Planning to Open a Holding Company in the UAE

Are you an owner of a holding company registered in Free Zone or Offshore in UAE or planning to open a holding company in the UAE? Are you wondering how the Corporate Tax in UAE is applicable on the holding companies registered in Free Zone? In this article, we are going to analyze in detail the applicability of Corporate Tax for Free Zone holding company.

Before discussing the applicability of Corporate Tax, keep in mind that all the companies registered as per the UAE Law shall register for Corporate Tax before the deadline specified in the FTA Decision No.3 of 2024 . In order to avail of the benefits, reliefs and exemptions under the UAE Corporate Tax Law, the first step is to get register and obtain the Tax Registration Number (TRN) for Corporate Tax.

A holding needs to determine the income type to understand the Corporate Tax applicability. Below are few examples of income which can be generated by a holding company.

• Dividend or profit distribution
• Capital gain from the sale of an asset
• Interest from Investment
• Rental Income from real estate investment

A resident company who is getting income by way of dividends or capital gain (except capital gain from real estate assets) can check the eligibility for exemption under UAE Corporate Tax Law. Read to know more. We have published a few interesting case studies on participation interest exemption which are self-explanatory. If you are eligible for exemption under UAE Corporate Tax, there is no further requirement to follow this blog. Let us assume, the holding company is earning income, but not eligible for exemption under Corporate Tax Law, in that case, subject to a condition, that revenue may be eligible for 0% Corporate Tax under the qualifying activity of “Holding of shares and other securities for investment purposes”.

As per Article 18 of Corporate Tax Law, followed by the Ministerial Decision No.265 of 2023, Cabinet Decision No.100 of 2023 and relevant guides, a Qualifying Free Zone company can earn 0% Corporate Tax on their Qualifying Income We have written a detailed article with all the insights relating to Free Zone Company and taxation for a Free Zone company Read here . Article 2(1) (d) of Ministerial Decision No.265 of 2023 has mentioned that Holding of shares and other securities for investment purposes is a qualifying activity. Any Free Zone company that earns income from outside the Free Zone area (Mainland UAE or Foreign) will be eligible for 0% Corporate Tax only on the income from Qualifying Activities. Federal Tax Authority published a guide Corporate Tax Guide | CTGFZP1 for Free Zone person which has given a lot of clarification on this activity along with case studies. Let us dive into that.

Holding of shares and other securities for Investment purposes

Under UAE Corporate Tax Law, the income from shares (Dividend or capital gain from inside UAE or outside UAE) may become eligible as exempt income. However, in order to claim the exemption, there are conditions attached. There can be situations like the conditions for participation interest exemption cannot be achieved. We have published few interesting case studies on participation interest exemption which are self-explanatory Read here.

For Example: - In order to claim participation interest exemption under UAE Corporate Tax, the UAE Company shall hold a minimum of 5% shares, 5% voting rights and 5% eligibility for liquidation proceedings. If a UAE Free Zone company, held shares in a public listed company and if the percentage of shares held is less than 5%, the company cannot claim the participation interest exemption. Does that mean the Free Zone Company will end up paying Corporate Tax on the dividend or capital gain received from the shares held in the publicly listed company? Here the benefits of UAE Corporate Tax Law and the intention of the UAE Tax authority to make UAE as a global Hub provide further reliefs.

The Free Zone Company holds shares in other companies for investment purposes and can consider their income from shares (Dividend or Capital Gain) as a qualifying income (income which is eligible for 0% Corporate Tax) for Corporate Tax purposes. While such income is considered as qualifying income, the free zone company shall satisfy the other conditions to become the Qualifying Free Zone. For those who want to read more about the conditions Read here.

Among all other conditions, maintaining substance inside Free Zone Company for a holding company was a challenging one. Normally, in order to prove the substance inside the Free Zone, adequate full-time employees, adequate assets, and adequate operating expenditures are required inside the Free Zone. We need to keep in mind that if any one of the conditions to become a qualifying free zone is violated, the company will cease to become eligible for 0% Corporate Tax in the year of violation and subsequent 4 tax years.

Does a holding company require full-time employees to operate? Do they require a big office in a free zone? Are they required to spend operating expenditures inside the Free Zone to become eligible for 0% Corporate Tax? FTA guide for Free Zones clarified these questions through a simple case study which is as below:-

Company V (a Free Zone Person) is engaged in the Qualifying Activity of holding of shares and other securities for investment purposes. Investment decisions are made by the Board of Directors and are executed through a broker. Company V has a small office in a Free Zone but does not have any employees.

Although Company V has no operational substance, the decision-making by the

Board of Directors constitutes the core income-generating activities of Company V. Consequently, provided decision-making takes place in the Free Zone (for example, minutes of the board meetings at Company V’s office in the Free Zone), Company V would be considered to meet the adequate substance requirement.

The intention of the Free Zone Company shall be to hold the shares for an uninterrupted period of 12 months, in case it is not held already for 12 months. Then only the Free Zone company can substantiate the intention of investment.

As we have already analyzed the holding of shares, what happens to the other securities? Any Qualifying Free Zone company that earns income from investment in any financial instrument which are kept for investment purposes, those income also can be qualified for 0% Corporate Tax.

To conclude, setting up a Free Zone company for holding purposes, give flexibility to the investor by way of either exemption from Corporate Tax on the participation interest or may make eligible for 0% Corporate Tax as a qualifying Free Zone person.

To learn more about 0% Corporate Tax for a Free Zone Holding Company, 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.