What is excluded from UAE Corporate Tax income?

1) Domestic dividends

Dividends, and other profit distributions, received from a Resident Person are exempt from Corporate Tax. There are no additional conditions a Taxable Person has to meet in order to benefit from this exemption. This reflects a distinction between payments a juridical person makes in order to earn its profits, and distributions it makes out of its profits which will already have been taxed under the Corporate Tax regime. This exemption also covers distributions made by a Resident Free Zone juridical person (whether qualifying or not) to another Resident Person

2) Income exempt under the participation exemption

Dividends and other profit distributions received from foreign juridical persons are exempt from Corporate Tax if the recipient has a Participating Interest in the foreign company. A Participating Interest is a significant long-term ownership interest in the shares or capital of a juridical person (the “Participation”) that provides the basis for the exercise of some level of control or influence over the activities of the Participation.

3) Participation exemption for other income and gains

Other income and gains may also be exempt if they are derived from a Participating Interest. This applies to holdings in both Resident and Non-Resident Participations. The requirements for a Participating Interest in both a Resident and Non-Resident are the same, save that in relation to a Participation Interest in a Resident, a Participation in a Qualifying Free Zone Person or an Exempt Person is considered to meet the subject to tax requirement. If a Taxable Person holds a Participating Interest for a period of at least 12 months, or has the intention to do so, it will be exempt from Corporate Tax

4) Foreign Permanent Establishment exemption

To eliminate or reduce potential international double taxation, a Resident Person can make an election when determining its Taxable Income to have income derived from Foreign Permanent Establishments exempted from Corporate Tax in the UAE

Where such an election is made, the Resident Person will not need to include the following items in their Taxable Income:

a) Income, and associated expenditure, in any of its Foreign Permanent Establishments

b) Losses in any of its Foreign Permanent Establishments.

The election must apply to all foreign Permanent Establishments that meet the subject to tax requirement. A Resident Person may not elect to apply the exemption for specific Permanent Establishments.

5) Income from operating aircraft or ships in international transportation

The UAE is a major international logistics and transportation hub and, in recognition of this, income earned by a Non-Resident Person from the operation of aircraft or ships in international transportation is exempt from Corporate Tax if certain conditions are met

In this regard, the Non-Resident Person should be in the Business of:

• International transport of passengers, livestock, mail, parcels, merchandise or goods by air or sea;

• Leasing or chartering aircrafts or ships used in international transportation; or

• Leasing of equipment which is integral to the seaworthiness of ships or airworthiness of aircrafts used in international transportation.

In addition, the exemption only applies if the country in which the Non-Resident Person resides provides an equivalent exemption from Corporate Tax, or a similar tax, to UAE Resident Persons engaged in the operation of aircraft or ships in international transportation. This is known as the “reciprocity” principle and is consistent with international norms in the taxation of international transportation.

Written By CA Adarsh Janardhanan ACA

Expandx Tax Consultants