Which Entities Fall Outside the Scope of UAE Top-up Tax

Alongside its guidance on scope and registration, the FTA (Federal Tax Authority) has published a separate guide on excluded entities and investment entities under the Top-up Tax rules.

The six categories of primary Excluded Entity

The legislation lists six.

1. A governmental entity
2. An international organisation
3. A non-profit organisation
4. A pension fund
5. An investment fund that is the UPE (Ultimate Parent Entity) of the group
6. A real estate investment vehicle that is the UPE of the group

An investment fund or a real estate investment vehicle only qualifies as an Excluded Entity where it is the UPE. A fund sitting further down the structure does not qualify on that basis, although it may still fall outside the charging provision as an investment entity.

The definitions themselves are demanding.

An investment fund must satisfy seven separate criteria, including pooling assets from multiple investors who are not all connected to one another. A fund held entirely by one family through connected companies fails that first test, however professionally it is managed.

A non-profit organisation has to satisfy six criteria covering purpose, tax exemption, absence of private ownership, restrictions on distributions, the destination of assets on dissolution, and a general condition that disqualifies any entity carrying on a trade unrelated to its purpose.

Subsidiaries of an Excluded Entity

The rules extend the exclusion to certain entities owned by a primary Excluded Entity, on the basis that these organisations often need to operate through separate vehicles for regulatory or commercial reasons. There are two routes.

Under the first, one or more primary Excluded Entities must hold at least 95% of the value of the entity, and the entity must operate exclusively or almost exclusively to hold assets or invest funds for their benefit, or carry out only activities that are ancillary to theirs. Under the second, the ownership threshold drops to 85%, but substantially all of the entity’s income has to consist of excluded dividends or excluded equity gains and losses.

Ownership is measured by value, not by the number of shares held, so a shareholder holding almost every issued share can still fall well below the threshold where a second class of shares carries most of the value. And indirect ownership is counted proportionally, so a chain of two 95% holdings gives 90.25% and fails the test at the second level.

Investment entities located in the UAE

An investment entity located in the UAE is not covered by the charging provision even where it does not qualify as an Excluded Entity. The category covers investment funds, real estate investment vehicles and insurance investment entities, together with certain entities they own. The insurance investment entity is the category most likely to be relevant to commercial groups, covering the vehicle through which a regulated insurer invests premiums to meet future policyholder claims.

What This Means for Your Business

Exclusion is a technical conclusion reached entity by entity, not a status that follows automatically from a group’s sector or from its CIT treatment. Foundations, family offices, fund structures and insurance groups in the UAE will often find that the holding company qualifies while an operating subsidiary two levels down does not, and the difference frequently comes down to a percentage or to the exact wording of a constitutional document.