United Arab Emirates

Tax base for Emirate level taxes 

For Emirate level income taxes, the tax base is defined in the respective Emirate level decrees, laws, fiscal agreements or fiscal letters. Such tax base may significantly differ from the tax base described below for the purposes of the UAE Federal CT. 

Tax base for UAE Federal CT  

Under the UAE CT Law, the accounting net profit (or loss) as stated in the standalone financial statements of a business is taken as the starting point for determining its taxable income. The law prescribes a number of key adjustments to the accounting net profit (or loss) in order to compute the taxable income.

The following table sets out the aspects to consider when determining the nature of a taxable person (i.e. resident vs. non-resident) as well as the applicable tax base:

Capital gains

There are no separate capital gains provisions under the UAE CT Law. Any gains / (loss) on disposal of capital assets would form part of the taxable income.

Unrealised gains or losses

Based on the CT Law, a taxable person that prepares financial statements on an accrual basis of accounting can opt for the following:

• Elect to recognise gains and losses on a ‘realisation basis’ for CT Law purposes for all assets and liabilities that are subject to fair value or impairment accounting under IFRS (i.e. all respective unrealised gains would not be taxable, and conversely, unrealised losses would not be deductible, until they are realised).
• Elect to recognise gains and losses on a ‘realisation basis’ for CT Law purposes for assets and liabilities held on capital account only. Unrealised gains and losses arising from assets and liabilities held on revenue account, on the other hand, would continue to be included in taxable income on a current basis.

Exempt income

To avoid instances of double taxation, and recognising the UAE’s position as an international business hub and leading holding company location, the UAE CT regime automatically exempts dividends and other profit distributions received by a UAE taxable person (UAE tax resident, or UAE PE of a non-resident) from a UAE tax resident person (domestic dividends). For other types of investment income, see the Participation Exemption relief below.

Participation Exemption 

The below rules apply to capital gains and other similar income from UAE tax resident persons, as well as to dividends and other profit distributions and capital gains from foreign juridical persons.  

Dividends, other profit distributions, and capital gains and other similar income are exempt if the ownership interest (referred to as a ‘participating interest’) in a  juridical person (referred to as ‘participation’) meets the following tests: 

• the ownership interest is at least 5%. A participating interest of less than 5% could also qualify for the exemption where the acquisition cost of the ownership interest exceeds AED 4 million,
• a 12-month uninterrupted holding period (or the intention to hold for 12 months) is in place,

• the participation is subject to UAE CT or tax in its country or territory of residence at a statutory rate that is not lower than 9%, and
• not more than 50% of the assets directly or indirectly owned by the participation consist of an ownership interest or entitlements that would not qualify for the participation exemption if these assets were held directly by the taxable person.

The ‘subject to tax’ test would also be satisfied if:

• A 9% effective tax rate (ETR) is applied on income or profits of the participation,
• In the event such a 9% ETR is not applicable based on the relevant jurisdiction’s tax regime, a 9% ETR is reached if re-calculated based on the provisions of the UAE CT Law.

Foreign Permanent Establishment Exemption

A resident person could create a PE in another jurisdiction based on the domestic tax laws of this jurisdiction, subject to any tax treaty. Generally, the income attributed to such a foreign PE will be taxed in that jurisdiction. In such a scenario, the UAE CT Law provides an option to the resident person to elect for an exemption of this income in the UAE. The exemption will be available if the foreign PE is subject to CT or similar taxes at a rate not less than 9% in the foreign jurisdiction. If the resident person opts for this exemption, it will not be eligible to take into account in the UAE the losses, income, expenditure, and foreign tax credits in relation to the foreign PE.

International transportation exemption

Income earned by a non-resident from operating aircraft or ships in international transportation will not be subject to CT in the UAE if the income earned by a UAE resident person that carries on these activities is exempt from CT in the jurisdiction of the non-resident.

Partners in an unincorporated partnership

As a general rule, an unincorporated partnership should not be treated as a taxable person, i.e. the partnership is looked through and each partner should be treated as an individual taxable person on its distributive share.  Each partner would be responsible for the full UAE CT compliance as if each carrying on independent business subject to UAE CT. Assets, liabilities, income, and expenditure of the partnership should be allocated to each partner in accordance with their distributive share.

The Ministerial Decision No. 261 of 2024 has clarified that a UAE unincorporated partnership shall not be considered a taxable person in its own right unless it is a juridical person.

Partners in an unincorporated partnership can make an irrevocable (save exceptional circumstances) application to the FTA for the unincorporated partnership to be treated as a taxable person, i.e. to be recognised as its own entity subject to UAE CT. Where this application is made, partners remain jointly and severally liable for the partnership’s CT liability. One partner will be appointed as the responsible partner for any UAE CT obligations and proceedings for the partnership.

Foreign partnerships

Foreign partnerships will be treated as unincorporated partnerships where:

• the partnership is not subject to any tax of a similar character to UAE CT under the laws of the foreign jurisdiction, and
• each partner in the foreign partnership is individually subject to tax with regards to its distributive share of any income of the foreign partnership. This condition shall be met if the foreign partnership is not subject to tax in its own right in the foreign jurisdiction.

Family foundations

The UAE CT Law identifies family foundations, trusts, and similar entities as independent juridical persons that are used to protect and manage the assets of an individual or a family with a separate legal personality.

A UAE family foundation can apply to be treated as a tax transparent unincorporated partnership for UAE CT purposes under certain conditions. Thus, a UAE based family foundation structure, with an elected tax transparent status, generally prevents the income of the foundation or trust from attracting UAE CT and is a useful vehicle for families to ensure a tax efficient holding structure, proper governance, as well as succession planning.

The Ministerial Decision #261 of 2024 extends the option for a tax transparent status to any underlying legal entity wholly owned and controlled, directly or indirectly, by a family foundation. Whereas a family foundation previously had to hold the assets directly in order for any income they generate to benefit from the structure’s tax transparent status, this amendment allows family foundations to hold assets via a legal entity such as a company without compromising the overall tax efficiency of the structure.