We have discussed the basis of the taxable income calculation earlier, now we can get into what income can be exempt from this calculation on the basis of the consultation document released by the MOF.
It is important to understand the exempt income for corporate taxation to correctly reduce the tax liability.
Since UAE is an international business hub and would like to attract more investors, the following type of income will be exempt from corporate taxation –
- Dividends and Capital Gains Income
- Foreign Branch Profit
- Income earned by non-resident operating aircraft or ships used for international transport (assuming the foreign jurisdiction provides the same exemption)
Exemption of Corporate Tax for Dividends and Captial Gains in the UAE
In order to avoid double taxation first on the income earned by the company and later when the profit is distributed or when the shares are sold, dividends received, and capital gains earned from the sale of shares of a subsidiary company by a UAE shareholder company are generally exempt from corporate tax.
The following transactions would be exempt –
- Dividends earned from UAE mainland companies
- Dividends earned from Free Zone companies
- Dividends earned from foreign companies (provided additional conditions are met)
- Sale of shares of UAE companies (provided additional conditions are met)
- Sale of shares of foreign companies (provided additional conditions are met)
- Sale of shares of Free Zone holding companies (provided additional conditions are met)
What are the additional conditions for the dividends and capital gains tax to be exempt?
- The UAE shareholder must own at least 5% of the shares of the subsidiary company
- The subsidiary jurisdiction must have a corporate tax rate of at least 9%, this is to avoid the income to be shifted to a no-tax or low-tax jurisdiction
Exemption of Foreign Branch Profit for Corporate Tax in the UAE
We have already discussed the difference between a branch and a subsidiary previously. In summary, the subsidiary is a separate legal entity while a branch is the same legal entity. Since a branch is not separate from the parent company, if there is a foreign branch company there may be challenges with calculating the UAE corporate tax.
In such a case the UAE company can either –
- 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 branch profit exemption is proposed to apply to all foreign branches of the UAE company, and will be irrevocable. An exemption for foreign branch profits may not be available where the foreign branch is not subject to a sufficient level of tax in the foreign jurisdiction in which it is located. What is a sufficient level of tax has not been disclosed in the consultation documents, however, we can assume that it should be at least the same amount of tax that would have been paid in UAE (i.e. 9%).
From the above, we can see which income can be treated as exempt for corporate purposes as per the consultation document released by the ministry of finance.
For professional advice on corporate tax, book an appointment with our tax experts.