United Arab Emirates

The tax decrees of the various Emirates provide that taxable income is calculated by reference to the financial accounting profit, subject to certain book-tax adjustments. 

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, which would be subject to 0% or 9% tax rate as the case may be.

Unrealised gains or losses

Based on the CT Law and the FAQs, 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 (i.e. any and all unrealised gains would not be taxable [and conversely, any and all 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 (i.e. only unrealised gains and losses in respect of assets and liabilities held on capital account would not be taxable or deductible, respectively, until they are realised). 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 United Arab Emirates’ position as an international business hub and leading holding company location, the UAE CT regime exempts dividends and other profit distributions received by a taxable person from a UAE tax resident entity (i.e. local dividends) or received from non-UAE tax resident persons, as well as other types of income as detailed below.

Participation exemption 

Dividends and other profit distributions relating to ownership interest (referred to as a ‘participating interest’) in a foreign juridical person (referred to as ‘participation’) will be exempt from tax if: 

• the ownership interest is at least 5%
• a 12-month uninterrupted holding period (or the intention to hold for 12 months) is in place

• the participation is subject to tax in its country or territory of residence at a 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 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.

Further, an entity could be treated as satisfying the condition that it must be subject to tax at a rate that is not lower than the UAE CT rate (i.e. at least 9%) if its principal business objective and activity is to acquire and hold shares or equitable interests that are considered as participating interests and the income of the participation during the relevant tax period substantially consists of income from participating interests. The tax rate requirement will also be treated as met where the juridical person is a QFZP or exempt person.

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.

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 United Arab Emirates. 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 losses, income, expenditure, and foreign tax credits in relation to the foreign PE in the United Arab Emirates.

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 United Arab Emirates 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 will not be treated as a taxable person, i.e. the partnership is looked through and each partner is treated as a taxable person on their distributive share. This would mean each partner would be responsible for complying with UAE CT administration and compliance burdens and for paying UAE CT on their taxable income 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. 

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 tax under the laws of the foreign jurisdiction and each partner is individually subject to tax on their distributive share of the partnership’s income when the partnership receives or accrues it. Partnerships are flexible vehicles that are typically complex from a tax perspective. The approach adopted in the UAE CT law attempts to simplify the tax treatment and is in line with international best practice.

Family foundations

The 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 family foundation can apply to be treated as a transparent ’unincorporated partnership‘ for UAE CT purposes under certain conditions. This would generally prevent the income of the foundation or trust from attracting UAE CT and could be a useful vehicle for families to ensure a tax efficient holding structure, proper governance, as well as succession planning.