restructuring of the company to ensure compliance. JCA can also help the companies with corporate tax registration and deregistration, documentation and record-keeping, and corporate tax return filing in the UAE. Consult with us today to get ahead with corporate tax preparation in the UAE.