Exempt income: what it means in UAE tax.
The meaning of exempt income under UAE Corporate Tax law: how it works, a worked example in AED, common mistakes and the legal references.
Income that UAE Corporate Tax leaves out of taxable income under Article 22, such as dividends from UAE companies, with its related costs.
What exempt income means
Exempt income is income that the Corporate Tax Law says must not be taken into account when working out taxable income. Article 22 lists it, and the related expenditure is left out too, so a business cannot deduct the costs of earning income that is not taxed.
The list is short. It covers dividends and other profit distributions from UAE resident companies, dividends and other income from a foreign Participating Interest that meets the participation exemption, income of a foreign permanent establishment where the business elects to exempt it, and certain income of non-residents from international shipping and aviation.
For an SME, the most common case is a dividend from another UAE company. It is fully exempt whatever the size of the holding. Exempt income is different from income of an exempt person, such as a government entity, and different from the 0% rate on Qualifying Income: exempt income is removed from the tax base altogether.
How it works
- Dividends and other profit distributions from a juridical person that is a UAE Resident Person are exempt.
- Dividends, gains and other income from a Participating Interest in a company are exempt if the participation exemption conditions are met.
- Income of a foreign permanent establishment is exempt only where the Resident Person elects under Article 24 and the branch is taxed abroad at a rate of at least 9%.
- Expenditure related to exempt income is not deductible, and losses from exempt activities cannot be used as tax losses.
- Exempt income is also removed from EBITDA when applying the general interest deduction limit.
Worked example
A Dubai trading company owns 30% of another UAE company and receives a dividend of AED 200,000. Its accounting profit, including the dividend, is AED 900,000.
| Accounting net profit | AED 900,000 |
| Less dividend from a UAE resident company (exempt) | AED 200,000 |
| Taxable income | AED 700,000 |
| First 375,000 at 0% | AED 0 |
| Remaining 325,000 at 9% | AED 29,250 |
| Corporate Tax payable | AED 29,250 |
Removing the dividend saves AED 18,000 of Corporate Tax, which is 9% of AED 200,000.
Common mistakes
- Deducting the costs of holding an investment, such as related interest or advisory fees, while treating its income as exempt.
- Assuming every foreign dividend is exempt. Foreign dividends are exempt only under the participation exemption conditions.
- Confusing exempt income with an exempt person or with the 0% rate for Qualifying Free Zone Persons.
The law
- Federal Decree-Law No. 47 of 2022, as amended, Article 22 (Exempt Income)
- Federal Decree-Law No. 47 of 2022, as amended, Article 24 (Foreign Permanent Establishment Exemption), Article 37, Clause 3 (no loss relief for exempt activities) and Article 30, Clause 1 (EBITDA excludes Exempt Income)
- Cabinet Decision No. 116 of 2022 on the Determination of Annual Income Subject to Corporate Tax, Article 2 (AED 375,000 at 0%)
Frequently asked questions
Do we need a minimum shareholding for a UAE dividend to be exempt?
No. Article 22 exempts dividends from UAE resident companies without a minimum holding. The 5% and 12 month tests apply to the participation exemption, which matters mainly for foreign dividends and for gains on selling shares.
Is interest income exempt?
No. Interest is not on the Article 22 list, so it is normally part of taxable income.
Related terms
Participation exemption · Taxable income · Tax loss relief · Interest deduction limitation. See every term in the UAE tax glossary.
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