Within 3 decisions issued by the Ministry of Finance

«International Investments» condition for exempting pension and social security funds from «corporate tax»

  • Finance is keen to impose a minimum burden of compliance with business within the scope of the corporate tax system. Archival

  • Younis Haji Al Khouri: "The new decisions aim to enhance the flexibility of the corporate tax system in the UAE, and create a supportive environment for business in various sectors."

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The Ministry of Finance has issued three new regulatory ministerial decisions for the purposes of Federal Decree-Law No. (47) of 2022 regarding corporate and business tax, including Ministerial Resolution No. (114) of 2023 regarding accounting standards and methods, Ministerial Resolution No. 115 of 2023 regarding pension and social security funds, which exempted private pension funds and social insurance funds in the UAE from corporate tax when making international investments, and Ministerial Resolution No. 116 of 2023 regarding the exemption of participation.

Enhance resilience

The Undersecretary of the Ministry of Finance, Younis Haji Al Khouri, said: "The three new decisions aim to enhance the resilience of the corporate tax system in the UAE and create a supportive environment for business in various sectors."

"The decisions cover many important dimensions in the sectors of regulated private pension funds and social insurance funds, which are often exempted by states from corporate tax."

He stressed that «the decision to adopt international accounting standards and provide facilities in accounting procedures for companies and small businesses, reflects the keenness of the Ministry of Finance to impose a minimum burden of compliance with business within the scope of the corporate tax system, and the decision to exempt participation at the local level ensures that the company is spared double taxation on its profits, as well as double taxation at the international level».

Pension Funds

The Resolution on Pension and Social Security Funds sets additional conditions for private pension funds and social insurance funds organized in the UAE, to be exempted from corporate tax.

The decision ensures compatibility with international tax practices, so that private pension funds and social insurance funds in the UAE are exempt from corporate tax when they make international investments, as well as benefit from the benefits of double taxation avoidance agreements. The resolution also details the maximum contributions per beneficiary, and the annual audit obligations for compliance by a statutory auditor to ensure the integrity of the exemption.

Accounting Standards

The Ministerial Decision on Accounting Standards and Methods provides clear guidance for businesses on the preparation of their financial statements, which will be used as a starting point for calculating taxable income for corporate tax purposes.

The resolution confirms that the International Financial Reporting Standards (IFRS) are the approved accounting standards that large businesses in the UAE must apply with revenues exceeding AED 50 million.

However, the decision provides facilities for SMEs with revenues not exceeding AED 50 million, as the option to apply IFRS has been made available to SMEs.

To further reduce the burden of compliance on these businesses, the resolution stipulates that the cash basis of accounting can be used by businesses with revenues of less than three million dirhams. The resolution also provides clarifications on what is meant by unifying the financial statements for the purposes of the tax group within the same tax group, as it requires the preparation of independent financial statements by compiling the financial statements of the parent company, the independent financial statements of each subsidiary as a member of the tax group, and the exclusion of transactions within the tax group in accordance with the provisions of the Corporate Tax Law.

Participation Exemption

In turn, the Musharaka exemption decision allows for exemption from corporate tax on dividends or shares, dividends, and capital gains from Musharaka shares, which are defined as ownership interests of 5% or more of the shares or capital of another entity lasting for at least 12 months.

The participation exemption applies only if the subsidiary is in another country where corporate tax is applied at a minimum rate of 9%, or if it applies corporate tax on profits, income or shares at a total rate of at least 9%.

The resolution further stipulates that the Musharaka exemption may apply to different types of ownership shares, including ordinary shares, preferred shares, recoverable shares, member and partner shares, for which the total acquisition cost exceeded AED four million.

This decision ensures that companies based in the UAE and owning investments in foreign entities that meet the required conditions will not be subject to corporate tax in the UAE on such investments.