A Guide to Exempt Income Under the UAE Corporate Tax

As the UAE Corporate Tax is likely to take effect from June 1st 2023, businesses need to understand the key aspects of the regime including the exempt income. Corporate tax consultants in Dubai understand that the proposed regime will exempt certain forms of income from taxation to avoid instances of double taxation. The main exemptions from the UAE corporate tax are the income earned by the UAE companies from investments in other companies, and income earned from operations conducted outside the UAE through foreign subsidiaries or foreign branches.

This article will enlighten you on the types of income that are categorised as exempt income under the UAE corporate tax regime. However, corporate tax advisors in Dubai advise you to wait for the issuance of the Corporate Tax Law to make any tax decision. All the information provided in this article is based on the Public Consultation Document, which may change once the government releases the UAE Corporate Tax Law. Read ahead to have a look at the exempt income under the UAE Corporate Tax:

Exemption for Dividends and Capital Gains

The proposed corporate tax regime will generally exempt a UAE corporate shareholder from corporate tax on dividends received, and capital gains earned from the sale of shares of a subsidiary company. The objective of this participation exemption will help 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 consultants in Dubai can shed more light on the exempt status of dividends and capital gains.

Domestic Dividends Earned From UAE Companies

All the domestic dividends earned from UAE companies will be exempt from the UAE corporate tax. The exempted domestic dividends include dividends paid by a Free Zone Person that benefits from the 0% corporate tax regime. Corporate tax advisors in Dubai can provide you with further insights on this.

Dividends Paid by Foreign Companies

The regime of corporate tax in the UAE will exempt dividends paid by foreign companies, and capital gains from the sale of shares in both UAE and foreign companies subject to certain conditions. The chief condition for this participation exemption is that the UAE shareholder company should own at least 5% of the shares of the subsidiary company. Moreover, the participation exemption can be availed only if the foreign subsidiary is subject to corporate tax (or an equivalent tax) at a rate of at least 9%. This condition is to prevent income from being shifted to a subsidiary in a no- or low-tax country.

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

Capital gains on the disposal of shares in a Free Zone Person will be exempt from corporate tax where 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 given below:

  • The UAE shareholder must own at least 5% of the shares of the subsidiary company
  • The subsidiary jurisdiction must have a corporate tax or its equivalent at the rate of at least 9%

Foreign Branch Profit Exemption

In this case, the UAE companies have two options: claim a foreign tax credit for taxes paid in the foreign branch country, or elect to claim an exemption for their foreign branch profits. The election to claim a foreign branch profit exemption will apply to all foreign branches of the UAE company and will be irrevocable. The exemption for foreign branch profits can’t be availed if the foreign branch is not subject to a sufficient level of tax in the foreign jurisdiction in which it is located. The advice of the corporate tax advisors in Dubai will come in handy for the companies to avail of foreign branch profit exemption.

Other Exempt Income

The exempt status will be granted to income earned by a non-resident operating or leasing aircraft or ships (and associated equipment) used in international transportation. However, to avail of this exemption, the same tax treatment should be granted to a UAE business in the relevant foreign jurisdiction under the reciprocity principle. Consult with corporate tax consultants in Dubai to know more about this exemption.

Consult with the Best Corporate Tax Consultants in Dubai, UAE

Learning about the types of income exempt from the UAE corporate tax regime will help you to 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.

JCA is one of the leading providers of corporate tax services in Dubai. As a corporate tax consultant, we can provide you services such as corporate tax assessment & advisory (one-time or retainer basis), corporate tax compliance Services & corporate tax agent services to represent you before the Federal Tax Authority. Avail of JCA’s customised tax solutions to ensure compliance with the UAE corporate tax regime.