The laws pertaining to social security and pensions, including private pensions and social security plans, have undergone significant modifications in the UAE. Public and private employers are required to register Emirati workers with the General Pension and Social Security Authority (GPSSA) during the first month of their employment. pension benefits; gratuities at the end of employment; and damages for accidents or fatalities at work. 60 years of insured service, 20 years of service, or 50 years of service are the ages at which Emirati nationals are entitled to pensions.

Treatment of Public and Private pension funds under UAE Corporate Tax

Public and Private pension funds are components of the financial governance of the UAE with a significant role in society’s welfare and economic stability. These funds are established and overseen by government entities working for retirees to ensure a stable and secure financial future. The tax obligations can be complex while determining the tax liability of these funds from the exemption point of view for beneficiaries and fund managers. 

Treatment of Social Security in the UAE

Social Security is a government programme that provides financial assistance to eligible individuals in the event of their retirement, disability, or the passing of a loved one. With the majority of employees qualifying based on their work history and contributions, it offers Medicare health insurance, retirement, disability, and survivor benefits. UAE nationals employed in the public and private sectors are required to make pension plan contributions under Federal Law No. 7 of 1999. By addressing gaps in services and laws, the New Federal Decree Law No. 57 of 2023 aims to enhance pension and social security services for Emirati workers who join the workforce on or after October 31, 2023.

What Are Qualifying Public Benefit Entities Under Corporate Tax UAE?

Qualifying public benefit entities attain exemption entity status to be recognized and qualified for tax exemption after satisfying certain conditions as per Article 4(1e)of the Corporate Tax Law, UAE.  These are non-governmental organizations. (NGOs), charitable organizations and certain non-profit organizations founded for the public good but not under government authority. These entities must fulfill certain requirements to be eligible for tax exemption under Clause 1e; these requirements may change based on the nature and goals of the entity. They must, in general, carry out operations that serve the public and abstain from giving profits to private parties. They could also have to complete a registration procedure or receive a certificate of public benefit status. 

What Are The Fundamental Purposes Of Public/Private Pensions And Social Security Funds?

Social security and public pension funds are qualified to seek corporate tax exemption, due to their social significance. When the Federal Tax Authority (FTA) grants this exemption, it becomes effective on the first day of the tax period indicated in the application or on a different date that the FTA specifies.

• Private social security funds: Due to their essential nature for providing post-retirement services such as end-of-service rewards, these funds are exempted from UAE corporate tax laws. The fund’s assets must be specifically assigned by law or contract for it to be eligible for tax exemption. By granting exemption to private social security funds, the new law intends to guarantee retirement earnings and protection for workers by incentivizing and encouraging them to have full access to social security coverage.
• Public Social Security and Pension funds: Public pension and social security funds are commonly governed, established, and sponsored, by Government entities(federal or state) yet their control does not rest entirely with the sponsored government body. The difference between wholly owned government assets and these funds is that the beneficiaries of these funds hold the entitlement to the advantages and any surplus assets. 

Analysis of social security and private pension funds: 

• Objective And Role:-Private pension funds are established to manage pension 

contributions and ensure payments to retirees who have reached a defined age of retirement. Similarly, private social security funds are set up by employers to manage statutory end-of-service gratuity payments for their employees.

• Path To Exemption:

These private entities may also attain exempt person status, subject to meeting certain conditions and receiving approval from the FTA. 

• Their assets must be legally or contractually designated as "pension plan assets" or "fund assets," and they must be under the regulatory supervision of an appropriate UAE authority to meet the qualifying requirements. 
•  These assets are strictly allocated for financing pension or end-of-service benefits.
• Plan members or beneficiaries should have a legal or contractual right to the fund’s assets or earnings. This requirement, however, does not apply to social security funds. 
• An approved Auditor must annually verify the fund’s compliance with the exemption requirements and report any breaches to the FTA.

• Permissible Income Sources

The income of these funds is restricted to specific sources, such as:

• Investments or deposits aimed at fulfilling fund obligations, provided these do not constitute a business operation.
• Underwriting commissions intended for fund purposes.
• Rebates from fund managers are not deemed as service compensation.
• Other income generated through investments benefiting plan members or end-of-service beneficiaries, aligned with a defined investment policy.

The FTA reserves the right to revoke the tax exemption under circumstances where the fund no longer meets the exemption criteria, compliance is not confirmed annually by the Auditor, or breaches are not reported to the FTA.

What Is The Status Of The Exempt Person’s Subsidiaries? 

• Qualifications:- A subsidiary of a governmental or private pension or a social security fund meets certain criteria, it may be eligible for corporate Tax exemption in the UAE. Let’s break down these conditions:

• Incorporation in the UAE: The subsidiary must be a juridical person incorporated within the UAE.
• Completely managed and owned: The Exempt person should be the exclusive owner and manager of the subsidiary.

• Permissible Activities: 

The subsidiary can engage in any of the following activities:

• engaging in all or a portion of the exempt person's activities.
• keeping ownership of assets or solely investing for the benefit of the exempt person.
• Doing supplementary tasks that are connected to the exempt person's work.
• Limitations on Foreign Jurisdiction Despite being efficiently managed and controlled within the United Arab Emirates, a subsidiary incorporated in a foreign jurisdiction is ineligible to apply for exempt person status under Article 4(1)(h).

• Wholly controlled subsidiaries:- 

A subsidiary is considered wholly controlled by an exempt person if the entity has direct influence over the subsidiary, whether through its rights, agreements, or other means.

• Pension & Social Security Funds Contributions:-

• For EmployeesTax deductible: Taxable persons can benefit from tax deductions when contributing to a pension or social security fund. Here are the key points:
• General Principles: As per Chapter 9 of Corporate Tax UAE, employer contributions are deductible tax.
• Exempt Person Requirement: Unlike the subsidiary case, there is no requirement for the fund to be an exempt person to qualify for deductions under the general pension plan during the applicable tax period.
• Restrictions: Each pension plan Member’s allowable contributions cannot exceed 15% of their total deductible compensation.

Frequently Asked Questions (FAQ)

What are private pension funds?

Investment vehicles known as private pension funds are made to give people retirement income. They operate apart from official government activities. Employer and employee contributions are combined in these accounts to provide long-term revenue.

What Distinguishes Private Pension Funds From Social Security?

• Coverage:- Employers fund and voluntarily participate in private pension programmes; the government oversees and legitimizes Social Security.
• Payroll taxes support Social Security, while employer and employee contributions support private pension plans.
• Asset control: Private pension funds are directly managed by the individual, in contrast to social security benefits, which are calculated using a formula.

The benefits listed below are offered by individual retirement plans.

Depending on their risk tolerance and retirement goals, participants can choose their assets.

• Portability:-  An employee's private pension savings can be transferred if they change jobs.
• Additional Income:- The money in these accounts is added to social security benefits.

Can people engage in both private pension plans and social security programmes? 

A large number of people pay into private pension plans and social security both. Private pension plans improve retirement savings, while social security serves as a safety net.

companies doing business in the United Arab Emirates must comprehend these exemptions and deductions. By adhering to the specified conditions, companies can optimize their tax positions while supporting their employees’ financial security. For customized retirement planning, think about speaking with UAE tax consultants. They may offer you advice on how to maximize your contributions to private pension plans, comprehend social security payments, and handle tax ramifications.