UAE Cabinet Broadens Corporate Tax Exemption to Include Wholly-Owned Foreign Affiliates

In a landmark move to enhance its competitive tax landscape, the United Arab Emirates Cabinet has issued a new decision widening the scope of corporate tax exemptions under Federal Decree-Law No. 47 of 2022. Effective immediately, foreign entities that are wholly owned by certain qualifying UAE-exempt entities will themselves now qualify for a corporate tax exemption. This change streamlines cross-border structures, reduces compliance complexity, and reinforces the UAE’s position as a globally attractive jurisdiction for parent-subsidiary group operations.

Background

Since introducing a federal corporate tax at a standard rate of 9 percent for profits above AED 375,000 in June 2023, the UAE has progressively carved out exemptions for entities delivering public or community benefits—such as charities, pension funds, and government-owned enterprises. However, ambiguity remained regarding the tax treatment of foreign-incorporated subsidiaries owned by these exempt entities. To eliminate uncertainty and foster seamless group structures, the Cabinet’s latest decision extends the exemption “downward” to eligible foreign affiliates.

Key Provisions of the Cabinet Decision

1. Inclusion of Wholly-Owned Foreign Entities

   • Any foreign legal person that is 100 percent owned (directly or indirectly) by a qualifying UAE-exempt entity will be considered exempt from UAE corporate tax on profits derived from UAE sources.

2. Qualifying Exempt Entities

   • The umbrella group of qualifying entities remains those already exempt under Article 9 of the Corporate Tax Law—public benefit entities, government bodies, certain pension and social security funds, and other entities designated by the Cabinet.

3. Compliance Requirements

   • To claim the exemption, the parent (UAE) entity must:

     • Register both itself and its foreign affiliate(s) with the Federal Tax Authority (FTA).

     • Demonstrate ownership via corporate documents (share certificates, trust deeds, or equivalent).

     • Submit a formal exemption application within the FTA’s online portal, referencing the Cabinet Decision.

4. Effective Date and Transitional Relief

   • The exemption applies to financial years starting on or after June 1, 2025.

   • Entities with existing tax periods spanning the implementation date may apply for pro-rata relief to avoid double taxation on transitional profits.

   
   
   
   

Strategic Implications

• Group Restructuring: Multinational groups can now consolidate holding structures in the UAE without triggering unintended tax on their foreign subsidiaries. This aligns with international best practices of territorial tax systems.

• Administrative Simplification: By centralizing the exemption process in the UAE and eliminating the need for bilateral treaty reliance, companies reduce paperwork, audit risk, and treaty-shopping concerns.

• Attracting Regional Headquarters: The enhanced exemption framework bolsters the UAE’s appeal as a regional headquarters hub, encouraging parent and sub-holding companies to locate management and finance functions onshore.

• Potential Revenue Impact: While this broadening of exemptions may marginally reduce corporate tax receipts, the policy trade-off strengthens the UAE’s long-term fiscal base by incentivizing inbound corporate structures and capital flows.

Action Steps for Affected Entities

1. Review Group Structures:

   • Identify any foreign affiliates wholly owned by your exempt UAE entities that might now qualify for the exemption.

2. Prepare Documentation:

   • Gather and verify share registers, trust instruments, and board resolutions proving 100 percent ownership.

3. Register with the FTA:

   • Update or create tax registrations for both UAE parent and foreign subsidiary in the FTA’s portal.

4. Submit Exemption Applications:

   • Use the Cabinet Decision reference number when applying, and request pro-rata relief if your tax period spans June 1, 2025.

5. Monitor Further Guidance:

   • The FTA may release detailed procedural guidelines or FAQs—stay alert to official circulars and professional advisories.

   
   
   
   

Conclusion

The Cabinet’s decision to extend the corporate tax exemption to wholly-owned foreign entities marks a significant enhancement of the UAE’s tax regime. By simplifying group tax treatment and fostering a more integrated cross-border environment, the UAE reinforces its status as a dynamic, business-friendly jurisdiction. Organizations should move swiftly to assess their corporate structures, fulfill the new registration and application requirements, and leverage this expanded exemption to optimize their tax profiles.