Retained earnings: what it means for UAE businesses.

What retained earnings means

Also called: Accumulated profits, Retained profits.

Retained earnings are the total profits a company has made since it started, less the losses, dividends paid and amounts moved to reserves. They sit in equity on the balance sheet. When the total is negative it is shown as accumulated losses.

For a UAE mainland company, retained earnings are shaped by the Commercial Companies Law. Article 103 requires a Limited Liability Company to set aside 5% of its net profits every year as a statutory reserve, and the partners may stop once the reserve reaches half of the capital. Public joint stock companies set aside 10% under Article 241. The general assembly then decides what profit to distribute, under Article 94 for an LLC.

Corporate Tax adds two points. Dividends paid to owners are not a deductible expense under Article 33 of the Corporate Tax Law, so paying out profit never reduces Taxable Income. For a UAE resident company that receives them, dividends from another UAE resident company are exempt income under Article 22. For an SME owner, this means drawing profit as a dividend and drawing it as a salary have different tax and accounting results.

How it works

• Opening retained earnings plus net profit after tax, less transfers to the statutory reserve and dividends declared, equals closing retained earnings.
• An LLC transfers 5% of net profit to the statutory reserve each year until the partners decide to stop at half of the capital (Article 103).
• The LLC general assembly approves the accounts and decides the profits to be distributed (Article 94).
• Dividends paid are not deductible for Corporate Tax (Article 33), and dividends received from UAE resident companies are exempt income (Article 22).
• Accumulated losses reduce equity; when an LLC's losses reach half of its capital, Article 308 requires a dissolution vote.

Worked example

An Abu Dhabi interior fit-out LLC has share capital of AED 300,000, a statutory reserve of AED 100,000 and retained earnings of AED 400,000 at the start of the year. It makes a net profit after tax of AED 500,000 and the partners declare a dividend of AED 250,000.

Opening retained earnings	AED 400,000
Net profit after Corporate Tax	AED 500,000
Transfer to statutory reserve at 5%	AED (25,000)
Dividend declared	AED (250,000)
Closing retained earnings	AED 625,000
Statutory reserve after transfer (half of capital is 150,000)	AED 125,000

The reserve is still below half of the AED 300,000 capital, so the 5% transfer continues next year, and the dividend does not reduce Taxable Income.

Common mistakes

• Paying dividends from the bank balance without an approved set of accounts showing enough distributable retained earnings.
• Forgetting the annual 5% statutory reserve transfer for an LLC, which overstates retained earnings available for distribution.
• Booking dividends to partners as an expense, which is wrong in the accounts and is disallowed under Article 33 of the Corporate Tax Law.

The law

• Federal Decree-Law No. 32 of 2021 on Commercial Companies, Article 94 (general assembly competencies), Article 103 (statutory reserve), Article 241 (statutory reserve of joint stock companies) and Article 308
• Federal Decree-Law No. 47 of 2022, as amended, Article 22 Clause 1 (Exempt Income) and Article 33 Clause 4 (Non-deductible Expenditure)

Frequently asked questions

Can an LLC distribute its statutory reserve?

Article 103 does not say so for an LLC. For joint stock companies, Article 241 bars distribution of the statutory reserve except for the part above 50% of capital in limited cases. Treat the LLC reserve as not distributable unless legal advice says otherwise.

Is there UAE tax on dividends paid by our company?

The paying company cannot deduct dividends under Article 33. A UAE resident company receiving dividends from another UAE resident company treats them as exempt income under Article 22.

Related terms

Balance sheet · Share capital · Exempt income · Limited liability company · Going concern. See every term in the UAE tax glossary.

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