Impact of UAE’s Corporate Tax on Offshore Structures & Holding Companies

 Impact of UAE’s Corporate Tax on Offshore Structures & Holding Companies

Introduction

The introduction of corporate tax in UAE marks a significant shift in the region’s economic landscape, especially for businesses that have long benefited from the country’s tax-free status. One of the most affected structures under this new regime are offshore entities and holding companies—particularly those set up in free zones or used for global asset protection and investment holding.

This article explores how the UAE’s corporate tax framework impacts offshore structures, holding companies, and multinational entities, and provides strategic insights for adapting to the new tax environment.

What Is the Corporate Tax in UAE?

The UAE corporate tax regime, introduced under Federal Decree-Law No. 47 of 2022, came into effect on 1 June 2023. It applies a standard corporate income tax rate of 9% on net profits exceeding AED 375,000, with certain exemptions and incentives still available for free zone and qualifying entities.

Key features include:

Applicability to both onshore and free zone entities

Anti-avoidance and transfer pricing rules

Requirements for economic substance and transparent reporting

Offshore Structures in the UAE: A Brief Overview

Before the implementation of corporate tax, offshore companies in jurisdictions like RAK ICC, JAFZA Offshore, and Ajman Offshore were popular vehicles for:

Global investment holding

Intellectual property (IP) ownership

Tax-neutral structuring

Privacy and asset protection

These entities were not allowed to operate within the UAE market and were exempt from corporate tax.

How Corporate Tax in UAE Affects Offshore Companies

While offshore companies remain legally recognized, the corporate tax in UAE brings new implications:

1. Economic Substance Regulations (ESR) Enforcement

Even before corporate tax, UAE entities engaged in relevant activities (like holding companies, financing, leasing, or IP management) were required to demonstrate economic substance. Under the new regime:

Substance requirements are being more rigorously enforced

Offshore companies with no physical presence or employees in the UAE may be reclassified as non-compliant

Non-compliance can lead to penalties or loss of tax-exempt status

2. Qualifying Free Zone Person (QFZP) Status

Offshore companies registered within free zones (e.g., JAFZA Offshore) may apply for QFZP status if:

They derive income only from qualifying activities (e.g., holding shares in subsidiaries)

They maintain adequate substance in the UAE

 However, failing to meet these criteria could result in full 9% taxation on profits.

3. No Blanket Exemption

Unlike the previous assumption that offshore means tax-free, the new law does not offer blanket exemptions for offshore entities. Each company must assess:

Nature of income

Location of operations

Economic presence

Source of revenue (mainland vs. foreign)

Holding Companies Under UAE Corporate Tax

Holding companies are often used by family offices, HNWIs, and multinationals to:

Own shares of other subsidiaries

Centralize control

Optimize tax structures

Key Impacts:

Passive Income: Dividends received from local or foreign subsidiaries may be exempt, if specific conditions are met (e.g., a minimum 5% ownership in foreign entities for 12 months).

Capital Gains: Gains from the sale of shares may also be exempt under certain conditions.

Reporting Requirements: Even exempt income must be reported, and transfer pricing documentation may be required for related party transactions.

International Implications & Substance Challenges

As the UAE aligns more closely with OECD standards and global tax transparency initiatives, many offshore and holding structures must reassess:

Substance over form: Shell companies with no UAE operations may face increased scrutiny.

Controlled Foreign Company (CFC) rules in other jurisdictions could attribute profits from UAE holding companies back to parent entities in high-tax countries.

Double Taxation Agreements (DTAs): Businesses must structure to utilize UAE’s 130+ DTAs, ensuring actual management and control occurs in the UAE.

Strategic Steps for Offshore and Holding Companies

To adapt to the corporate tax in UAE, businesses should:

Conduct a Tax Impact Assessment

 Evaluate whether your entity falls within the taxable threshold and what portion of your income is at risk.

Review Substance Requirements

 Ensure there is physical presence, management, and control in the UAE for offshore or free zone companies.

Evaluate Group Structures

 Consider restructuring holding companies to comply with QFZP criteria or shifting operations to meet exemption rules.

Update Transfer Pricing Policies

 Ensure arm’s-length pricing for transactions between group entities and maintain documentation.

Seek Professional Tax Advice

 UAE tax law is still evolving. Engaging a qualified tax advisor can help ensure long-term compliance and efficiency.

Conclusion

The implementation of corporate tax in UAE is a paradigm shift—especially for offshore structures and holding companies that once operated in a tax-neutral environment. While the UAE remains a competitive jurisdiction with many benefits, businesses must now operate with greater transparency, substance, and compliance.