HOW THE UAE’S NEW CORPORATE TAX IMPACTS INVESTMENT GAINS & DIVIDENDS FOR FINANCIAL COMPANIES

This article has been researched and written by the Tax & Compliance Team at Creation Business Consultants. AI has not been used in generating this article.

Starting in June 2023, the UAE introduced a federal corporate tax at a rate of 9% on business profits exceeding AED 375,000. This marks a significant shift in the UAE’s taxation landscape, especially for financial companies. One of the most pressing concerns for these institutions is how the new tax regime impacts investment gains and dividends. In this blog, we’ll break down the key changes, their implications, and strategies for financial companies to optimize their tax obligations.

BOOK A FREE CONSULTATION

1. OVERVIEW OF THE UAE’S NEW CORPORATE TAX REGIME

The UAE’s new corporate tax framework is designed to align with international tax standards while maintaining its competitive edge as a global business hub. Key features include:

A 9% tax rate on profits exceeding AED 375,000.
Exemptions for certain types of income, such as dividends and capital gains from qualifying investments.
A focus on providing a predictable and business-friendly tax environment.

2. TAX TREATMENT OF INVESTMENT GAINS FOR FINANCIAL COMPANIES

Financial companies engaged in investment activities must understand how the new tax rules apply to their income streams. Here’s a breakdown:

2.1 CAPITAL GAINS TAX

Taxable Income: Capital gains from the sale of investments (e.g., stocks, bonds, or other assets) are generally considered part of a company’s taxable income.
Tax Rate: Gains are subject to the standard 9% corporate tax rate, regardless of whether they are short-term or long-term.
Exemptions: Gains from the sale of shares in subsidiaries or associates may be exempt if the company holds a substantial stake (e.g., 50% or more).

2.2 EXEMPTIONS FOR CERTAIN INVESTMENTS

Real Estate and Passive Income: Investments in sectors like real estate or assets generating passive income may qualify for special exemptions or reduced tax rates.
Qualifying Holdings: Gains from qualifying shareholdings in UAE or foreign companies may also be exempt under specific conditions.

3. TAX TREATMENT OF DIVIDENDS FOR FINANCIAL COMPANIES

Dividends are a critical income source for financial companies, and the new tax regime offers attractive exemptions for dividend income.

3.1 DIVIDEND EXEMPTION

UAE Dividends: Dividends received from other UAE-based companies are fully exempt from corporate tax.
Foreign Dividends: Dividends from qualifying foreign companies may also be exempt, provided they meet certain criteria.

3.2 FOREIGN DIVIDEND INCOME AND WITHHOLDING TAXES

Withholding Taxes: Foreign dividends may be subject to withholding taxes in the source country.
Double Taxation Treaties (DTTs): The UAE has signed DTTs with numerous countries, which can reduce or eliminate withholding taxes on cross-border dividend payments.

4. IMPACT ON FINANCIAL COMPANIES OPERATING IN THE UAE

The introduction of corporate tax in the UAE represents a shift from the UAE’s historically tax-free environment. Here’s how it impacts different types of financial companies:

4.1 INVESTMENT COMPANIES

Predictable System: The new tax regime provides a clear framework for calculating tax obligations on investment income.
Minimized Tax Burden: Exemptions on dividends and favorable treatment of capital gains help reduce overall tax liability.

4.2 FINANCIAL SERVICES PROVIDERS

Adjustments Required: Asset management firms, brokers, and banks must adapt their financial planning to account for the new tax rules.
Tax Planning: Understanding the tax treatment of various income types is essential for optimizing profitability.

5. STRATEGIES FOR MANAGING TAX ON INVESTMENT GAINS AND DIVIDENDS

To minimize tax liabilities and maximize returns, financial companies can adopt the following strategies:

5.1 MAXIMIZE DIVIDEND EXEMPTIONS

Invest in UAE-Based or Qualifying Foreign Companies: Focus on investments that generate tax-exempt dividend income.
Strategic Shareholding: Establish subsidiaries or invest in qualifying foreign companies to benefit from dividend exemptions.

5.2 OPTIMIZE CAPITAL GAINS TAX PLANNING

Hold Investments Longer: While the UAE does not distinguish between short-term and long-term gains, holding assets longer can align with broader tax objectives.
Invest in Subsidiaries or Associated Companies: Structuring investments to qualify for capital gains exemptions can reduce taxable income.

5.3 LEVERAGE DOUBLE TAXATION TREATIES (DTTs)

Reduce Withholding Taxes: Invest in countries with favorable DTTs to minimize withholding taxes on foreign dividends.
Enhance Returns: Structuring investments through treaty jurisdictions can significantly improve net returns.

6. COMPARISON OF TAX TREATMENT FOR DIFFERENT INCOME TYPES

INCOME TYPE	TAX TREATMENT	EXEMPTIONS/ CONDITIONS
Capital Gains	9% corporate tax on profits from asset sales	Exemptions for gains from qualifying shareholdings (e.g., subsidiaries, associates).
Dividends (UAE)	Fully exempt from corporate tax	Must be from UAE-based companies.
Dividends (Foreign)	Exempt if from qualifying foreign companies; may be subject to withholding taxes.	Double Taxation Treaties (DTTs) can reduce or eliminate withholding taxes.
Passive Income	Subject to 9% corporate tax unless exempt under specific rules.	Real estate and certain passive income-generating assets may qualify for exemptions.

CONCLUSION: NAVIGATING THE TAX LANDSCAPE

The UAE’s new corporate tax regime introduces a structured and predictable system for financial companies. While the 9% tax rate applies to most profits, the exemptions for dividends and certain capital gains provide opportunities to minimize tax burdens. By adopting strategic tax planning and leveraging international tax treaties, financial companies can optimize their tax obligations and maintain profitability.

HOW CREATION CAN HELP

At Creation Business Consultants, we specialize in helping financial companies navigate the complexities of the UAE’s new corporate tax regime. Our team of experts can assist with: