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The UAE Ministry of Finance has announced three new decisions related to corporate taxation. The ministerial decision spells out the conditions for exempting privately regulated pension and social security funds; the basis for preparing financial statements and the mechanism for consolidating them into one tax group; and determining the conditions for requiring participation in the exemption.
Younis Haji Al Khouri, Deputy Minister of the Ministry, said the decisions are aimed at increasing the flexibility of the UAE corporate tax regime and ensuring a conducive business environment for all industries.
“These decisions cover several important aspects related to privately regulated pension and social security funds, which are generally exempt from corporate tax in other countries. Designating IFRS as the applicable accounting standard and further simplifying the accounting process for SMEs, Reflecting Treasury’s commitment to minimizing the compliance burden for businesses…in addition, the Participation Exemption will prevent double corporate taxation of an entity’s profits and eliminate international double taxation.”
pension and social security funds
This further conditions the exemption of corporate tax for privately regulated pension and social security funds in the UAE. The decision ensures consistency with international taxation practices so that the exempt status of UAE private pension or social security funds is also recognized when investing internationally and can benefit from avoiding double taxation. In addition, the decision details the maximum contribution amount for each beneficiary and the annual confirmation of compliance by the statutory auditors.
Accounting Standards and Methods
This provides clear guidelines for businesses to prepare financial statements that will be used as a starting point for calculating taxable income for corporation tax. The decision confirms that International Financial Reporting Standards (IFRS) is the applicable accounting standard in the UAE and must be used by large businesses with revenues exceeding AED50 million.
SMEs with revenues below this amount may choose to apply IFRS. To further ease the compliance burden, the decision confirms that businesses with revenues below AED 3 million can use cash basis accounting.
participation exemption
This provides corporate tax exemption for dividends, profit distributions and capital gains on participating interests, defined as an ownership interest of 5% or more in the shares or capital of another entity held for at least 12 months. The exemption applies if the subsidiary is located in a jurisdiction where the corporate tax rate is at least 9%, or it can be demonstrated that the effective tax rate on profits, income or equity is at least 9%.
The decision also clarified that the relief will apply to various ownership interest types, including preference shares, ordinary shares and redeemable shares, as well as member and partner interests where the total acquisition cost of the ownership interest equals or exceeds AED4 million. This ensures that UAE companies making certain investments in foreign entities subject to the required conditions will not incur any corporate tax on such investments.
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