The tax residents would be subject to corporate tax (CT) for their worldwide income while non-residents would be subject to CT on the taxable income from their permanent establishment (PE) in the United Arab Emirates (UAE); and Income which is sourced in the UAE. The above is a very generic provision of the proposed law but there are some exceptions which have been discussed as under:
Dividends and Capital Gains
Generally, there are two types of items in the business. Some items have a long-term impact on the business-like machinery, it is called capital items while some items have a short-term impact on the business like inventory which is called revenue items. On these items, there are two types of gains and losses. One is realised gains or loss, which means when the item will be sold gain or loss will be realised, and the second is unrealised gain or loss, which means a change in the value of the items before sales.
It has been proposed in the public consultation document that realised gain or loss on the capital items will be considered while calculating taxable profits or losses. However, for the revenue items, unrealised gains or losses will be counted to ascertain the taxable profit or loss. Investment in shares falls under the capital items so only realised gain or loss on shares (gain or loss on the sales of shares) will be considered while calculating taxable profits or losses. As discussed in our previous article, Para 3.5 of the public consultation documents (the document) on UAE CT clearly states that “Employment income and other personal income earned by UAE and foreign individuals such as dividends, rental receipts from UAE real estate investments, and other investment income will not be within the scope of the proposed UAE CT regime.”
In the light of the above provision of the proposed public consultation document, dividend income and realised capital gains in the hands of the individual shareholders would be out of the scope of corporate tax. The individual may be located in the UAE or out of the UAE, still, CT would not be applicable on such income.
Where there is a UAE corporate shareholder, any domestic dividend earned from UAE companies would be exempt, including dividends paid by a Free Zone Person that benefits from the 0 per cent CT regime. The domestic realised capital gain from a mainland company for UAE corporate shareholders would be exempt if the company owns at least five per cent shares of the subsidiary. Capital gains on the disposal of shares in a Free Zone Person would be exempt from CT where the Free Zone Person is a holding company and substantially all of its income is derived from shareholdings in subsidiary companies that meet the participation exemption conditions (5 per cent shareholding).
Dividends paid by foreign companies, and capital gains from the sale of shares from foreign companies would also be exempt from CT provided UAE corporate shareholder owns at least 5 per cent shares of the subsidiary, and the foreign subsidiary is subject to at least 9 per cent CT or similar tax to prevent income shift to a subsidiary in a no or low-tax country.
For the foreign corporate shareholder, the treatment of the paid domestic dividend and realised domestic capital gain on sales of shares would remain same as mentioned above for the UAE corporate shareholders. However, if the foreign corporate shareholder is earning any foreign income, it would be out of the scope of the UAE CT regime.
Foreign branch profit
The branch is not a separate legal entity but an extension of the main entity. This means a branch, either located in the UAE or out of the UAE, of a business has no legal standing and business are not required to maintain separate books for the branches. The transactions between the main company and branches are not subject to any taxes.
If the branch of a business is located in the UAE, its whole income and expenditure will be merged with the main company, and it will be taxed accordingly. However, if the branch is located out of the UAE, then the UAE companies can either (i) claim a foreign tax credit for taxes paid in the foreign branch country, or (ii) elect to claim an exemption for their foreign branch profits.
In the first option, the numbers of the branch will be merged with the main company, it will be taxed, and the branch will be given credit for the taxes paid out of the UAE. In the second option, branch profits will not be taxable in the UAE but the branch will be required to get an irrevocable exemption that would be only available if the branch profits are being taxed out of the UAE at nine per cent or more. The businesses having branch/branches out of the UAE must take a rational decision regarding the taxability of the branch/branches profits.
Other Exempt Income
Since the UAE is a major logistic centre and an international travel hub, so special exemption has been given in the proposed CT regime, which requires income earned by a non-resident from operating or leasing aircraft or ships (and associated equipment) used in international transportation would be exempt from CT provided the same tax treatment is granted to a UAE business in the relevant foreign jurisdiction under the reciprocity principle. The law will provide us more clarity about such income and international transportation.
The above is the exempt income of a taxable person, while some persons would be thoroughly exempt from the proposed CT regime that we had already discussed in one of our previous articles.