Holding Company and Exemption Under Corporate Tax in UAE

UAE Holding Company & Tax Exemption Secret

As a global hub, many investors have incorporated holding structures in the United Arab Emirates for the purpose of holding various assets inside the country and outside the country. Holding companies hold shares, real estate properties, and investments in various Financial Instruments, etc. There are many intentions behind the setting up of holding companies in the UAE, and one of the reasons is tax benefits. Mainly, investors are setting up holding companies either in a Free Zone holding company or a parent company with offshore authorities. Foreign investors can own 100% of holding companies established in the UAE free zones, making it an attractive option for international stakeholders. Onshore holding companies must have a local partner who owns 51% of the company. Additionally, companies in free zones benefit from free repatriation of profits. Free zones in the UAE provide benefits such as tax exemptions and simplified regulatory requirements. However, holding companies can own shares in other companies but cannot engage in commercial activities like trading or manufacturing.

Since the introduction of Corporate Tax Law in the UAE, with effect from 01st June 2023, the Ministry of Finance and Federal Tax Authority have published many Cabinet Decisions, Ministerial Decisions, Guides and public clarifications. If you are the owner or partner of a holding company or planning to make a holding company in the UAE, continue reading this article, where we will discuss how you need to prepare for UAE Corporate Tax and what benefits UAE Corporate Tax provides for a UAE-based holding entity. Additionally, a holding company in the UAE can be established with no specific paid-up capital requirement, simplifying the setup process for investors. The process of setting up a holding company in Dubai can take several weeks to complete. It typically takes about 10 business days to incorporate a holding company in the Dubai International Financial Centre (DIFC). The initial step in setting up a holding company is to choose the business type and arrange the required documents. Once the business structure is chosen, you can register your holding company with the appropriate authorities in the UAE. You must prepare various documents, including the memorandum and articles of association, for a holding company setup.

While availing the benefits of a holding company, we need to keep in mind that a holding company shall register for Corporate Tax and file corporate tax returns. The administrative compliances are to be taken care of to avoid administrative penalties. A holding company must comply with local regulations and secure necessary approvals from relevant authorities. You will need to open a corporate bank account for the holding company to manage its financial transactions. A mainland holding company can conduct commercial and administrative activities through its subsidiaries. A free zone holding company in the UAE is required to operate within the regulations of the specific free zone it is registered. Read here the administrative penalties under the UAE Corporate Tax Law.

To make an initial understanding, the below explanations are equally applicable for Mainland, Free zone and Offshore companies registered/ established in the UAE. Before discussing the implications of Corporate Tax, let us understand the potential income which can be generated by a holding company. The UAE allows the incorporation of holding companies in all its Emirates, providing flexibility for investors to choose their preferred location. Abu Dhabi Global Market (ADGM) also permits holding companies, allowing them to hold shares, assets, and facilitate investments internationally. Dubai’s Department of Economic Development is responsible for the registration of onshore holding companies. After selecting the type of holding company, you may need to consult with local authorities for specific licensing requirements. The business name of a holding company must comply with the naming guidelines set by the Department of Economic Development (DED). The regulatory framework for holding companies varies between mainland companies and those in free zones.

Real Estate assets inside the UAE or outside the UAE 

Rental Income or capital gain earned by a UAE holding company for the real estate properties located inside the country or from a foreign country will be subject to Corporate Tax as per the Standard rate fixed by the Law. Any tax paid in a foreign country can be adjusted with tax liability in the UAE Foreign Tax Credit. Setting up a Foundation in UAE, the tax benefits can be availed for income from real estate properties. A holding company can manage and control its subsidiaries without being involved in their day-to-day operations, ensuring strategic oversight without operational interference. Establishing credit with banks and creditors can be easier for holding companies, as lenders consider the financial strength of the subsidiaries managed by the parent company. Additionally, a holding company in the UAE can own both physical and intellectual assets of its subsidiaries. Establishing a holding company often requires a tenancy agreement for office space before obtaining final registration. A holding company can also improve risk management by isolating the impact of adverse events to a specific subsidiary without jeopardising the entire group.

Let us deep dive into other types of income/ gains that can be earned by a holding company.

• Dividends 

• Capital Gains ( at the time of selling the investment/shares 

Furthermore, the above-mentioned income can be generated from inside the UAE or outside the UAE.

Dividends and Capital Gains earned by a Holding Company 

➤ As per the Corporate Tax Law Article 22 (1), a UAE company that gets dividends and other profit distributions from another UAE company is exempted from Corporate Tax calculation (Calculation of Taxable income) without any conditions.

➤ Dividend or capital gain earned by a UAE company from outside the UAE. Let us call this participation interest. As per Article 23(1) of Corporate Tax Law, income from participation interest can be exempted from Corporate Tax, subject to the following condition.

1) UAE Company shall hold a minimum of 5% shares, 5% voting rights and shall be eligible for 5% of the division at the time of liquidating the foreign companies. If 5% shares are not held, the value of the shares shall be a minimum of 4 million Dirhams. 

2) UAE company either held the shares in the previous 12 months or shall have an intention to hold for the coming uninterrupted 12 months. Here, the attention required that, as per the Corporate Tax Guide | CTGEXI1 published in October 2023, in case the income is generated by way of capital gain, the asset shall be held for 12 months, and the intention to hold will not be considered. 

3) The income generated by foreign companies shall be subject to tax in the country where it is generated at a minimum rate of 9%. In the guide Corporate Tax Guide | CTGEXI1  further explained that if the income generated is taxed at an effective rate of 9% or more or the country has a jurisdictional tax of 9% or more can substantiate this condition.

4) 50% or more of the assets owned by a foreign company (directly or indirectly) shall qualify for participation interest exemption if those would have been directly owned by UAE Company. Let us again make our understanding strong. Only Dividends from a UAE company to another company are exempted without any conditions. The income by way of capital gain shall be subject to participation interest income exemption conditions.

UAE holding company income and taxation summary as below:-

We have published case studies/ examples about this Article. Click on this link to read the case study

While this article gave you insights about holding company exemption from UAE Corporate Tax, there are more insights for the below scenario: A holding company offers limited liability protection to its shareholders, meaning their personal assets are not at risk in case of any legal claims or liabilities against the company.

If your holding company does not satisfy any conditions for Participation exemption, you may still get 0% Corporate Tax under a Qualifying Free Zone. Read more Holding Company Registered in Free Zone or Offshore in UAE.

Frequently Asked Questions (FAQ)

Q1. What is a holding company in the UAE?

A holding company in the UAE is a legal entity primarily established to own and manage shares, assets, or other ownership interests in other companies (known as subsidiaries). Unlike operating companies, a pure holding company typically does not engage in direct commercial activities like manufacturing, selling products, or providing services. Its main purpose is to hold and oversee the assets of its subsidiaries, offering a structured framework for managing diverse investments.

The UAE allows the incorporation of holding companies in all its Emirates, with options for both mainland and free zone setups.

Q2. What is the purpose of a holding company?

Holding companies serve several strategic purposes:

• Asset Protection and Risk Mitigation: By placing operating companies and valuable assets (like intellectual property or real estate) in separate entities under a holding company, the assets of the holding company and other subsidiaries are shielded from the liabilities and financial risks of any single subsidiary.

• Centralised Control and Strategic Oversight: A holding company provides a centralised structure for managing and controlling multiple subsidiaries. While subsidiaries handle day-to-day operations, the holding company focuses on high-level strategy, capital allocation, and major decision-making.

• Investment and Diversification: Holding companies can easily acquire stakes in various businesses across different sectors, allowing for diversification of investments and spreading risk.

• Tax Efficiency: With proper structuring, especially in UAE Free Zones, holding companies can benefit from favorable tax regimes, including exemptions on corporate tax, dividends, and capital gains.

• Simplified Expansion: A holding company structure makes it easier to expand into new ventures or markets by simply setting up new subsidiaries under the existing umbrella.

• Access to Financing: A financially strong holding company can often obtain loans or raise capital at more favorable rates than individual subsidiaries, and then distribute funds as needed.

   

Q3. Is Dubai a good place for a holding company?

Yes, Dubai is considered an excellent place for establishing a holding company due to several compelling reasons:

• Strategic Global Location: Dubai's geographical position acts as a natural bridge between Europe, Asia, and Africa, making it an ideal hub for managing international investments and operations.

• Business-Friendly Environment: The UAE government actively promotes foreign investment, offering streamlined regulations, a stable legal framework, and supportive incentives.

• Tax Advantages: Dubai, particularly its numerous Free Zones, offers attractive tax benefits for holding companies, including 0% corporate tax on qualifying income, no capital gains tax, and no withholding tax on dividends and royalties for qualifying entities.

• 100% Foreign Ownership: In many Free Zones, foreign investors can enjoy 100% ownership of their holding companies, providing complete control and flexibility.

• Repatriation of Profits: The UAE allows for full repatriation of profits and capital, with no foreign exchange currency restrictions.

• Asset Protection and Legal Security: Dubai boasts a strong and stable legal system that provides a secure environment for protecting assets held by holding companies.

• Access to Global Talent: Dubai's diverse and skilled workforce makes it easy to find suitable talent to support business operations.

   

Q4. What are the benefits of a Dubai Holding company?

The benefits of setting up a holding company in Dubai are significant and directly address common business and investment needs:

• Asset Protection: Shields valuable assets (e.g., intellectual property, real estate, cash) from the operational risks and liabilities of individual subsidiaries.

• Enhanced Risk Management: Isolates financial or legal troubles of one subsidiary from affecting the entire corporate group.

• Tax Optimisation: Access to 0% corporate tax on qualifying income in Free Zones, no capital gains tax, and no withholding tax on dividends and royalties (subject to meeting specific criteria under UAE Corporate Tax Law).

• Centralised Management and Control: Simplifies the oversight and strategic direction of multiple business interests under one entity.

• Flexibility and Diversification: Enables easy expansion into new markets or industries by setting up new subsidiaries, and allows for spreading investment risk.

• No Minimum Share Capital (in many Free Zones): This reduces the initial financial burden for entrepreneurs.

• 100% Foreign Ownership: Provides complete control to international investors, particularly in Free Zones.

• Ease of Profit Repatriation: Allows for unrestricted transfer of profits and capital out of the UAE.

• Credibility and Investment Opportunities: A well-structured holding company can enhance credibility with lenders and investors, facilitating access to diverse investment opportunities in the region and globally.

• Succession Planning: Offers an effective mechanism for transferring ownership and control across generations.

To learn more about Holding Company and Exemption Under Corporate Tax in UAE, book a free consultation with one of the Flyingcolour team advisors.

Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.