In the latest Ministry of Finance updates, clarity is offered on pension fund exemptions and on UAE businesses holding stakes in overseas entities. Image Credit: Shutterstock

Dubai: ​The UAE Ministry of Finance has updated the 'participation exemption', which provides for corporate tax exemptions on dividends, profit distributions, and capital gains from a 'participating interest'.

The latter is defined as a 5 per cent or greater ownership interest in another entity's shares or capital, held for at least 12 months.

In another major announcement, the Ministry of Finance has offered options for SMEs on how they can go about their accounting needs to be CT-compliant.

The exemption applies if the subsidiary is in a jurisdiction with a corporate tax rate of at least 9 per cent. Or can demonstrate an effective tax rate of at least 9 per cent on profits, income, or equity.

The decision clarifies that the 'relief will apply to various ownership interest types, including preferential shares, ordinary shares and redeemable shares and membership and partner interest where the aggregated acquisition cost of the ownership interests is equal to or exceeds Dh4 million.

This ensures UAE-based companies with specific investments in foreign entities that meet the required conditions, do not suffer any UAE corporate tax on such investments.

"The participation exemption will prevent double corporate tax on the profits of one entity and eliminate international double taxation," said Younis Haji Al Khouri, Undersecretary of the Ministry of Finance.

Read More

​​​​​​More conditions have been set for private pensions and social security funds to be exempt from Corporate Tax. The decision makes for an alignment with 'international tax practices' so that UAE private pension or social security funds exempt status becomes recognised when investing internationally. And thus double-tax treaty benefits can be obtained.

The latest UAE Ministry of Finance decision also sets out details of maximum contributions per beneficiary and the annual confirmation of compliance by a statutory auditor to ensure integrity of the exemption.

SMEs have options on IFRS for accounting

Clear guidelines have also been set for businesses preparing their financial statements that will be used as the starting point to calculate taxable income for CT.

The International Financial Reporting Standards (IFRS) are the applicable accounting standards in the UAE and must be used by larger businesses with revenues of more than Dh50 million.

SMEs with revenues not exceeding Dh5 million have under the new MoF update the option of applying IFRS.

"To reduce the compliance burden even further, the decision confirms that 'cash basis' accounting may be used by businesses that have less than Dh3 million in revenue," the MoF said in a statement.

Tax grouping

"The decision also provides clarity on what is meant by consolidated financial statements for tax grouping purposes. Where, such financial statements will be the aggregation of the parent company and each subsidiary’s (that is a member of the tax group) standalone financial statements once intra-group transactions are eliminated."

According to Al Khouri, "Designating IFRS as the applicable accounting standards and further simplifying accounting processes for SMEs reflects the Ministry of Finance's commitment to impose a minimal compliance burden for businesses in scope of the corporate tax regime."