United Arab Emirates
Corporate - Tax credits and incentives
Foreign Tax Credit
A credit is available for any foreign taxes paid on a UAE Taxable Person’s income. The foreign tax credit is limited to the amount of CT due on the relevant income. Any unutilised foreign tax credit cannot be carried forward and or back and will ultimately be lost.
Dividends and other profit distributions as well as foreign exchange, impairment and capital gains and losses relating to ownership interests (referred to as a ‘Participating Interest’) in an entity (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, and
- The Participation is subject to tax in its country or territory of residence at a rate that is not lower than 9%.
In order to avoid abuse of the Participation Exemption, no more than 50% of the assets directly or indirectly owned by the Participation may 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.
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 Qualifying Free Zone 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 a threshold to be specified by the Minister.
The Participation exemption will not be available for a period of 2 years where a Participation Interest was derived by acquisition of interest that did not satisfy the Participation Interest conditions or the acquisition was subject to group or restructuring relief.
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 losses, income, expenditure and foreign tax credits in relation to the Foreign PE in the UAE.
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.
Transfers within a Qualifying Group
The UAE CT Law provides tax relief on intra-group transfer of assets or liabilities between Taxable Persons that are members of the same Qualifying Group. Taxable Persons will be treated as members of the same Qualifying Group if all the following conditions are met:
- the Taxable Persons are tax resident entities, or non-residents that have a PE in the UAE;
- the Taxable Persons are at least 75% commonly owned and have the same financial year and prepare the financial statements using the same accounting standards; and
- none of the Taxable Persons are regarded as an Exempt Person or a Qualifying Free Zone Person.
There is a clawback period of 2 years from the date of initial transfer in the case there is a subsequent transfer of such asset or liability outside the permitted group or where transferor or transferee ceases to be the member of the permitted group.
Business Restructuring Relief
Similar to intra-group transfer of assets or liabilities within a Qualifying Group, the UAE CT Law provides tax relief on mergers, spin-offs and other corporate restructuring transactions where whole or independent part of business is being transferred in exchange of shares or other ownership interest provided the following conditions are met:
- the transfer is in undertaken accordance with the applicable regulations in the UAE;
- the Taxable Persons are Resident Persons, or Non-Resident Persons that have a PE in the UAE;
- none of the Persons are regarded as an Exempt Person or a Qualifying Free Zone Person;
- have the same financial year and prepare the financial statements using the same accounting standards; and
- the transfer is undertaken for valid commercial or economic reasons.
There is a claw back period of 2 years from the date of the transfer if there is a subsequent transfer to a third party, or shares or ownership interests received are transferred or otherwise disposed of, the gains or losses on the initial transfer will be reported in the period in which the subsequent transfer made to the third-party.
Free trade zones (FTZs)
Companies and branches registered in a Free Zone are considered Taxable Persons under the UAE CT Law and are required to meet normal compliance obligations, including transfer pricing requirements. However, provided a Free Zone entity meets the conditions to be considered a Qualifying Free Zone Person (‘QFZP’), it should be eligible for a 0% UAE CT rate on its Qualifying Income. The income of a QFZP which is not Qualifying Income will be taxed at a 9% CT rate.
In order to qualify for the 0% UAE CT rate, QFZP must meet all of the following conditions:
- It must be a Free Zone Person (i.e. a juridical person incorporated, established or otherwise registered in a Free Zone, incl. branches);
- Maintain adequate substance in the UAE;
- Derive Qualifying Income (to be defined in a Cabinet decision);
- Not have made an election to be subject to the standard UAE CT regime;
- Comply with all transfer pricing rules and documentation requirements; and
- Meet any other conditions as prescribed by the MoF.
If a QFZP fails to meet any of these conditions at any time during a tax period, it will no longer be considered a QFZP and will be subject to the standard UAE CT regime from the beginning of that tax period. Notwithstanding this, the MoF may set rules under which a person may continue as a QFZP, or cease to be a QFZP from a different date.
There are a number of areas that remain uncertain, including the definition of Qualifying Income (subject to a Cabinet decision yet to be released), the treatment of transactions between Free Zone entities and related/unrelated entities/branches in mainland UAE, what will be regarded as ‘adequate substance in the UAE’ for a Free Zone Person, and any additional conditions that may be set by a Cabinet decision.