The United Arab Emirates (UAE) has become a leading centre for commerce and innovation in the Middle East. This success is due to several factors, including:
- Strong Infrastructure: The UAE boasts a well-developed infrastructure that supports businesses of all sizes.
- Strategic Location: Situated at the crossroads of East and West, the UAE offers easy access to major markets.
- Business-Friendly Policies: The UAE government has implemented policies that attract and retain businesses, creating a competitive environment.
However, one recent initiative to enhance the business environment is the introduction of the corporate tax (CT) regime in June 2023. This new tax system aims to:
- Diversify the Economy: The UAE corporate tax helps create a more stable economic foundation by reducing reliance on energy revenue.
- Increase Transparency: The corporate tax system promotes a clear and predictable business tax framework.
The Corporate Tax Explained
The United Arab Emirates implemented a corporate tax system, a form of direct tax levied on the net income or profit earned by corporations and other business entities. This tax is governed by Federal Decree-Law No. 60 of 2023 (available as a 187 KB PDF), which amends certain provisions of the previous Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses.
The corporate tax applies a 9% tax rate on the taxable profits of corporations exceeding AED 375,000. This ensures that the new tax does not burden smaller businesses.
So, Are Only SMEs Exempt from Corporate Tax in the UAE? Who Is Exempted?
It’s important to understand that not all businesses are subject to the UAE corporate tax. Several entities, including investment funds, public benefit organizations, and pension funds, are exempt. Depending on your company’s activities and structure, you may also be eligible for corporate tax exemptions. Exploring these exemptions can significantly impact your financial planning and decision-making.
This blog serves as a starting point. Let’s delve deeper into the corporate tax regime and learn who is exempted from UAE corporate tax.
Understanding UAE Corporate Tax Exemptions
The UAE’s corporate tax system offers exemptions to attract foreign investors and boost key economic sectors. This fuels diversification and growth. Small businesses get a 0% tax rate to encourage innovation and jobs. Existing Emirate-level taxes prevent double taxation and some entities, like charities, are exempt to ensure funds go towards their public benefit goals. This commitment to a competitive business environment makes the UAE attractive. Remember, a tax professional can help you understand how these exemptions apply to your specific situation, especially with changing laws.
According To the Federal Tax Authority’s Guidelines and The Official Portal of The UAE Government, The Following Entities Are Exempt:
1. Small and Medium-Sized Businesses:
The UAE offers a helping hand by exempting them from corporate tax if their annual revenue stays under AED 375,000 (roughly USD 102,000). This gives SMEs some breathing room to grow and become a bigger part of the UAE’s economy.
Here’s the catch – This perk applies to their entire net profit, so no corporate tax up to that limit. But, once you cross that AED 375,000 mark, the amount above AED 375,000 gets charged for 9%, while the first 375,000 is taxed at 0%. There might also be some reporting requirements even if you qualify for the exemption. To make sure you are following the rules correctly, talking to a corporate tax expert in the UAE is a good idea.
2. Government Entities & Government-Controlled Entities
The UAE exempts government entities, including those controlled by the government, from UAE corporate tax. This makes sense because these entities are ultimately an extension of the government itself and their profits are often reinvested back into public services or national projects.
Here’s why this exemption exists:
- Government Efficiency: The government doesn’t need to collect and then redistribute tax money within its own entities. This simplifies the financial processes for government operations.
- Public Benefit: Profits generated by government entities are often used for public good, such as infrastructure development or social programs. Taxing them would essentially mean taxing these public services.
There are a few nuances to consider:
- Independent Businesses: If a government entity operates a separate, commercially focused business that requires a license, that business might be subject to corporate tax.
- Transparency: Even though they are exempt, some government entities might still be required to maintain financial records for transparency and accountability purposes.
3. Extractive Businesses (Of Natural Resources)
The UAE gives extractive businesses a break on corporate tax! These are companies involved in pulling natural resources like oil, gas, or minerals out of the ground.
There are two reasons for this exemption:
- Existing Taxes: Extractive businesses already pay a separate tax at the Emirate level, where they operate. The UAE wants to avoid double taxation, which can be a burden for businesses.
- Economic Reliance: These industries are crucial for the UAE’s economy. Exempting them from corporate tax helps maintain their profitability and encourages continued investment in the sector.
Here are some additional points to consider – While the general principle is an exemption, there might be specific conditions for extractive businesses to qualify. It’s best to check with the Federal Tax Authority for the latest guidelines or a tax expert.
4. Non-Extractive Natural Resource Businesses
The UAE’s corporate tax system has a special category for businesses dealing with natural resources, but not by directly extracting them. These are “non-extractive natural resource businesses.” Unlike extractive businesses (oil, gas, minerals) which get a full exemption, non-extractive ones have a conditional exemption.
Here’s the breakdown:
- Conditional Exemption: These businesses can qualify for a corporate tax exemption, but they need to meet specific criteria outlined in the UAE’s corporate tax law.
- Focus on Activities: The exemption likely hinges on the nature of their activities. They might be involved in processing, transporting, or trading natural resources, but not directly extracting them.
- Benefits and Requirements: Meeting the exemption criteria allows them to avoid corporate tax, similar to extractive businesses. However, there might be specific reporting requirements even if exempt.
Why the Conditional Exemption?
There could be a few reasons for this approach:
- Encouraging Value Addition: The UAE might want to incentivize businesses that add value to natural resources beyond just extraction. This could involve processing, manufacturing, or specialized services.
- Balancing Interests: While these businesses contribute to the natural resource sector, they might not have the same economic weight as extractive industries. A conditional exemption allows for some tax benefits while ensuring a fair contribution to the system.
5. Qualifying Public Benefit Entities and Qualifying Investment Funds
The UAE offers corporate tax exemptions for two specific categories that serve the greater good: Qualifying Public Benefit Entities (QPBE) and Qualifying Investment Funds (QIF).
Let’s break down what each entails:
- Qualifying Public Benefit Entities (QPBE):
- Focus on Social Good: These are non-profit organizations dedicated to charitable, educational, scientific, or other public benefit purposes. Think of charities, foundations, social clubs, or NGOs.
- Tax-Free Operations: By exempting them from corporate tax, the UAE ensures their resources go directly towards their public benefit goals. Donations and fundraising efforts remain untaxed, maximizing their impact.
- Maintaining Transparency: Even if exempt, QPBEs might still be required to maintain financial records for accountability purposes. This ensures transparency and public trust in their operations.
- Qualifying Investment Funds (QIF):
- Facilitating Investment Growth: These are investment vehicles like mutual funds or collective investment schemes that pool investor funds for investment purposes.
- Boosting the Economy: The UAE exempts QIFs to encourage investment activity and attract more capital into the country. This ultimately fuels economic growth and diversification.
- Conditions May Apply: There might be specific criteria for a QIF to qualify for the exemption. These could involve the type of investments made, the fund structure, or minimum investment amounts.
Overall Benefits:
These exemptions demonstrate the UAE’s commitment to:
- Supporting Social Causes: By allowing QPBEs to operate tax-free, the government prioritizes social good and encourages charitable giving.
- Creating a Vibrant Investment Hub: Exempting QIFs attracts foreign investors and fuels economic growth.
6. Dividends and Capital Gains (From Qualifying Shareholdings)
The UAE offers a tax break on profits earned through investments!
Here’s the breakdown of this exemption for dividends and capital gains:
- Focus on Investments: This exemption applies to dividends (profit distributions) and capital gains (profits from selling shares) received by a UAE company from its qualified shareholdings.
- Boosting Investment Activity: By not taxing these investment earnings, the UAE encourages companies to invest in other businesses. This fosters a more dynamic and interconnected business environment.
- Qualifying Shareholdings: There are likely criteria for what qualifies as a “qualifying shareholding.” This could involve:
- Minimum Ownership Percentage: Owning a certain minimum stake (e.g., 5%) in the other company.
- Holding Period: Holding the shares for a specific period (e.g., 12 months) before selling them to qualify for capital gains exemption.
Benefits and Considerations:
- Increased Investment Returns: Companies can see a bigger return on their investments without corporate tax eating into their profits.
- Global Investment Focus: This exemption doesn’t restrict qualified shareholdings to the UAE. Companies can invest in other countries and still benefit from the tax break.
Important Points:
- Understanding Requirements: It’s crucial to understand the specific requirements for “qualifying shareholdings” to ensure you meet the exemption criteria.
- Consulting a Tax Professional: Tax laws can be complex. Consulting with a tax professional familiar with the UAE system can help navigate the specifics of this exemption.
Still, Wondering If Your Company Is Exempt from UAE Corporate Tax?
The UAE’s corporate tax has exemptions for businesses like yours! From startups to investors, there are ways to save.
Figuring it out can be a maze. Safari Star can help. Our UAE tax experts will break down the exemptions and show you how to claim what you deserve. Don’t get lost in the details, contact Safari Star today for a consultation today!
