The decisions aim to enhance the flexibility of the country's corporate tax regime and ensure a supportive business environment for all sectors

The UAE’s Ministry of Finance has announced three new decisions relating to corporate tax. The ministerial decisions clarify the conditions for the exemption of private regulated pensions and social security funds; the basis of preparing financial statements and mechanisms for consolidating them within a tax group; and determining the conditions for claiming participation exemption.

Younis Haji Al Khouri, undersecretary of the ministry, said the decisions aim to enhance the flexibility of the UAE's corporate tax regime and ensure a supportive business environment for all sectors.

“The decisions cover several important aspects related to private regulated pensions and social security funds which are normally exempted from corporate tax in other countries. 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 addition, the participation exemption will prevent double corporate tax on the profits of one entity and eliminate international double taxation."

Pensions and social security funds
This sets out further conditions for private regulated pensions and social security funds in the UAE to be exempt from corporate tax. The decision ensures alignment with international tax practices so that the UAE private pension or social security funds exempt status is also recognised when investing internationally, and double tax treaty benefits can be obtained. In addition, the decision sets out details of maximum contributions per beneficiary and the annual confirmation of compliance by a statutory auditor.

Accounting standards and methods
This provides clear guidelines for businesses preparing their financial statements that will be used as the starting point to calculate taxable income for the corporate tax. The decision confirms that International Financial Reporting Standards (IFRS) are the applicable accounting standards in the UAE and must be used by larger businesses that have revenues of more than Dh50 million.

Small and medium businesses that have revenues below this amount have the option of applying IFRS. To reduce the compliance burden even further, the decision confirms that the cash basis accounting may be used by businesses that have less than Dh3 million revenue.

Participation exemption
This provides corporate tax exemptions on dividends, profit distributions, and capital gains from a participating interest, which is defined as a 5 per cent or greater ownership interest in another entity's shares or capital held for at least 12 months. 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 also clarifies that the relief will apply to various ownership interest types, including preferential, ordinary 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 incur any corporate tax on such investments.