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Tax Free Income
An entity can enjoy tax free income if the following conditions are met:
- It is a qualified free zone person
- It conducts qualifying services
- It is specifically excluded from taxation by the FTA
- It meets specific definitions of tax free income (sources of income are tax free)
Lets dive in these categories:
A. Qualifying Free Zone Person
If an entity is classified a “Qualifying Free Zone Person” then this person will be exempted from Corporation Tax.
What is a Qualifying Free Zone Person?
To be treated as a “Qualifying Free Zone Person”, the Free Zone entity must:
- Maintain adequate substance in the UAE;
- Derive “Qualifying Income” as specified in a Cabinet Decision;
- Comply with transfer pricing rules and maintain the relevant transfer pricing documentation; and
- Not have made an election to be subject to CT in full.
B. Qualifying Activities Performed
a. Manufacturing of goods or materials.
b. Processing of goods or materials.
c. Trading of Qualifying Commodities.
d. Holding of shares and other securities for investment purposes.
e. Ownership, management and operation of Ships.
f. Reinsurance services.
g. Fund management services.
h. Wealth and investment management services.
i. Headquarter services to Related Parties.
j. Treasury and financing services to Related Parties.
k. Financing and leasing of Aircrafts.
l. Distribution of goods or materials in or from a Designated Zone.
m. Logistics services.
n. Any activities that are ancillary to the Qualifying Activities specified in paragraphs (a) to (m) of this Clause.
C. Persons Exempted from Corporation Tax
The following persons are exempt from corporation tax:
- The UAE Federal and Emirate Governments and their departments, authorities and other public institutions;
- Wholly Government-owned companies that carry out a mandated activity, and that are listed in a Cabinet Decision;
- Businesses engaged in the extraction of UAE natural resources and related non-extractive activities that are subject to Emirate-level taxation after meeting certain conditions;
- Public Benefit Entities that are listed in a Cabinet Decision;
- Investment Funds that meet the prescribed conditions;
- Public or private pension or social security funds that meet certain conditions; and
- UAE juridical persons that are wholly-owned and controlled by certain exempted entities after meeting certain conditions.
How are the above exempted:
Automatically or by way of application.
D. Sources of Tax Free Income
- Charities and other public benefit organisations will be exempt from UAE CT, subject to meeting certain conditions and being listed in a Cabinet Decision.
- Dividends and capital gains earned from domestic and foreign shareholdings would generally be exempt from CT, subject to certain conditions.
- Capital gains on the sale of shares may be exempt from corporate income tax, subject to meeting certain conditions.
- Income earned by an individual from the investment in UAE property in their personal capacity will generally not be subject to UAE CT.
- Profits below the AED 375,000 per annum
- Small businesses with revenue below a certain threshold can claim ‘small business relief’ and be treated as having no taxable income during the relevant Tax Period and may be subject to simplified compliance obligations. To claim small business relief, an election must be made to the FTA.
- Any UAE resident juridical person or individual with revenues below the threshold defined by the Minister and that meets any other conditions that may be set, can claim small business relief.
Other Tax-Free Income Streams
The following income is exempt from UAE CT:
- Dividends and other profit distributions received from UAE incorporated or resident legal persons;
- Dividends and other profit distributions received from a Participating Interest in a foreign juridical person (see further information below);
- Certain other income (e.g., capital gains, foreign exchange gains / losses and impairment gains or losses) from a Participating Interest (see further information below);
- Income from a foreign branch or permanent establishment where an election is made to claim the “Foreign Permanent Establishment” exemption; and
- Income earned by non-residents from the operation or leasing of aircrafts or ships in international transportation where certain conditions are met (see further information below).
Being a qualifying free zone person -0% Free Zone CT once declared in the tax return.
Exempted persons - usually governmental organisations and extracting companies.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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