1. OVERVIEW OF THE UAE’S NEW CORPORATE TAX REGIME
The modern corporate tax system establishes international taxation support while protecting the UAE’s global business development base position. Key highlights include the following:
- Corporate tax at 9% will apply to profits exceeding AED 375,000.
- The new corporate tax system provides exemptions to different types of income, including dividends and capital gains from qualifying investments.
- The business community will find corporate tax predictable because it offers support to all companies.
2. TAX TREATMENT OF INVESTMENT GAINS FOR FINANCIAL COMPANIES
Financial companies working in investment businesses must be aware of how new tax rules apply to their income streams. The following is the breakdown:
2.1 CAPITAL GAINS TAX
- Taxable Income: Capital gain from disposals of (business) investment assets (stocks, bonds, or other investments) is part of the company’s taxable income.
- Tax Rate: There is no differentiated treatment for short-term vs long-term; both would be taxed at the normal corporate tax rate of 9%.
- Exemptions: A corporation can exclude capital gains from the sale of a subsidiary or associate company’s shares from taxable income if the company has a specific ownership stake (i.e. 50% ordinary equity).
2.2 EXEMPTIONS FOR CERTAIN INVESTMENTS
- Real Estate and Passive Income: Exemptions and lower rates of tax will be available for investments in real estate or income-producing assets for exempt purposes.
- Qualifying Holdings: There are different circumstances in which gains from qualifying shareholdings from UAE or foreign companies qualify for exemptions.
3. TAX TREATMENT OF DIVIDENDS FOR FINANCIAL COMPANIES
The new corporate tax system provides extensive dividend income exemptions to financial firms because dividends form a major part of their income.
3.1 DIVIDEND EXEMPTION
- UAE Dividends: An absolute divorce is there for corporate tax on dividends earned from another UAE company.
- Foreign Dividends: Foreign dividends from qualifying foreign companies may also be subject to exemptions if the qualifying criteria are met.
3.2 FOREIGN DIVIDEND INCOME AND WITHHOLDING TAXES
- Withholding Taxes: Foreign dividends will be potentially subject to withholding taxes in the jurisdiction of the underlying company.
- Double Taxation Treaties (DTTs): The UAE has signed double tax treaties (DTTs) with numerous countries that could reduce or eliminate withholding tax on cross-border dividend payments.
4. IMPACT ON FINANCIAL COMPANIES OPERATING IN THE UAE
The implementation of corporate tax in the UAE of corporate tax in the UAE represents a departure from the tax-free regime that existed beforehand. Below sets out how the new tax regime will impact financial companies:
4.1 INVESTMENT COMPANIES
- Predictable System: The introduction of a corporate income tax represents a clear and fair system which will allow companies to assess investment income tax obligations in a predictable manner.
- Minimised Tax Burden: The exemption of dividends as well as the favourable tax treatment of capital gains allows the investment company, broker and bank to achieve a better overall tax efficiency.
4.2 FINANCIAL SERVICES PROVIDERS
- Adjustments Required: The new tax regulations are now forcing investment firms, brokers, and banks to audit and revise their tax planning processes.
- Tax Planning: Tax treatment of each concealment must be understood as a point of departure for maximising investment outcomes.
5. STRATEGIES FOR MANAGING TAX ON INVESTMENT GAINS AND DIVIDENDS
To reduce tax and enhance returns, investment firms, brokers, and banks can think about methods such as:
5.1 MAXIMIZE DIVIDEND EXEMPTIONS
- Invest in UAE-Based or Qualifying Foreign Companies: Mainly invest in assets exempt from corporate tax on dividend income.
- Strategic Shareholding: Establishing subsidiaries or investing in suitable foreign companies will increase the amount of exempted dividends.
5.2 OPTIMIZE CAPITAL GAINS TAX PLANNING
- Hold Investments Longer: The new UAE corporate tax treats long-term gains as short-term gains, so holding investments for extended periods will help achieve broader tax objectives.
- Invest in Subsidiaries or Associated Companies: Designing investments in such a way that they qualify for exemptions on capital gains would help reduce taxable income.
5.3 LEVERAGE DOUBLE TAXATION TREATIES (DTTs)
- Reduce Withholding Taxes: Invest in countries that have such favourable DDTs for the withholding tax on foreign dividends and taxable capital gains.
- Enhance Returns: Structuring investments through treaty jurisdictions may be one of the best ways in which net returns may be enhanced.
6. COMPARISON OF TAX TREATMENT FOR DIFFERENT INCOME TYPES
CONCLUSION: NAVIGATING THE TAX LANDSCAPE
With the institution of the new corporate tax regime (including its stability, predictability and detail), it seems the UAE is setting a very reasonable roadmap for investment firms, brokers, and banks to comply with. Generally, while a corporate tax rate of 9% applies to all profits, removing dividends from companies based on exemptions and treating some capital gains differently provides an opportunity for companies to mitigate tax liability. Through their planning strategies and utilising international tax treaties, financial firms could probably forecast that it would be possible to approximately maximise their tax level while remaining profitable.
HOW CREATION CAN HELP
At Creation Business Consultants, we are experts in assisting financial companies with the new corporate tax regime in the UAE. We can help with:
Please contact us at any time to find out more about how we can help with UAE VAT services and other tax services:
