Exempt Income Under the UAE Corporate Tax

As the UAE Corporate Tax is expected to come into effect on June 1st 2023, it is vital for companies to understand the key aspects of the regime including the exempt income. As the name suggests, the proposed regime would exclude some types of income from taxes to prevent instances of double taxation. 

The revenue that the UAE companies receive from investments in other businesses and the income they earn from operations carried out outside the UAE via international subsidiaries or foreign branches are the two primary exemptions from the UAE corporate tax. Now that we know what the main exemptions are, it’s time to take a look at the various types of income that are categorized as exempt income under the UAE corporate tax regime.

• Foreign-based companies' dividends

The UAE's corporate tax law would exclude dividends paid by foreign businesses as well as capital gains on the sale of shares in both the UAE and international businesses subject to a few restrictions. The main prerequisite for this participation exemption is that the UAE shareholder firm must hold at least 5% of the shares of the subsidiary business. Furthermore, the participation exemption is applicable if the foreign subsidiary pays corporate tax at a rate of at least 9%. This is to prevent income from being transferred to a subsidiary in a nation with no or low taxation.

• Domestic income derived from UAE companies

The UAE corporation tax will not be applied to any domestic dividends received from UAE-based companies. Dividends paid by a Free Zone Person who benefits from the 0% corporate tax regime are included in the exempted domestic dividends.

• Foreign branch profit exemption

In this situation, the UAE companies can either choose to claim an exemption for their overseas branch profits or choose to claim a foreign tax credit for taxes paid in the foreign branch country. All foreign branches of the UAE Company can elect to claim the foreign branch profit exemption, and it is irrevocable.

• Exemption for dividends and capital gains

A UAE corporate shareholder will typically be excluded from corporation tax on dividends received and capital gains earned from the sale of shares of a subsidiary firm under the proposed corporate tax regime. UAE corporate shareholders will be generally exempt from corporate tax on dividends received and capital gains earned from the sale of shares of subsidiary companies under the proposed corporate tax regime. The exempt status of dividends and capital gains can be better understood with the help of corporate tax advisors in Dubai.

• Other exempt income

In addition to the types of exempt income we previously mentioned, the revenue generated by a non-resident who operates or leases ships or aircraft (and related equipment) utilized in international transportation shall be given the exempt status. However, following the reciprocity principle, a UAE firm must have the same tax treatment in the pertinent foreign country to benefit from this exemption.

Need Professional Help?

Doesn’t matter what kind of business you are dealing with, Reyson Badger can help you handle your financial needs and be prepared for the UAE corporation tax. Reyson Badger, being one of the top accounting and auditing firms in Dubai, can help you from tax registration to submitting returns. Reyson Badger has teams of expert accountants who can help businesses with every financial aspect. If you need more information about the types of exempt income or want to know the answer to your question “What are the types of income that are classified as exempt income under the UAE corporate tax regime.” our team of experts can help you.