Exempt person under UAE Corporate Tax Law

Introduction – Chapter 3 Exempt Persons under UAE Corporate Tax Law

A person who is exempt under the UAE Corporate Tax Law is not liable to pay Corporate Tax. This can be because of automatic exemption or by exemption through an application by the Taxable Person. Further, the provision details who can automatically be considered as Exempt Persons. Also, who can apply for securing an exemption under the UAE Corporate Tax Law.

• Automatic Exemption from UAE Corporate Tax Law

Certain Persons under the UAE Corporate Tax Law maybe automatically exempt from Corporate Tax. Also, this means that the law specifically provides that certain categories of persons are exempt. For example, a Government Entity and Government Controlled Entity are Exempt Persons by automatic application of law.

• Exemption claimed through application

A Taxable Person can apply, under the relevant provisions, to claim exempt status under the UAE Corporate Tax Law. Such entities can apply for exemption from Corporate Tax. On examination of the application, the Federal Tax Authority can exempt them from Corporate Tax, after fulfilment of certain conditions.

Article 4: Who are Exempt Persons under UAE’s Corporate Tax Law?

Entity	Type of Exemption
A Government Entity	Automatic Exemption
A Qualifying Public Benefit Entity	Automatic Exemption
A person engaged in the Extractive Business	Automatic Exemption
A Government Controlled Entity	Automatic Exemption
A person engaged in the Non-Extractive Natural Resources Business	Automatic Exemption
A Qualifying Investment Fund	Exemption on application
A public pension fund, or a social security fund, or a private pension fund or a social security fund	Exemption on application
A juridical person entirely owned and controlled by certain Exempt Persons	Exemption on application
The Cabinet can determine any such other person

Juridical Person owned or controlled by certain Exempt Persons:

A juridical person which is wholly owned or controlled by the following Exempt Persons:

• A Government Entity, or
• A Government Controlled Entity, or
• A Qualifying Public Benefit Entity, or
• A Qualifying Investment Fund

And does any of the following:

1. Conducts in part or entirely the Exempt Person’s activity; or,
2. Is holding assets or investing funds exclusively for the Exempt Person; or,
3. The activities undertaken are ancillary to that of Exempt Person

The provisions of this Article shall also consider a person as an Exempt Person.

The Cabinet may also designate any other persons they consider appropriate to be treated as Exempt Persons under the UAE Corporate Tax Law.

Cases where Exempt Persons are considered as Taxable Persons

In any of the below mentioned persons, i.e.,

1. A Government Entity
2. A Government Controlled Entity
3. A Person engaged in Extractive Business
4. A Person engaged in Non-Extractive Business

Generally, the following persons are Exempt Persons but they are considered as Taxable Person if they undertake certain activities.

For example:

If a Government Controlled Entity undertakes business which is not a  ‘Mandated Activity’ or a Government Entity undertakes business under a ‘License’, they will be considered as Taxable Person for the purposes of the UAE CT law and will become liable to pay Corporate Tax on the revenue earned from such activities

However, the above mentioned Persons shall retain their “Exempt” status, even if they become Taxable Persons, for the following purposes:

• Article 26 – Relief when the two or more Taxable Persons belong to the same Qualifying Group,
• Article 27 – Relief when there is Business Restructuring,
• Article 38 – Transfer of Tax Losses
• Article 40 – Tax Group Provisions

Applicability of exemption for Exempt Persons under the UAE Corporate Tax Law

Effective Date: Once the application of the Taxable Person is approved, , such exemption shall become applicable from the beginning of the Tax Period mentioned in the application, or any other date as maybe prescribed by the Federal Tax Authority.

Date of cessation as an Exempt Person: If the Exempt Person fails to comply with the conditions specified in the provisions, it shall cease to be an Exempt Person from the beginning of such Tax Period.

Conditions by the Minister for Continuation or Cessation of Exempt Person from a different date:

In certain cases, conditions can be set up by the MOF that will determine the Exempt status. These can be whether the person ceases to be an Exempt Person. Or continues to remain an Exempt Person under the UAE CT law. The Minister can prescribe conditions under the following circumstances:

1. Due to liquidation or termination of the Exempt Person, he is not able to fulfil the conditions; or,
2. The failure of the person to meet the specified conditions is only temporary which will be duly rectified and the procedures are there for compliance; or,
3. Other such circumstances as may be prescribed

Do you qualify as an Exempt Person under the UAE CT law?

Article 5 & 6 – Government and Government Controlled Entities under the UAE Corporate Tax Law

Applicability of Provisions of Article 5 of UAE CT Law to Government Entities

The following persons shall be covered under the category of ‘Government Entity’ under the UAE Corporate Tax Law, and will accordingly be exempt from UAE Corporate Tax: –

• The Federal Government
• The Emirate Governments
• Ministries
• Departments, agencies, authorities and other public institutions of The Federal Government
• Departments, agencies, authorities and other public institutions of The Emirate Government

The exemption available to them is automatic, and there is no further action required to be undertaken by them to claim exemption.

Article 5: Government Entity working under license

1. Undertaking work under a License: If a Government Entity undertakes work under a license issued by a Licensing Authority, then it shall be considered as an independent business.
2. Government Entity liable for Corporate Tax: Where the Government Entity undertakes work under a license, it will be liable to pay Corporate Tax under the provisions of the UAE Corporate Tax Law.
3. To maintain Separate Financial Statements: The Government Entity has to maintain the Financial Statements for the independent activity, separately from its other Business Activities.
4. To calculate Taxable Income Separately: Furthermore, for each Tax Period, the Government Entity has to calculate the Taxable Income separately for the independent business.
5. Transaction between Government Entity and Independent Business to be considered as Related Party Transaction: If a Government Entity, operating under a license as an independent business, engages in a transaction with another business of the same Government Entity, it will be classified as a Related Party transaction according to Article 34 of the UAE’s Corporate Tax Law.
6. Application to consider as Single Taxable Person: Lastly, an application can be made by the Government Entity to consider all its business activities as a single Taxable Person. But this is subject to certain conditions that need to be fulfilled that may be imposed by the Minister.

Applicability of provisions of Article 6 of UAE CT law to Government Controlled Entities

The following persons shall be considered as a ‘Government Controlled Entity’ under the UAE Corporate Tax Law, and will accordingly be exempt from UAE Corporate Tax: –

• Juridical Person directly wholly owned and controlled by a Government Entity
• Juridical Person indirectly wholly owned and controlled by a Government Entity

The exemption available to them is automatic, and there is no further action required to be undertaken to claim exemption.

Article 6: Government Controlled Entity not conducting Mandated Activities  

1. What is a Mandated Activity? Mandated Activity as defined in Article 1 of the UAE Corporate Tax Law is an activity undertaken as per the legal instrument regulating or establishing the Government Controlled Entity. This activity is specified through the Cabinet’s decision after taking suggestions from the Minister for the same.
2. Undertaking work that is not a Mandated Activity: If a Government Controlled Entity carries out work which is not a Mandated Activity, then it shall be considered as an independent business.
3. Government Controlled Entity liable for Corporate Tax: If the Government Controlled Entity undertakes work that is not a Mandated Activity, then in such a situation, it will be liable to Corporate Tax under the provisions of UAE’s Corporate Tax Law.
4. To maintain Separate Financial Statements: The Government Controlled Entity will maintain the Financial Statements separately for the business that is not Mandated business.
5. To calculate Separate Taxable Income: Further, for each Tax Period, it will calculate the Taxable Income separately for that business that is not undertaking Mandated Activity.
6. Transaction between Government Entity and Independent Business to be considered as Related Party Transaction: If a transaction takes place between the business related to Mandated and Non-Mandated Activity, then it will be considered as a Related Party transaction as per Article 34 of the UAE’s Corporate Tax Law.

Corporate Tax on Natural Resources in UAE

Natural resources include resources like oil, natural gas, water, coal, naturally formed minerals and non-renewable, non-living natural resources that can be extracted from the Emirates’ territory. . Under the UAE Constitution, the right to extract such natural resources is with the Emirate, where the resource is found. The UAE Corporate Tax provides for two types of natural resources business:

1. Extractive Natural Resources Business
2. Non-Extractive Natural Resources Business

Article 7: Extractive Natural Resources Business under UAE Corporate Tax Law

What is Extractive Natural Resources Business?

Extractive Natural Resources Business as defined in Article 1 of the UAE Corporate Tax Law means:

1. Exploring Natural Resources, or
2. Extracting Natural Resources, or
3. Removing Natural Resources, or
4. Producing and exploiting the Natural Resources

Conditions to be Fulfilled to get exemption from Corporate Tax under the UAE Corporate Tax Law, Corporate Tax will not be applicable on Extractive Natural Resources Business if it fulfills all the below mentioned conditions:

• Holds a right, concession or License: The person holds a right, concession or license given by the Local Government for conducting Extractive Natural Resources Business,
• Has an interest in the right, concession or License: The person has an interest in a right, concession or license given by the Local Government for conducting Extractive Natural Resources Business,
• Subject to tax under the Emirates’ Law: He is subject to tax as per the applicable law in the Emirates
• Notification to Ministry: He has given a notification to the Ministry as per the manner agreed with the Local Government

Income of Suppliers, Contractors, etc.: However, income of the suppliers, contractors or other people engaged in the business activities of an entity engaged in Extractive Natural Resources Business will not be exempt from Corporate Tax if it doesn’t meet the conditions in its own right. They will be liable to corporate taxation as per the provisions of the UAE Corporate Tax Law.

Income from Both Extractive Business and Other Business

If a person extracts income from both Extractive Business and other business, then:

• Extractive Business: The Taxable Income from Extractive Business will be calculated and taxed as per the applicable law of Emirates.
• Other Business: The income from other business shall be calculated and taxed as per the provisions of UAE Corporate Tax Law.
• Other Business is Non-Extractive Natural Resources Business: But if the other business is of Non-Extractive Natural Resources Business and fulfils the conditions under Article 8 of the UAE CT Law, then income from such Business will be treated as exempted.

Note: If ‘other business’ is ancillary business of Extractive Business

If the other business is ancillary in nature to the Extractive Business and its revenue does not exceed 5% of the total revenue earned from both the businesses (I.e., the Extractive Business and the ancillary Business) in the same Tax Period; then, any income derived from the ancillary business hall be regarded as have been earned from  Extractive Business only.

Transaction between Extractive and other Business: If there is a transaction between the Extractive Business and the other business, then it will be considered as a Related Party Transaction.

Calculating Taxable Income of the Other Business:

While calculating the Taxable Income of the other business the following shall be incorporated:

1. Separate Financial Statement: The other business is to be considered as an independent business with separate Financial Statements from those prepared for Extractive Business.
2. Common Expenditure: If there is any common expenditure between the Extractive Business and other business, it will be apportioned on the basis of their revenue.
3. Separate calculation of Taxable Income: The Taxable Income is to be calculated separately for other business for every Tax Period.

What are the tax implications if I have an Extractive Business in the UAE under the UAE CT law?

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Article 8: Non-Extractive Natural Resource Business under UAE Corporate Tax Law

What is Non-Extractive Natural Resources Business?

Non-Extractive Natural Resources Business as defined in Article 1 of the UAE Corporate Tax Law means the business activity of the State related to:

1. Separating , or
2. Treating , or
3. Refining , or
4. Processing , or
5. Storing , or
6. Transporting, or
7. Marketing , or
8. Distributing

the Natural Resources. It could either be a single activity or a combination activities in which a Person is engaged.

Conditions to be Fulfilled by the Non-Extractive Business to get exemption from Corporate Tax

IA person engaged in a Non-Extractive Natural Resource Business shall be exempt from Corporate Tax only if it fulfills all the conditions mentioned below.:

• Holds a right, concession or License: The person holds a right, concession or license given by the Local Government for conducting Non-Extractive Natural Resources Business.
• Interest in a right, concession or license: The person has an interest in a right, concession or license given by the Local Government for conducting Non-Extractive Natural Resources Business.
• Income from Non-Extractive Business solely earned by Person(s) engaged in such Business Activity: The income of the Person for the Non-Extractive Business is obtained solely from the Persons who undertake the business activity in the Non-Extracting Business.
• Subject to tax under Emirates’ Law: the Person is subject to the tax as per the applicable law in the Emirates.
• Notification to Ministry: The Person has given a notification to the Ministry as per the manner agreed with the Local Government.

Transaction between Non-Extractive Natural Resource Business and other business: If there is a transaction between Non-Extractive Natural Resource Business and other business, it will be considered as Related Party Transaction.

Income of Suppliers, Contractors, etc.: However, income of the suppliers, contractors or other people part of such a company for Non-Extractive Natural Resource Business will not be exempted from Corporate Tax, if it doesn’t meet the conditions on its own right. They will be liable to corporate taxation under UAE’s Corporate Tax Law.

Income from Both Non-Extractive Natural Resource Business and Other Business

If a person extracts income from both Non-Extractive Natural Resource business and other business, then:

• Non-Extractive Natural Resource Business: The Taxable Income from Non-Extractive Business will be calculated and taxed as per the applicable law of Emirates.
• Other Business: The income from other business shall be calculated and taxed as per the provisions of UAE Corporate Tax Law.
• In case Other Business is Extractive Business: But if the other business is of Extractive Natural Resources Business and fulfils the conditions mentioned under Article 7, then it will be treated as exempted

Note: If other business is ancillary business of Non-Extractive Business

But if the other business is ancillary in nature to the Non-Extractive Business and its revenue does not exceed 5% of the total revenue earned from both the businesses (I.e., the Non-Extractive Natural Resource Business and the ancillary Business) in in the same Tax Period; then,  any income derived from the ancillary business hall be regarded as have been earned from Non-Extractive Natural Resource Business only.

Calculating Taxable Income of the Other Business:

The Taxable Income for the other business will be calculated as follows:

1. Separate Financial Statement:

   It is considered that the other business as an independent entity, with separate Financial Statements prepared from those of the Non-Extractive Natural Resource Business.

2. Common Expenditure:

   If the Non-Extractive Natural Resource Business and the other business share common expenditures. Then, we will apportion them based on their respective revenues.

3. Separation calculation of Taxable Income:

   You must calculate the Taxable Income separately for the other business for each Tax Period

What are the tax implications if I have an Non-Extractive Natural Resource Business in the UAE under the UAE CT law?

Article 9 – Exemption from UAE Corporate Tax to Qualifying Public Benefit Organisations

Introduction

Generally, charities and Public Benefit Organisations play a vital role in social causes in every country. The reason: the Government of every country undertakes several activities to benefit the people. Public Benefit Organisations that work towards the welfare of the people also partly resolve these issues. Therefore, there is an exemption from Corporate Tax for Qualifying Public Benefit Organisations. The UAE Government also recognises the importance of such organisations. It proposes to provide them with exemption from the liability to pay Corporate Tax.

Article 9: Conditions to be satisfied for Exemption from UAE Corporate Tax to Qualifying Public Benefit Entity

What is a Qualifying Benefit Entity?

As per Article 1 of the UAE Corporate Tax Law, a Qualifying Public Benefit Entity is an institution that:

1. Is listed as such by the Cabinet’s decision on the suggestion of the Minister and
2. Fulfils the conditions as mentioned under Article 9

Conditions to be satisfied to get Exemption:

These conditions must be satisfied for a Qualifying Public Benefit Entity to receive an exemption.

1. Purpose of Entity: It is incorporated and operated for:
   • The exclusive purpose of charitable, cultural, health, artistic, educational, environmental, healthcare, etc. or any such purposes; or
   • It works as a professional entity, chamber of commerce or other such entity for the public benefit and social welfare
2. Activities of Entity: Also, to conduct the business activity that directly fulfils or aims at fulfilling the purpose for which it was established
3. Utilization of Assets and Income: Additionally, its assets and income are utilised for fulfilling that purpose and for payment of reasonable expenditure
4. Assets and Income not for Personal Benefit: It does not utilize its assets or income to pay for or provide personal benefits. To shareholders, trustees, members, settlors, or founders who are not Qualifying Public Benefit Entities or Government Controlled Entities or government entities
5. Any other condition as prescribed by the Cabinet

Effective date of Exemption for Qualifying Public Benefit Entity?

Once the Cabinet lists the Qualifying Public Benefit Entity, it will be exempt from CT starting from that Tax Period. It can also be any other date as decided by the Cabinet.

Authority can seek additional information from Qualifying Public Benefit Entity:

Additionally, the Authority can request for supplementary material to ensure that the Public Benefit Organisation complies with the conditions.

Also, given the important role played by the Qualifying Public Benefit Organisations. The exemption from Corporate Tax to Public Benefit Organisations would go a long way in achieving the social objectives.

Article 10 – Taxation of Qualifying Investment Fund under the UAE Corporate Tax Law

Introduction

Investment, external or internal, is an integral part of the growth of the economy of every country. Further, the greater the magnitude of investment in a country. Then, the higher is the pace of economic activities and growth in a country.  Moreover, to make UAE as a leading destination for various investment funds and investment managers. Further, the taxation of Investment Funds under the UAE Corporate Tax Law, includes certain tax benefit and a concessional tax regime.

What is a Qualifying Investment Fund?

A Qualifying Investment Fund means an entity that undertakes the work of issuing investment interests for:

1. Raising funds, or
2. Pooling Investment Fund, or
3. Establishing a Joint Investment Fund

Further, the purpose is to allow the investment interest holder to get a benefit of the profits. This can be from the entity’s holding, management, acquisition, or disposal of investments.

Article 10: Conditions to be fulfilled by a Qualifying Investment Fund to get  exemption under the UAE CT Law.

Additionally, an application can be made for exemption if it fulfils these conditions:

1. The State’s Competent Authority or a foreign Competent Authority subject the Investment Fund or its manager to regulatory oversight
2. To do either of the following:
   1. Trade the interest in the Investment Fund on the Recognised Stock Exchange or
   2. To market it and make sufficiently available to the investors
3. The major motive is not Corporate Tax avoidance
4. Any other condition prescribed by the Cabinet

Authority can seek additional information from Qualifying Public Benefit Entity: Also, the Authority may request for additional information and records from the Qualifying Public Benefit Entity. Further, this is to ensure that it is complying to enjoy the Exempt status obtained by it.

What are the tax implications if I have Qualifying Investment Fund in the UAE under the UAE CT law?