Exempt Income under the “Corporate Tax” in the United Arab Emirates

− A Comprehensive Guide! −

The United Arab Emirates (UAE) introduced a federal corporate tax framework, effective from June 1, 2023, marking a significant shift in the country’s tax landscape. While the corporate tax rate is set at 9% for taxable profits exceeding AED 375,000, certain categories of income are considered exempt under the UAE Corporate Tax Law1. These exemptions aim to support the UAE’s continued growth as a global business hub by maintaining a competitive environment for businesses and investors.

A. Definition of Exempt Income
Exempt income refers to specific types of income that are excluded from the corporate tax base, meaning no tax is payable on these earnings. The purpose of such exemptions is to avoid double taxation, to encourage investment, and to ensure the UAE remains an attractive jurisdiction for both domestic and foreign businesses.

B. Categories of Exempt Income
The UAE Corporate Tax Law outlines several categories of income that are exempt from corporate tax, helping businesses optimize their tax liabilities. These include:

I. Income from Qualifying Shareholdings
One of the most significant exemptions pertains to income earned from “qualifying shareholdings.” This includes dividends and capital gains earned from owning shares in other UAE or foreign companies. For these earnings to qualify as exempt, the shareholding must meet certain conditions, including:

• A minimum ownership threshold (typically at least 5% of the company’s shares).
• The subsidiary must be subject to a corporate tax rate of at least 9% in its jurisdiction.
• The investment should be held for at least 12 months.

This exemption helps promote cross-border investments and the growth of UAE-based businesses by reducing the tax burden on dividends and capital gains.

II. Income from Foreign Permanent Establishments (PE)
Profits earned from foreign permanent establishments are also exempt, provided certain conditions are met. A company’s foreign branch income is excluded from the UAE tax base if:

• •The foreign branch is located in a country where its income is subject to tax at a rate equal to or higher than the UAE corporate tax rate.
• The taxpayer opts for the exemption for all of its foreign branches in that country.

This exemption is designed to eliminate the possibility of double taxation for UAE businesses operating abroad, thereby promoting international expansion.

III. Income Earned by UAE Free Zone Entities
Companies operating within designated free zones in the UAE are granted favourable tax treatment. As part of the government’s commitment to maintaining free zones as attractive hubs for international business, income earned from qualifying activities by free zone entities is subject to a 0% corporate tax rate.
However, this preferential rate applies only to income derived from transactions with other free zone entities or entities outside the UAE. Income generated from activities with mainland UAE businesses may still be subject to the regular corporate tax rate unless specific conditions are met.

IV. Government-Owned Entities and Sovereign Wealth Funds
Certain government-owned entities and sovereign wealth funds are fully exempt from corporate tax. This includes UAE government authorities, as well as investment arms and institutions owned by the federal government or the Emirates. These entities are exempt to ensure that public investments and strategic industries can continue to operate without any undue tax burden.

V. Qualifying Investment Funds
Investment funds, including certain real estate investment trusts and other regulated funds, can also benefit from corporate tax exemptions. For an investment fund to qualify, it must meet specific regulatory requirements and ensure that it is widely held, professionally managed, and has a clear investment strategy aimed at generating returns from diverse assets.
This exemption seeks to boost the growth of the investment management industry in the UAE, encouraging both local and foreign investors to use the UAE as a base for their investment portfolios.

VI. Income from Intra-Group Transfers
Intra-group transactions, such as transfers of assets or businesses within the same corporate group, are also exempt from corporate tax provided that certain conditions are met. The exemption is designed to facilitate restructuring and streamline group operations without triggering tax liabilities, as long as the entities involved in the transfer remain within the UAE for at least three years post-transfer.

C. The Importance of Exempt Income Provisions
The exempt income provisions in the UAE corporate tax regime play a pivotal role in ensuring the country’s tax system is both competitive and fair. These exemptions help:

• Attract Foreign Direct Investment: By exempting certain foreign-sourced income from tax, the UAE continues to be an attractive destination for multinational corporations looking for a tax-efficient hub.
• Prevent Double Taxation: Many of the exempt categories, such as income from foreign branches and qualifying shareholdings, are designed to prevent the same income from being taxed twice, both in the UAE and in foreign jurisdictions.
• Encourage Business Growth and Expansion: Exemptions for intra-group transfers and income earned by qualifying investment funds are tailored to promote restructuring, consolidation, and investment in key sectors of the economy.
• Maintain the UAE’s Free Zone Model: By offering special treatment to free zone entities, the UAE ensures that its free zones continue to be dynamic areas for international trade, finance, and technology companies.

D. Compliance and Documentation Requirements
To benefit from exempt income provisions, businesses must ensure that they comply with the relevant conditions and maintain proper documentation. This includes keeping detailed records of shareholdings, foreign branch operations, and intra-group transactions to demonstrate eligibility for exemptions in case of a tax audit.

E. Conclusion
The exempt income provisions under the UAE corporate tax law are critical for maintaining the UAE’s position as a global business hub. These exemptions provide clarity and certainty for businesses, allowing them to plan their investments and operations effectively while benefiting from favorable tax treatment. Companies operating in the UAE must remain aware of these provisions to ensure they are fully compliant and maximizing their tax efficiency.

As the UAE’s corporate tax regime continues to evolve, businesses should stay informed about any changes to exemptions and consult with tax professionals to navigate the new tax landscape effectively.

We at Meyer-Reumann & Partners are specialized in individual consultation and dedicated to help you achieve the outcomes you desire from a legal perspective.

We are currently offering an initial consultation on corporate tax at a reduced price of AED 1,100 excl. 5% VAT until the end of the year (31 December 2024). Please contact us directly for an appointment

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