Page 6 - ICAI UAE TAX UPDATE_AUGUST 2024

2. Exempt Income Establishment as if it is a separate entity that operates
• Domestic Dividends: Dividends, and other profit independently from the parent entity to which the
distributions, received from a juridical person that is a Permanent Establishment belongs (i.e. its head office),
Resident Person are exempt from Corporate Tax with no and also to the other entities of the group.
additional conditions.
• In order to accurately attribute the profit between the
• Participation Exemption: Dividends and other profit Permanent Establishment and its parent, a two-step
distributions received from foreign juridical persons analysis is required:
are exempt from Corporate Tax if the recipient has a
Participating Interest in a foreign juridical person. • Step one: Conduct a functional analysis to identify the
functions performed by the Permanent Establishment on
If a Taxable Person holds a Participating Interest and the one side, and the head office on the other side, treating
relevant conditions continue to be met, it will be exempt each as separate to the other. This analysis should also
from Corporate Tax on: take into account the assets used and the risks assumed
by the Permanent Establishment and the head office,
• gains or losses on the transfer, sale, or other disposition respectively.
of the whole or part of the Participating Interest,
• Step two: Determine the compensation relating to
• foreign exchange gains or losses in relation to the arrangements or dealings between the Permanent
Participating Interest, and Establishment and the head office, commensurate with
their respective functions performed, assets deployed,
• impairment gains or losses in relation to the and risks assumed.
Participating Interest.
3. Deductible & Non-Deductible Expenditure
Only income received by the Taxable Person in their • The general rule is that expenditure must be incurred
capacity as a shareholder (i.e. as an owner of the wholly and exclusively for the purposes of the Taxable
ownership interest) can be exempt. Other income earned Person’s Business and must not be capital in nature
from the Participation from other relationships, such as for the expenditure to be deductible for Corporate Tax
that of a debtor-creditor (for example, Interest income purposes.
received) or service provider (for example, service fee
received), will remain subject to Corporate Tax unless • Employee costs are generally considered to be wholly
exempt under other applicable provisions. and exclusively incurred for Business purposes provided
that they are not excessive. As such, it is not relevant
• Foreign Permanent Establishment Exemption: a whether an employee is paid wholly in cash or also
Resident Person can make an election to have the income receives other benefits, such as a car for personal use.
and associated expenditure derived from Foreign
Permanent Establishments exempted from Corporate • Expenditure incurred in relation to deriving Exempt
Tax in the UAE. Where such an election is made, the Income is not deductible when determining Taxable
Resident Person shall not include losses, income, and Income.
associated expenditure in any of its eligible Foreign
Permanent Establishments. • If expenditure is incurred for more than one
purpose, the portion of the expenditure which can be
• Income attributable to Permanent Establishment deducted must be identifiable part or proportion of the
expenditure incurred wholly and exclusively for the
• A Permanent Establishment has the meaning contained purposes of deriving Taxable Income and an appropriate
in Article 14 of the Corporate Tax Law. A Person and its proportion of any unidentifiable part or proportion of
Permanent Establishment are Related Parties and should the expenditure incurred for the purposes of deriving
be treated as separate and independent entities. This Taxable Income that has been determined on a fair and
approach is known as the “separate entity approach” . reasonable basis.

• The separate entity approach: Non-Resident Person is Allocation keys are criteria used to determine how
required to attribute the appropriate amount of income expenses can be assigned or distributed across different
and associated costs to its Permanent Establishment departments, products, services, or divisions within
in accordance with the arm’s length standard. The a Business. These keys can be applied to factors such
arm’s length standard requires treating a Permanent as headcount, floor space, usage, time spent, or any
6 www.icaidubai.org

UAE TAX UPDATE NEWSLETTER ISSUE 05 - August 2024