The Federal Decree-Law No. 47 of 2022 introduced a corporate tax regime in the UAE effective June 1, 2023. Under this new tax law, certain entities are exempt from corporate tax UAE due to strong public policy justifications. These exempt entities are known as "Exempt Persons". This article will discuss the key categories of Exempt Persons and conditions for qualifying as an Exempt Person as a Public Benefit Entity, pension fund, social security fund, or subsidiary of such funds. It will also cover compliance requirements and tax consequences of exempt status.
What is an Exempt Person?
An Exempt Person is an entity that is exempt from Corporate Tax UAE under the provisions of the Corporate Tax Law. These entities are considered "Exempt Persons" due to their strong public interest and policy justifications for not being subjected to tax. The Exempt Persons include:
- Qualifying Public Benefit Entities that are listed in a Cabinet Decision and meet relevant conditions.
- Public and private pension or social security funds, which may become Exempt Persons upon application and subject to approval by the FTA.
If a pension or social security fund is an Exempt Person, its wholly owned subsidiary may also apply to the FTA to be categorized as an Exempt Person, provided it meets certain conditions.
1. Qualifying Public Benefit Entities
Qualifying Public Benefit Entities are organizations established to carry out charitable, social, cultural, religious, or other public benefit activities without the motive of making a profit. To qualify as a Qualifying Public Benefit Entity, an entity must meet certain conditions, including being established and operated exclusively for permitted purposes, not conducting a business or business activity (except for activities related to its purpose), using its income and assets exclusively for its purpose or necessary expenses, and ensuring that no part of its income or assets is payable to or available for the personal benefit of any individual.
Qualifying Public Benefit Entities that meet these conditions and are listed in a decision issued by the UAE Cabinet at the suggestion of the Minister are exempt from Corporate Tax UAE. The FTA may request information or records to verify that Qualifying Public Benefit Entities continue to meet the exemption requirements. Payments made to these entities listed in a Cabinet Decision are tax-deductible for businesses. Moreover, these entities play a crucial role in society by promoting social welfare and public interests, and their exemption supports their valuable contributions.
Table 1: Conditions for Qualifying Public Benefit Entities to be Exempt from Corporate Tax in the UAE
|Establishment and Operation Purpose
|Exclusively for religious, charitable, scientific, artistic, cultural, athletic, educational, healthcare, environmental, humanitarian, animal protection, or other similar purposes. OR - Operated exclusively for the promotion of social welfare or public benefit as a professional entity, chamber of commerce, or similar entity.
|Business or Business Activity
|The entity does not conduct a Business or Business Activity, except for activities directly related to or aimed at fulfilling its established purpose.
|Income and Assets
|An entity's income or assets are used exclusively for the furtherance of its established purpose or for necessary and reasonable expenditure incurred.
|No Personal Benefit Conditions
|No part of the entity’s income or assets is payable to or available for the personal benefit of any individual unless they are a Qualifying Public Benefit Entity, Government Entity, or Government Controlled Entity.
|Listed in a Cabinet Decision
|The entity must be listed in a decision issued by the Cabinet at the suggestion of the Minister to qualify as a Qualifying Public Benefit Entity.
|The FTA may request information or records to verify ongoing compliance with exemption requirements, including books, records, agreements, and details of beneficiaries, employees, officers, and fiduciaries.
|Effective Date of Exemption
|Generally effective from the beginning of the Tax Period in which the entity is included in the relevant Cabinet Decision. The Cabinet may allow an earlier start date under certain circumstances.
2. Public and Private Pension Funds and Social Security Funds
Public and private pension funds and social security funds play a crucial role in providing financial security and retirement benefits to individuals in the UAE. Recognizing their importance, the UAE government has implemented a corporate tax regime that exempts these entities from Corporate Tax UAE, subject to certain conditions.
Public Pension Funds and Social Security Funds
Public pension funds and social security funds are typically initiated, sponsored, and governed by a Federal or Local Government Entity. However, the entitlement to receive benefits from these funds and any surplus assets of the fund normally rests with the beneficiaries. Therefore, they are not typically considered to be wholly owned and controlled by the Government Entity which oversees them.
To encourage the establishment and operation of these funds, the UAE government allows them to apply for exemption from Corporate Tax UAE. Once approved by the Federal Tax Authority (FTA), the exemption is effective from the beginning of the Tax Period specified in the application or any other date determined by the FTA.
Private Pension Funds and Social Security Funds
- Private pension funds manage pension contributions and provide payments to retired individuals above a defined retirement age.
- Private social security funds provide statutory end-of-service gratuity payments to employees.
To qualify for exemption, private pension funds and social security funds must meet specific conditions, including:
- Being subject to regulatory oversight.
- Having a pool of assets designated as "pension plan assets" or "fund assets."
- Using these assets solely to finance pension plan benefits or end-of-service benefits.
- Ensuring that plan members/beneficiaries have a right or contractual claim to the assets or earnings of the pension fund (except for social security funds).
- Having an Auditor to confirm compliance and report any breaches to the FTA.
- Ensuring that income is received only from specific sources, such as investments, underwriting commissions, rebates, or other income for the benefit of plan members.
- The FTA can withdraw the exemption if the fund no longer meets these conditions.
Subsidiary of an Exempt Fund
A subsidiary of a public or private pension fund or social security fund that is an Exempt Person can also apply for exemption from Corporate Tax UAE, provided it meets certain conditions:
- It must be a juridical person incorporated in the UAE.
- It must be wholly owned and controlled by the Exempt Person.
- It must conduct activities related to the Exempt Person, hold assets or invest funds for the Exempt Person, or carry out ancillary activities.
Contributions to Pension or Social Security Funds
Contributions made by an employer to a pension or social security fund are tax-deductible under general principles, even if the fund is not an Exempt Person. The maximum deduction for each Pension Plan Member is 15% of their deductible remuneration.
Failure to Meet the Conditions of an Exempt Person
If an exempt person fails to meet the relevant conditions at any time during a tax period, it shall cease to be considered an exempt person from the beginning of that tax period. However, there are exceptions to this rule.
- Liquidation or Termination: An exempt person who is liquidated or terminated may continue to be deemed as an exempt person from the date its liquidation or termination procedure starts until the date it is completed, provided that a notification has been submitted to the FTA within 20 business days from the date of the beginning of the procedures.
- Temporary Failure: An exempt person may continue to be deemed as an exempt person if the failure to meet the conditions is due to a situation or event beyond its control, it has applied to the FTA to continue to be treated as an exempt person within 20 business days from the date it fails to meet the conditions, it rectifies the failure within 20 business days from the submission of the application (which can be extended by an additional 20 business days in certain cases), and it provides evidence to the FTA that there are appropriate procedures to monitor compliance with the relevant conditions.
- No Corporate Tax Advantage: An exempt person shall cease to be an exempt person if it can be reasonably concluded that the main purpose or one of the main purposes of its failure to meet the conditions is to obtain a corporate tax advantage that is not consistent with the intention or purpose of the Corporate Tax Law.
Corporate Tax Consequences of Benefiting from Exempt Person Status
Benefiting from Exempt Person status under the Corporate Tax Law has several consequences, which include:
- No availability of Small Business Relief: Exempt Persons are not eligible for Small Business Relief, which allows certain Taxable Persons to be treated as having no Taxable Income for a Tax Period.
- No availability of Qualifying Group Relief or Business Restructuring Relief: Exempt Persons are not eligible for Qualifying Group Relief or Business Restructuring Relief. Qualifying Group Relief allows for the offsetting of losses within a group of companies, while Business Restructuring Relief provides tax relief for certain business restructuring transactions.
- No transfer of Tax Loss: Exempt Persons cannot transfer Tax Losses from their activities or Business operations to a Taxable Person. Tax Losses can typically be offset against the Taxable Income of another Taxable Person, but this is not permitted for Exempt Persons.
- Exempt Person cannot be a member of a Tax Group: The Tax Group provision is intended for entities subject to Corporate Tax UAE. An Exempt Person under Article 4 of the Corporate Tax Law cannot form or join a Tax Group.
It is important for entities considering applying for Exempt Person status to be aware of these consequences and to carefully consider whether the benefits of Exempt Person status outweigh the limitations.
Exempt Persons must also comply with various requirements, which include:
- Tax Registration: The entity must register for Corporate Tax purposes with the FTA. This involves providing the FTA with information about the entity, such as its name, address, and Tax Registration Number (TRN).
- Application: The entity must apply for exemption from Corporate Tax UAE and meet the relevant timelines set out in the Corporate Tax Law and any other relevant legislation. The application must be submitted to the FTA and must include the required supporting documentation.
- Administration: The entity must have proper administration and record-keeping procedures to maintain its Exempt Person status. This includes maintaining accurate financial records and ensuring that all transactions are properly documented.
- Confirmation: The entity's auditor must confirm its Exempt Person status. The auditor must review the entity's financial statements and other relevant documentation to ensure that the entity meets the requirements for exemption.
It is important for Exempt Persons to be aware of these requirements and to take the necessary steps to comply with them. Failure to comply with these requirements could result in the loss of Exempt Person status and the imposition of penalties.
Entities seeking exemption from corporate tax UAE should consider seeking guidance from experienced tax consultants. Tax consultants can help determine eligibility, prepare and submit applications, ensure compliance with ongoing requirements, and represent the entity in discussions with the Federal Tax Authority. Their expertise can help entities navigate the exemption process efficiently and effectively, ensuring they meet all the requirements and obtain the necessary approvals. This allows them to benefit from the exemption and focus on their core activities without the burden of corporate tax liability.