This blog explores the concept of Exempt Persons and Exempt Income under the UAE Corporate Tax regime. If you’re a business, fund, or government-related entity trying to understand whether you’re liable to pay tax in the UAE—or exempt from it—this one’s for you. We’ll cover who qualifies as exempt, under what conditions, and what types of income are left out of the tax net. We’ll also decode how the exemption works in practice, including for investment funds, public benefit entities, and businesses in natural resources.
Preface
In earlier articles, we looked at who qualifies as a taxable person and how residents or non-residents are taxed on their income in the UAE. Now, we turn our attention to the other side of the spectrum—who doesn’t have to pay corporate tax.
This section of the UAE Corporate Tax Law provides relief for entities and types of income that are either socially significant, strategically important, or practically outside the regular business scope. But as always, the devil’s in the details.
Let’s unpack those details.
Exempt Persons
Certain persons are completely excluded from corporate tax—but not without conditions. Here’s a breakdown of the categories that may enjoy this exempt status:
1. Government Entities
These are arms of federal or local government—ministries, departments, and institutions. Their core activities are exempt. However, if they carry out business (like running a utility or owning commercial real estate), that part may still be taxed unless special treatment is granted.
2. Government Controlled Entities
These are companies where the government holds control, directly or indirectly. Like government entities, they are exempt—but only on non-business income. Their income from actual business activities could still be taxed.
3. Extractive and Non-Extractive Natural Resource Businesses
Entities engaged in these sectors may be exempt if:
- They hold a license or concession from a local government
- They are subject to Emirate-level taxation
- They treat other business income separately
This exemption does not extend to subcontractors or suppliers who deal with such companies. Those third parties must qualify on their own.
4. Qualifying Public Benefit Entities
Entities established for:
- Charitable, educational, healthcare, cultural, or social welfare purposes
- Regulated and monitored by the government
- Must not operate as commercial enterprises, and
- No income or assets can benefit insiders or related persons
This includes chambers of commerce, NGOs, and professional societies.
5. Qualifying Investment Funds
To qualify:
- Must be under regulatory oversight
- Either publicly traded or not set up to avoid tax
- Income must mainly come from investments
- Application must be made to the tax authorities
Loss of these conditions means loss of exemption, retroactive from the beginning of the tax period.
6. Pension or Social Security Funds
Also exempt, subject to regulatory monitoring and an application to the tax authority.
7. Wholly Owned UAE Juridical Persons
If fully owned and controlled by any of the above exempt persons, they may also qualify for exemption—subject to approval.
Government and Government Controlled Entity
Although exempt, business income earned by these entities can be taxable unless specific conditions are met:
- They can apply to have their business activities treated as a single taxable person
- This simplifies tax reporting and avoids separate taxation of each activity
- But this option is not available for Government Controlled Entities
Also, Transfer Pricing rules apply to all transactions between exempt and taxable business activities.
So, even within one entity, internal dealings need to reflect arm’s length pricing—just like between unrelated companies.
Extractive & Non-Extractive Natural Resources Business
Let’s say an oil company holds a concession to extract oil in the UAE. If:
- It holds that license directly or indirectly
- Is taxed at the Emirate level
- And treats other business income separately
Then it’s exempt from Corporate Tax on that extractive activity.
But if the company runs a retail business on the side? That retail income is taxed separately.
Important: This exemption does not cover contractors, sub-contractors, or suppliers unless they individually qualify for exemption.
Qualifying Public Benefit Entity
This category includes organizations focused on public welfare, such as:
- Professional groups
- Charitable trusts
- Chambers of commerce
They must:
- Operate for specific purposes (e.g., education, art, science)
- Avoid unrelated business activities
- Ensure no income benefits insiders
- Follow any conditions set by Cabinet decisions
The exemption begins once the entity is listed in the Cabinet Decision or approved by the tax authorities.
Qualifying Investment Fund
Investment Funds get exemption—but only if:
- The fund or its manager is under regulatory oversight
- The fund is either listed on a recognized stock exchange or not created just to avoid tax
- No part of the income goes to activities that wouldn’t qualify for exemption
To claim exemption, they must apply to the tax authority in the prescribed format.
If they violate any conditions? The exemption ends from the start of that tax period, unless special relief is granted by the Finance Minister.
Exempt Income
Some types of income are exempt, no matter who earns them. These include:
1. Dividends and Profit Distributions
- From a UAE-resident juridical person
- From a foreign participation that meets certain thresholds
2. Income from a Foreign Permanent Establishment
If properly structured and taxed abroad, income from foreign PEs can be excluded from UAE taxable income.
(Details of this were covered in the previous M2K Alert #3.)
3. Income from Operating Aircraft or Ships in International Transport
Non-residents earning income from shipping or aviation in international trade are also exempt, provided they are engaged in:
- Transporting goods, people, mail, or livestock
- Leasing or chartering aircraft or ships
- Leasing equipment used in such transport
These exemptions support global trade and reduce the chances of double taxation.
Participation Exemption
This is the big one for holding companies and investors.
A Participating Interest means holding at least:
- 5% ownership in a foreign or local company
- For an uninterrupted 12 months (or intended to be held that long)
- That entity is subject to at least 9% corporate/income tax
- The owner gets 5% of profit and liquidation rights
If these are satisfied, the income—dividends, capital gains, and related gains—is exempt.
But wait—there’s more nuance.
Even if the 12-month holding period isn’t met yet, but there’s an intent to hold for that period—exemption still applies.
But if ownership drops below 5%, any earlier exempt income becomes taxable in that tax period.
Also, to satisfy the tax rate condition:
- The participation must earn most of its income from other participating interests
- And its main purpose must be holding investments
Some definitions like “substantially consists of” or “principal purpose” are open to interpretation. We’re still waiting for more clarity here.
Let’s illustrate:
A UAE mainland company holds shares in:
- Bahrain Holding Co. (tax < 9%)
- US Co. and India Co. (tax > 9%)
- Cayman Co. (no tax)
If more than 50% of Bahrain Holding’s assets are shares in US and India companies (which qualify), then dividends received from Bahrain Holding may still qualify as exempt in UAE—despite Bahrain’s low tax rate.
More exempt income includes:
- Capital gains on sale of participating interest
- Dividend distributions
- Foreign exchange gains
- Reversal of impairments
But, losses on these investments are not deductible.
Also, ownership in Free Zone Persons or Exempt Persons satisfies the 9% tax condition, simplifying things for UAE entities.
Exemption is not allowed in certain cases:
- If the participation gets deduction for distributions under foreign tax law
- If there’s a deductible impairment loss on the investment or loan
- If there’s a loss from liquidation
- If acquired under special anti-abuse conditions (2-year bar applies)
- Or if cost exceeds a certain threshold (to be notified by the government)
Each edge case is treated distinctly, and the law allows for flexibility via ministerial notifications.
To sum up:
- UAE domestic dividends are always exempt
- Foreign dividends require participation conditions to avoid double taxation
- Capital gains from both domestic and foreign shares are exempt if the thresholds are met
This framework supports UAE’s ambition to be a regional investment and holding hub—while still guarding against tax avoidance.
Final Thoughts
The UAE Corporate Tax Law makes room for genuine exemptions—not loopholes. From government bodies and pension funds to investment vehicles and global shipping operations, the law recognizes that not all income or entities should be taxed in the same way.
But none of these exemptions are automatic. They come with clear, documented conditions, and often require formal applications. If any of those conditions are missed—even accidentally—the exemption evaporates retroactively.
So whether you’re a holding company, a social welfare entity, or a business in the extractive sector, the lesson is clear: read the fine print, track your compliance, and document everything.
Because when it comes to tax exemption, the margin for error is as narrow as the exemption is valuable.
