Effective 1 June 2023, a new federal corporate tax regime is introduced in the UAE. Previously, corporate tax applied only to banks and oil companies under the tax system of each of the 7 Emirates comprising the UAE.

Under the new federal corporate tax regime, resident companies in the UAE are taxed on their worldwide income, i.e., income derived from the UAE or from outside the UAE.

Exempt Persons

The following persons are exempt from corporate tax in the UAE:

• A government entity;
• A government-controlled entity;
• A person engaged in an extractive business;
• A person engaged in a non-extractive natural resource business;
• A qualifying public benefit entity;
• A qualifying investment fund (see Sec. 10.1.);
• A public or private pension fund or a social security fund that is subject to regulatory oversight of the competent authority in the UAE and that meets any other conditions that the Minister of Finance may prescribe;
• A juridical person incorporated in the UAE that is wholly owned and controlled by specified exempt persons (government entity, government-controlled entity, qualifying investment fund, public pension, or social security fund) and conducts any of the following activities:
  • undertakes part or whole of the activity of the exempt person;
  • is engaged exclusively in holding assets or investing funds for the benefit of the exempt person; or
  • only carries out activities that are ancillary to those carried out by the exempt person; and
• Any other person as may be determined in a decision issued by the Cabinet.

The persons mentioned above are eligible for exemption from corporate tax only if they comply with the specific conditions applicable to them under the new federal corporate tax law. If an exempt person fails to satisfy the conditions during a tax year, the person ceases to be exempt from the beginning of that tax year.

However, the Minister has the authority to establish conditions under which a person may remain exempt or cease to be exempt from a different date in the following instances:

• Failure to meet the conditions is due to the person’s liquidation or termination;
• Failure to meet the conditions is of a temporary nature and will be promptly rectified, and suitable procedures are in place to monitor compliance with the relevant conditions of the new federal corporate tax law; or
• Any other instances as determined by the Minister.

On 4 May 2023, the UAE Ministry of Finance issued Ministerial Decision No. 105 of 2023, providing further guidance on these instances and their application.

The Decision clarifies that in the case of liquidation or termination, the person may continue to be deemed as an exempt person from the date its liquidation or termination process starts until the date it is completed, provided a notification is submitted to the tax authority within 20 working days from the start of the liquidation or termination process. The person ceases to be deemed as an exempt person on the day following the completion of the liquidation or termination process.

In the case of temporary failure, the Decision clarifies that the person may continue to be deemed as an exempt person if all the following conditions are met:

• The failure to meet the conditions is due to a situation or event beyond the person’s control, which could not have been predicted or prevented;
• The person submits an application to the tax authority to continue being treated as an exempt person within 20 working days from the date of failing to meet the conditions;
• It is reasonably expected that the failure to meet the conditions will be rectified within 20 working days from the date of submitting the application; and
• The person provides evidence to support the implementation of appropriate procedures to monitor compliance with the relevant conditions upon request by the tax authority within 20 working days from the date of the request or any other period as may be determined by the tax authority.

In the case of any other instances, the Decision clarifies that the person ceases to be deemed an exempt person from the date of failing to meet the conditions if it is reasonable to conclude that the main purpose or one of the main purposes of the failure is to obtain a corporate tax advantage that is inconsistent with the intentions or purposes of the new federal corporate tax law.

Participation Exemption

Effective 1 June 2023, income from a participating interest is exempt from corporate tax in the UAE. A participating interest means an ownership interest of 5% or more in the shares or capital of a person, referred to as participation, provided all of the following conditions are met:

• The income recipient has held, or has the intention to hold, the participating interest for an uninterrupted period of at least 12 months;
• The income from the participating interest is subject to corporate tax or any other tax imposed under the applicable legislation of the country or territory in which the person is resident that is of a similar character to corporate tax at a rate not less than the rate of corporate tax in the UAE (9%);
• The participating interest entitles the income recipient to receive not less than 5% of the profits and not less than 5% of the liquidation proceeds on cessation of the participation;
• Not more than 50% of the direct and indirect assets of the participation consist of ownership interests or entitlements that would not have qualified for an exemption from corporate tax if held directly by the income recipient; and
• Any other conditions as may be prescribed by the Minister.

A participation is considered as having met the ‘subject to tax’ condition if all of the following conditions are met:

• The principal objective and activity of the participation is the acquisition and holding of shares or equitable interests that meets all the participation conditions (see above); and
• The participation income derived during the relevant tax year or tax years substantially consists of income from participating interests.

If the participation conditions are met, income from participating interest exempt from corporate tax includes the following:

• Dividends and other profit distributions received from a foreign participation that is not a resident person;
• Gains or losses on the transfer, sale, or other disposition of participating interest (or part thereof) derived after the expiry of a 12-month period or a 2-year period where participation was acquired in exchange for the transfer of an ownership interest that did not meet the participation conditions or a transfer was exempted under the Relief for Transfers in a Qualifying Group (see below) or Business Restructuring Relief (see Sec. 11.) of the new federal corporate tax regime;
• Foreign exchange gains or losses in relation to a participating interest; and
• Impairment gains or losses in relation to a participating interest.

If the income recipient fails to hold an ownership interest of 5% or more in the participation for an uninterrupted period of at least 12 months, any income previously excluded as per the exemption provisions is recaptured and included in the calculation of the taxable income in the tax year in which the ownership interest in the participation falls below 5%.

A participation in a qualifying free zone person (see Sec. 10.) or an exempt person is treated as having met the subject to tax condition, subject to any conditions that the Minister may prescribe.

Capital Gains

Capital gains derived from the sale of capital assets are considered ordinary income and are subject to standard corporate tax except gains earned from a participating interest. Gains or losses on the transfer, sale, or other disposition of a participating interest (or part thereof) is exempt from corporate tax provided it is derived after the expiry of a 12-month period or a 2-year period where a participation was acquired in exchange for the transfer of an ownership interest that did not meet the participation conditions, or a transfer was exempted under Article 26 (Relief for Transfers in a Qualifying Group) or 27 (Business Restructuring Relief) of the Decree-Law.

Dividends

Dividends received from resident companies are exempt from tax, including dividends received under the participation regime (see above).