Exempt Entities Under Corporate Tax in UAE : A Comprehensive Guide

The UAE has introduced exemptions from corporate tax under  Corporate Tax Law (CTL) for some persons and corporations in public interest and policy while implementing taxes. There are some categories and conditions for the exempted entities under which exempt entities don’t pay corporate taxes. Ministerial Decision No. 43 of 2023 has been released by the Ministry of Finance, UAE by providing the exclusions list from Corporate Tax for instance, state-owned companies, national companies, the entities affiliated with the state, commercial and industrial natural resource companies, and non-residents who derive their income only from the UAE sources and do not have a permanent establishment in the UAE. Therefore, Taxable Persons should seek the expert services of trusted Tax Consultants in UAE to effectively determine taxability in compliance with the statutory Law. 

General Exemptions of UAE Corporate Tax

• UAE Federal and Emirate Governments 
• Government-Owned Companies 
• Natural Resource Businesses 
• Qualifying Public Benefit Entities 
• Qualifying Investment Funds 
• Public or Private Pension/Social Security Funds 
• Juridical Persons Controlled by UAE Exempt Entities 
• Charities/Public Benefit Organizations 
• Foreign Charities/Public Benefit Organizations

Automatic Exempted Entities:- 

These automatic exempt entities underscore the UAE's commitment to fostering a supportive environment for essential public services, strategic government projects, and social welfare initiatives. By relieving these entities from corporate tax obligations, the UAE ensures that their financial resources are directed towards fulfilling their core missions, whether it be public administration, infrastructure development, or social welfare.The following entities are included in this automatic exemption:

• The Federal and Emirates UAE Governments with Public Institutions:- In this type of exemption governmental institutions, including ministries-related departments/public institutions. The rationale is that these entities are not profit-driven and their functions are essential for the administration and service delivery within the country. Exempting them from corporate tax helps ensure that public resources are not diverted from their primary purposes.
• Government-owned Companies Engaged in Mandated Activities:- Companies that are wholly owned and controlled by the government and carry out specific mandated activities are also exempt. These companies are listed in a Cabinet Decision, which outlines the activities considered essential for public welfare or economic stability. For example, companies involved in infrastructure development, healthcare services, or educational services might fall under this category. The exemption helps these companies focus on their public service mandate without the financial burden of corporate taxation.
• Businesses Involved in Extraction of UAE Natural Resources: Companies involved in the extraction of natural resources of the UAE as well as other related equally value-added non-extractive businesses are subjected to Emirate-level taxation and not the federal corporate tax. This policy recognizes the unique contributions of the natural resources sector to the national economy and ensures that taxation at the emirate level adequately supports local economic development.
• Qualifying Public Benefit Entities:- Such Entities are incorporated to promote social benefit and public welfare or enlisted in Cabinet Decision No. 37/2023 or any related decisions. These entities include charities, non-profits, and other organizations that operate exclusively for social welfare purposes. By exempting these entities from corporate tax, the government encourages philanthropic activities and the provision of essential services to underserved populations.

How does Corporate Tax Apply to a Qualifying Public Benefit Entity?

Approval-Based Exempted Entities:-

Under UAE Corporate Tax, certain other entities can gain exemption upon approval by the Federal Tax Authority (FTA). This approval-based exemption mechanism allows for a more tailored approach to tax relief, ensuring that entities contributing significantly to the economy or society receive the necessary support. The following entities are eligible for such exemptions upon meeting specific conditions and obtaining approval:

• • Qualifying Investment Funds:- Investment funds that meet prescribed conditions can apply for exemption. Such funds normally comprise mutual funds, hedge funds as well as private equity funds where a number of investors pool their finances with an aim of collectively purchasing several securities and other assets. The conditions for exemption often revolve around regulatory compliance, investment structure, and the purpose of the fund. By exempting qualifying investment funds from corporate tax, the UAE aims to attract foreign and domestic investments, enhance capital markets, and support economic growth.
  • Public or Private Pension/Social Security Funds:- Public and private pension funds, as well as social security funds, can also apply for exemption. These funds are established to manage retirement savings and provide financial security to retired individuals or beneficiaries of end-of-service gratuity payments. Ministerial Decision No. 115/2023 outlines the specific conditions that these funds must meet to qualify for exemption. The exemption ensures that contributions and investment earnings within these funds are maximized for the benefit of pensioners and beneficiaries, without being eroded by corporate taxes.

• UAE Juridical Persons Wholly Owned by Exempt Entities:

Commercial companies entirely and exclusively owned and controlled by certain exempt entities that are juridical persons in UAE may apply for exemption if they engage in activities listed in the Corporate Tax Law. This provision typically covers subsidiaries or special purpose vehicles created by exempt entities to carry out specific projects or functions. The exemption ensures that the tax benefits extended to the parent exempt entity are not negated by corporate tax obligations on their subsidiaries, thereby maintaining the financial integrity and operational efficiency of the entire organizational structure.The approval process involves registering for Corporate Tax, submitting an application to the FTA, and demonstrating compliance with the relevant conditions. Once approved, these entities can operate without the financial burden of corporate taxes, allowing them to focus on their core objectives. This targeted exemption policy ensures that entities crucial to the economic and social fabric of the UAE receive the necessary tax relief to thrive and contribute effectively to national development.

• Charities and Public Benefit Organizations:-Charitable and public benefit organizations are the entities that help society and address social ills, and the UAE Corporate Tax Law offers tax relief for such organizations subject to certain criteria. Organizations that can apply are the non-profit, foundations, and trusts, however, they should have their activities restricted for the public benefit and distribute any excess income for the same. To get out of the tax, organizations must apply to the Federal Tax Authority, meet conditions stated in the Cabinet Decision No. 37 of 2023 and meet the requirements stated thereafter. These organizations accept donations and the donors are provided with tax exemptions thus boosting philanthropy and funding of charities. This policy enhances the accomplishment and viability of non-profit organizations, which in turn boosts social stability and development.

Frequently Asked Questions (FAQs)

What are some exempted entities in the United Arab Emirates from Corporate Tax?

Public limited companies/ corporations/Central or state-governed companies, basic materials manufacturers, government-owned companies, and public utilities, or companies that are owned to a substantial extent by federal or state government; public benefit organizations; and private social security/ pension funds.

What is the threshold for income exemption under UAE Corporate Tax?

All persons including persons/firms generating less than AED 375,000 in a year do not pay corporate tax thus protecting small businesses and start-ups.

Can freelance professionals be said to be outside UAE Corporate Tax completely?

It excludes freelancers with an overall generated net income of less than threshold in a year to enhance the setting up of business entities in the UAE.

What are the requirements a public benefit organization has to fulfill for them to be exempted from paying taxes?

They should act for the public interest, should not distribute profit and may require the registration or acquire the public benefit certificate.

Are there any other taxes that exempt entities are liable to meet?

Although the exempt entities do not pay the turnover tax they may take other taxes such as value added tax and withholding tax; and are bound to adhere to the regulatory tax laws in order to escape the legal implication.

Conclusion:

UAE’s Corporate Tax Law puts in place a reasonable taxation regime for the purpose of economic growth, company formation, and investment appeal improvement. Knowledge and application of legal exceptions enable the formulation of mature decisions that enable business entities and the country as a whole to grow economically.