Income that would be exempt from the proposed corporate tax regime
Tax residents would be subject to corporation tax (CI) on their worldwide income while non-residents would be subject to IC on the taxable income of their permanent establishment (PE) in the United Arab Emirates (UAE); and income from the UAE. The above is a very generic provision of the proposed law, but there are a few exceptions which have been discussed below:
Generally, there are two types of articles in the business. Some items have a long-term impact on business-type machines, they are called capital items while some items have a short-term impact on the business, such as inventory, called revenue items. On these elements, there are two types of gains and losses. One is the realized gain or loss, which means the moment the item is sold, the gain or loss will be realized, and the second is the unrealized gain or loss, which means a change in the value of items before sales.
It was proposed in the public consultation document that realized gains or losses on capital items be taken into account in the calculation of taxable profits or losses. However, for revenue items, unrealized capital gains or losses will be accounted for in determining the taxable profit or loss. Investing in shares is a capital item, so only the gain or loss realized on the shares (gain or loss on the sale of shares) will be taken into account when calculating taxable profit or loss. As noted in our previous article, paragraph 3.5 of the UAE TC Public Consultation Documents (Document) clearly states that “Employment income and other personal income earned by UAE and foreign individuals such as dividends, rents from UAE real estate investments and other investment income will not fall within the scope of the proposed UAE TC regime.”
In view of the above provision of the draft public consultation document, dividend income and capital gains realized in the hands of individual shareholders would be outside the scope of corporation tax. The individual can be located in the UAE or outside the UAE, but the CT would not be applicable on such income.
Where there is a UAE shareholder company, any domestic dividends received by UAE companies would be exempt, including dividends paid by a free zone person who benefits from the 0% CT regime. Domestic capital gain realized by a mainland company for UAE corporate shareholders would be exempt if the company owns at least 5% of the shares of the subsidiary. Capital gains on the disposal of shares of a free zone person would be exempt from corporate tax where the free zone person is a holding company and substantially all of its income is derived from shareholdings in subsidiaries that meet the participation exemption conditions (5% participation).
Dividends paid by foreign companies and capital gains from the sale of shares of foreign companies would also be exempt from CT provided that the UAE corporate shareholder owns at least 5% of the shares of the subsidiary and that the subsidiary be subject to at least 9% CT or similar tax to prevent the shifting of income to a subsidiary in a low-tax or zero-tax country.
For the foreign shareholder company, the treatment of domestic dividend paid and domestic capital gain realized on share sales would remain the same as mentioned above for UAE shareholder companies. However, if the foreign shareholder company earns foreign income, this would fall outside the scope of the UAE CT regime.
The branch is not a separate legal entity but an extension of the main entity. This means that a branch, located in the UAE or outside the UAE, of a company has no legal status and companies are not required to keep separate books for branches. Transactions between the main company and the branches are not subject to any tax.
If a branch of a company is located in the United Arab Emirates, all of its income and expenses will be merged with the main company and will be taxed accordingly. However, if the branch is located outside the UAE, UAE companies can either (i) claim a foreign tax credit for taxes paid in the foreign country of the branch, or (ii) choose to claim an exemption for the profits of their foreign branch.
In the first option, the numbers of the branch will be merged with the main company, it will be taxed and the branch will receive a credit for the taxes paid from the UAE. In the second option, the branch profits will not be taxable in the UAE, but the branch will need to obtain an irrevocable exemption which would only be available if the branch profits are taxed outside the UAE at 9% or more. Companies with branches/branches outside the UAE should make a rational decision regarding the taxation of branch/branch profits.
Since the UAE is a major logistics center and international travel hub, a special exemption has therefore been granted in the proposed TC regime, which requires income earned by a non-resident from the operation or rental of aircraft or vessels (and related equipment) used in international transport. the transport would be exempt from CT provided that the same tax treatment is granted to a UAE company in the relevant foreign jurisdiction under the principle of reciprocity. The law will provide us with more clarity on these revenues and international transport.
The above is the exempt income of a taxable person, while some people would be completely exempt from the proposed CIT regime which we have already discussed in one of our previous articles.
Mahar Afzal is Managing Partner at Kress Cooper Management Consultants. The above is not an official, but a personal opinion of the author. For any questions/clarifications, please write to him at [email protected]
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