Chapter Seven – Exempt Income

The chapter seven of the UAE Corporate Tax Law covers the exempt cases where certain types of income are eligible to be taxed, reflects UAE’s alignment with global tax principles and foster economic competitiveness.

The Articles 22 to 25 outlines the types of income exempted from corporate tax, including dividends from resident and foreign companies, and income from qualifying participating interests, foreign permanent establishments, and Non-Resident Persons generated from international shipping or aviation operations.

These provisions are offered to avoid double taxation and promote cross-border investments and trade, which is also subject to specific conditions.

Article 22 – Exempt Income

Certain types of income are excluded when calculating a business’s taxable income. These include:

1. Dividends from UAE Companies
   If a business receives dividends or similar gains from another UAE-based company i.e a resident juridical person, such income will be exempt from corporate tax.
2. Dividends from Foreign Participations
   A foreign business that receives income from dividends or similar distributions in which the business holds a Participating Interest will be exempt from corporate tax.
3. Other Income from Participating Interests
   Any other income generated, apart from the dividends, from foreign Participating Interests are also exempt from corporate taxation, provided they meet the criteria outlined in Article 23.
4. Income from Foreign Permanent Establishments
   If a UAE business has a branch or permanent establishment in a foreign country and satisfies the criteria in Article 24, the income generated from that branch will be exempt from corporate taxation in UAE.
5. International Shipping/Air Transport by Non-Residents
   A non-resident business involved in activities like international shipping or air transport in international routes will also be exempt from corporate tax,  if they meet certain conditions.

Article 23 – Participation Exemption

This Article outlines the conditions for which income from foreign investments (Participating Interests) will be exempt from corporate tax in UAE.

1. Income generated from qualifying investments such as Participating Interests from foreign companies will not be taxed under the following conditions:

• The business should hold an ownership of at least 5% of the shares or capital of the foreign company.
• The participating interest must be held by the taxable person for a consecutive period of at least 12 consecutive months, or the intent to hold for 12 months must exist.
• The foreign company must be subject to corporate tax (or similar tax) in its home country at a rate not lower than UAE’s standard rate (9%).
• The UAE business must be entitled to at least 5% of both:

Distributable profits

Liquidation proceeds

• No more than 50% of the foreign company’s assets should consist of investments that wouldn’t be tax-exempt if directly owned.

2. If the foreign entity is a holding company and earns income mostly from qualified investments, it can still meet the above tax condition even if it pays less than 9% tax.
3. Free Zone/Exempt Entity Participation – If the investment is in a Qualifying Free Zone Person or another exempt person, and it meets additional criteria set by the Minister, it may also qualify.
4. The following income is exempted from corporate if all the conditions are satisfied:

• Dividends and profit distributions from non-resident foreign investments
• Capital gains or losses from selling non-resident foreign investments
• Foreign exchange gains/losses related to non-resident foreign investments
• Impairment gains/losses

5. Participation exemption is not allowed if:

• The foreign company receives a tax deduction for paying dividends
• The investor or UAE business had earlier claimed impairment losses before qualifying for corporate tax exemption
• A related party claimed an impairment loss on a loan to the investee company.

6. Reversal of Impairment Loss: If such a previously disallowed impairment loss is reversed later, the regained income will be exempt (up to the amount previously not exempted).
7. Liquidation Losses: Losses from the liquidation of an investment cannot be exempted.
8. Transfers in Exchange for Non-Qualifying Assets: If the investment was acquired in exchange for a non-qualifying investment, such investment will not be exempted for two years.
9. If the business fails to keep at least 5% ownership for 12 months, the previously exempt income becomes taxable in the year the ownership drops.
10. The Minister may allow investments that cost above a certain threshold to qualify, even if they don’t meet the 5% ownership requirement.

Article 24 – Foreign Permanent Establishment Exemption

This Article allows a UAE business to elect not to pay tax on profits (and not claim losses) from its foreign branches or establishments.

1. A UAE business can choose to exclude the income and expenses of its foreign permanent establishments (FPEs) from taxable income.
2. If the business chooses this route, it cannot:

• Deduct losses from FPEs
• Include income or expenses of FPEs
• Claim any foreign tax credits related to FPEs

3. FPE Income/Expense – Total income and expenses from all relevant FPEs.
4. Separate Entity Principle – FPE is treated as a separate business from the UAE entity to calculate corporate tax.
5. Market Value Treatment – Any transfer of assets or liabilities between the UAE entity and its FPE must be valued at market value when calculating income.
6. The exemption applies to all of the UAE company’s FPEs that meet the eligibility criteria in Clause 7.
7. An FPE is eligible for exemption only if it pays corporate or similar income tax in the native country at a rate of at least 9%, the same as the UAE.

Article 25 – Non-Resident Person Operating Aircraft or Ships in International Transportation

A foreign or a non-resident company is exempt from corporate tax on international transport income if it does any of the following:

• Transports passengers, animals, goods, etc. by sea or air across borders
• Leases or charters aircraft or ships used for such international transport
• Leases essential equipment related to the operation of such aircraft or ships

2. This exemption is allowed only if a UAE company doing similar business in the foreign country would receive the same tax treatment there (i.e., no tax or exemption).

Frequently Asked Questions

1. What is exempt income under the UAE Corporate Tax Law?

Exempt income refers to specific types of income that are not subject to UAE Corporate Tax, provided they meet the conditions outlined in Chapter Seven of the UAE Corporate Tax Law.

2. Why does the UAE Corporate Tax Law provide exemptions for certain income?

The exemptions are designed to prevent double taxation, encourage investment, and support the UAE’s competitiveness as a global business hub.

3. What types of income are generally considered exempt under Chapter Seven?

Chapter Seven generally covers exemptions such as dividends from qualifying shareholdings, certain capital gains, income from qualifying foreign permanent establishments, and other exempt income specified under the Corporate Tax Law, subject to applicable conditions.

4. Are all dividends exempt from UAE Corporate Tax?

No. Dividend income is exempt only if it satisfies the conditions prescribed under the UAE Corporate Tax Law and related regulations.

5. Are capital gains exempt from Corporate Tax in the UAE?

Capital gains may qualify for exemption if they arise from a qualifying participation and meet the conditions specified under the participation exemption rules.

6. What is the participation exemption under the UAE Corporate Tax Law?

The participation exemption allows qualifying businesses to exclude certain dividend income and capital gains from Corporate Tax, provided the ownership and other legal requirements are met.

7. Can income from foreign branches be exempt from UAE Corporate Tax?

Yes. Income from a qualifying foreign permanent establishment may be exempt if the taxpayer elects the foreign permanent establishment exemption and satisfies the relevant conditions.

8. Does exempt income need to be reported in the Corporate Tax return?

Although exempt income is generally not taxable, businesses may still need to disclose it in their Corporate Tax return in accordance with the Federal Tax Authority’s reporting requirements.

9. What conditions must businesses meet to claim exempt income?

Businesses must satisfy the eligibility criteria set out in the UAE Corporate Tax Law, maintain supporting documentation, and comply with all applicable reporting and record-keeping requirements.

10. How can businesses determine whether their income qualifies for exemption?

Businesses should review the provisions of Chapter Seven, evaluate the relevant qualifying conditions, and seek professional tax advice to ensure the correct treatment of exempt income.