Khaleej Times, Monday, Feb 27, 2023 | Sha'ban 07, 1444
Is your business income exempt from corporate tax?
Emirates:
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.