Corporate Tax Exemptions in the UAE: A Comprehensive Guide for Exempt Persons

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Certain sectors are given the exemption from the UAE corporate tax “CT” law, mainly due to their importance and the positive impact they have on our society and economy. This is merely to encourage such activities/businesses by minimizing any financial or any regulatory burden unless they conduct an activity that falls within the scope of the UAE Corporate tax law.

Exempt persons fall in one of the four categories as defined in Article 4 of the CT law.

• Automatically exempt
  
• Exempt if notified to the Ministry of Finance and meet relevant conditions
  
• Exempt if listed in a Cabinet Decision and meet relevant conditions
  
• Exempt if applied and approved by the FTA subject to meeting conditions
  

1.  Automatically exempt

1.1 - Government Entities

Includes the federal government, local government, government departments, government agencies, authorities, and public institutions of the federal government or local government.

These entities are outside the scope of CIT since their activities are generally conducted as part of the government’s duties and it is internationally common for a government to exempt its own activities from taxation.

If government entities conduct any business activities under a license issued by a licensing authority, then such entities shall be subject to Corporate Tax. Such entities must prepare separate financial statements for its business activities and file Corporate Tax return. It is also possible for such entities to have more than one business each under separate license. However, they may apply to the Authority to be treated as a single taxable person and file a single tax return.

2.  Exempt if notified to the Ministry of Finance and meet relevant conditions

2.1 - Extractive & Non-Extractive Natural resources business

Exemption applies to certain businesses dealing with natural resources. Natural resources such as oil, natural gas, water, sand and rock deposits are key to the economy of the UAE. By law, natural resources in the UAE belong to the Emirate where those resources are found and therefore to respect the sovereignty of the Emirates over their Natural Resources these entities are exempt from the CT law.

A business holding a right, license or concession from a Local Government to undertake extraction activities which is subject to local taxation will be exempt from Federal CT. They are required to notify the MoF in the form and manner agreed with the local government.

Other business activities other than extractive and non-extractive activities shall be subject to CT. If the other activities are ancillary to the extraction activities and the revenue from those activities are not more than 5% of the total business revenue in any tax period, they will also be exempt. examples of ancillary activities would include earning rental income from letting out vacant parts of a property or equipment used in the Person’s Extractive business.

If a Person derives income from both an Extractive Business and any other Business, separate financial statements need to be kept and any common expenditure is apportioned in proportion to their revenue, unless different proportion is mentioned in the legislation of the relevant emirate, in which case the latter proportion will apply. Transactions between the extractive / non extractive business and other business shall be considered related party transactions and would be subject to the transfer pricing provisions.

The exemptions applicable for Extractive natural resources business closely resemble to Non-Extractive Natural resources business, additionally there is one more condition, Non-Extractive Business must derive income from transactions with other businesses, as opposed to with an end customer or consumer.

 3.  Exempt if listed in a Cabinet Decision and meet relevant conditions

3.1  - Government Controlled Entities

Entities wholly owned and controlled by one or more Government Entities and are listed in a Cabinet Decision along with their mandated activities are exempt from CT.

A Government-owned UAE company may carry out a Mandated activity, typically where this activity needs to be separated from the Government Entity itself for management or accountability.

Where the Government Controlled Entities carry out non mandated business activity, income from such activity shall be subject to CT. Separate financial records must be kept for other business activities so that the taxable income may be calculated and accounted for.

Transactions between the business activities and the Mandated activities are treated as “related party transactions” and would fall within the Transfer Pricing provisions.

3.2 - Qualifying Public Benefit Entities

QPBEs that focus on public interest, promoting philanthropy, community services, or corporate and social responsibility are exempt from CT subject to meeting certain conditions. The list of QPBE in the UAE is provided in the scheduled annexure of Cabinet Decision No. 37 of 2023. The decision lists more than 500 entities of Federal as well as for each Emirate.

The conditions are summarized below:

• The entity is established and operated exclusively for the promotion of social welfare or public benefit.
• The entity should undertake business activity that directly relate to or are aimed at fulfilling the purpose for which it is established.
• Its income or assets are used exclusively in the furtherance of the purpose for which it was established.
• Its income or assets are not payable or made available for the personal benefit to any other parties other than QPBE itself, Government Entity or Government Controlled Entity).

These entities do not have safe harbor, even 1% of the activity they undertake is commercial in nature they loose their exempt status and all of their revenue then becomes subject to CT.

4.   Exempt if applied and approved by the FTA subject to meeting conditions

4.1 - Qualifying Investment Funds

The UAE has established itself as a center for asset and wealth management, and its financial services sector is a key part of the UAE’s economy. Central to this is the variety of investment fund regimes and fund vehicles is available to attract international investment.

While there are various structures that collective investment funds may take, some of these investment funds are structured as an Unincorporated Partnership and are treated as fiscally transparent for Corporate Tax purposes, where the income derived by such an investment fund being treated as earned by the investors.

To achieve the tax neutrality of investment funds and ensuring that both domestic or foreign investors experience a tax position comparable to if they had directly invested in the underlying assets of the fund, the investment fund that are structured as incorporated entities such as real estate investment trusts and regulated investment companies, can apply to the authority for exemption upon meeting certain conditions

• The investment fund or the investment fund’s manager is subject to the regulatory oversight of a competent authority in the State, or a foreign competent authority. Examples of such competent authorities in the UAE include the Securities and Commodities Authority, the ADGM Financial Services Regulatory Authority, and the DIFC Dubai Financial Services Authority.
•  Interests in the investment fund are traded on a Recognized Stock Exchange or are marketed and made available sufficiently widely to investors where no single investor and its related parties own more than 30% of the fund's ownership interests if the fund has less than ten investors, or more than 50% if the fund has ten or more investors
• Fund is managed by an investment manager with at least 3 investment professionals and the investors has no control over the fund.
• The main or principal purpose of the investment fund is not to avoid Corporate Tax.

4.2  -  Public and private pension or social security funds

To qualify for an exemption, a fund must be subject to State oversight.

4.3  - A juridical persons that are wholly owned and controlled by the exempt persons

To qualify for an exemption, the following conditions are to be met

• They Undertakes part or whole of the activity of the Exempt Person.
• Are engaged exclusively in holding assets or investing funds for the   benefit of the Exempt Person.
• Only carries out activities that are ancillary to those carried out by the Exempt Person.

Registration and record keeping obligations of Exempt Persons

There is no requirement for Government Entities, Government Controlled Entities, Extractive Businesses and Non-Extractive Natural Resource Businesses to register for CT, if they do not have a Business or Business Activity that is subject to Corporate Tax. However, they are required to maintain records which evidence their exempt status for 7 years from the end of the Tax Period.

QPBE’s  Must apply for registration and obtain TRN from 1 October 2023 and others Must apply for registration and obtain TRN by 1 June 2024.

Disclaimer : The content on this website is provided for general informational purposes

only. It is not intended as professional advice and should not be construed as such. The

information is based on the knowledge and experience available at the time of writing

and is subject to change.