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Is your business income exempt from corporate tax?

These are general provisions of the law, but there are exceptions like some persons are exempt from the UAE Corporate Tax Law

The juridical resident persons are subject to tax for their worldwide income. Natural persons conducting business in the UAE are liable to pay tax on the total income from the business. Non-resident persons are responsible for paying tax on the taxable income related to their permanent establishment (PE) in the UAE and income sourced from the UAE.

These are general provisions of the law, but there are exceptions like some persons are exempt from the UAE Corporate Tax Law, which we have already discussed in detail. In the same way, as given in article 22 of the law, the following income and related expenditure shall not be taken into account in determining the taxable income.

Dividend received from resident juridical person

If the juridical resident person is disbursing the profits in the form of dividends or any other form, the income in the hands of the recipient will be exempt from UAE CT law. The juridical resident person can be a juridical person Incorporated in the UAE and a juridical person incorporated out of the UAE but controlled and managed from the UAE.

The recipient may be any other juridical resident person, a natural person or a non-resident person. If the recipients are taxable persons while calculating their taxable profits, they will deduct the dividend and other such income from their accounting profits to arrive at the taxable profits. There will not consider the related expenditure as well.

For example, suppose a USA company, being controlled and managed from the UAE, pays dividends to the UAE company. In this case, dividend income will be exempt while calculating the taxable income of the UAE company since the dividend is being received from the resident juridical person.

The question arises, what about the dividend and other profit distribution made by the natural resident persons who are conducting the business in the UAE? Of course, natural persons conducting the businesses will pay themselves dividends, and dividends in the hands of a natural person will be considered their personal income. We know that there is no personal income tax in the UAE, so it will not be subject to corporate tax.

Dividend received from non-resident juridical person

Article 22(2) and 22(3) of the UAE CT law says that if the taxable person is investing at least five per cent in shares and other equitable interest of a foreign juridical person and earning any income from this investment, then such income shall be exempt from UAE CT law provided all related conditions are fulfilled.

The law has used the word “Participation Interest” for such five per cent minimum ownership interest in the shares or capital of a juridical person. Other conditions to qualify the income as exempt are that the taxable person held or intends to hold this minimum investment of five per cent, in shares of the foreign entity for an uninterrupted period of 12 months, and participation income is at least subject to nine per cent tax.

Moreover, the person is entitled to at least five per cent of profits available for distribution and five per cent of the liquidation proceeds on cessation of participation. In addition, more than 50 per cent of the assets of the ownership interest would not have qualified for exemptions if directly had been held by the taxable person.

The participation income may be a dividend or similar profit distribution by the foreign juridical person. In addition, the income can be in the form of impairment gain, foreign exchange gain, and any additional gain on transfer, sale, or other disposition of a participating interest (or part thereof) after holding a continuous period of 12 months.

The participation income will not be subject to tax. In the same way, participating expenses like impairment loss, shall not be allowed for tax purposes. If the participation has claimed a deduction for the dividend or other distributions, and the taxable person recognized a deductible impairment loss then participation exemption will not be available.

If the participation does not meet the above mentioned conditions, then participation exemption will not be available for two years. Moreover, where the taxable person fails to hold a minimum five per cent ownership interest for a continuous period of twelve months, then any participation exemption claimed shall be included in the calculation of the taxable income in the tax period in which the ownership interest in the participation falls below five per cent.

Income from foreign PE of resident juridical person

A resident person can make an election not to consider the income and associated expenditure of its foreign PE in determining its taxable income. The taxable person can claim this exemption if the tax on the income of foreign PE income is at least nine per cent. If the taxable person has elected for this, then the taxable person will not be allowed the losses, expenses and foreign tax credit related to the foreign PE to compute its taxable income. The exemption, where available, shall apply to all foreign PEs of the resident person that meet the related conditions.

Income from leasing of ships and aircraft

Non-residents are subject to tax for their UAE-sourced income. The law says that if the non-residents are earning income from the UAE by operating aircraft or ships in international transportation, then such income will be exempt from the UAE CT law provided the same exemption is available to the UAE carriers in the country or territory in which the non-resident person is resident, and the non-resident person is in the business of (i) international transport of passengers, livestock, mail, parcels, merchandise or goods, or (ii) leasing or chartering aircraft or ships used in international transportation, or (iii) leasing of equipment which are integral to the seaworthiness of ships or the airworthiness of aircraft used in international transportation.

Taxable persons need to identify their exempt income and adjust their accounting profits accordingly to arrive at the taxable profits.

Mahar Afzal is a managing partner at Kress Cooper Management Consultants. The above is not an official opinion of the Khaleej Times but a personal opinion of the writer. For any queries/clarifications, please write to the writer at mahar@kresscooper.com