Tax Exemptions for Qualifying Public Benefit Entities that includes Universities from UAE Corporate Tax Law

The Ministry of Finance (‘MoF’) has recently issued a Cabinet Decision (‘CD’) No. 37 of 2023 dated 07 April 2023 regarding the Corporate Tax exemptions to Qualifying Public Benefit Entities (‘QPBE’) for the purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (‘Corporate Tax Law’).

Further to the CD, MoF also released an explanatory Guide on 12th May 2023, where they provided an explanation and intended effect of each Article of the Corporate Tax Law.

As per the UAE MoF, QPBEs that focus on public interest, promoting philanthropy, community services, or corporate and social responsibility are eligible for tax exemptions under the country’s corporate tax law. This decision by Cabinet is designed to reflect the important role these entities are playing in the UAE.

Article 9 of the Corporate Tax Law provides the conditions to be met by a public benefit entity to be eligible for Corporate Tax exemption. Some of the conditions are summarized below:

• The entity is established and operated exclusively for the promotion of social welfare or public benefit.
• The entity should undertake business activity that directly relates to or are aimed at fulfilling the purpose for which it is established.
• Its income or assets are used exclusively in the furtherance of the purpose for which it was established.
• Its income or assets are not payable or made available for the personal benefit to any other parties other than QPBE itself, Government Entity or Government Controlled Entity).

The key aspects of the cabinet decision are outlined below:

• The decision lists more than 500 entities (Federal as well as for each Emirate) that shall be considered exempt QPBEs. The list covers religious institutions, government sourced funds, sports club charities, trust clubs, school, and college welfare funds.
• The government entities shall notify the MOF of any changes occurring in listed QPBEsin a manner (to be prescribed by the MOF) and within (20) working days of the occurrence of the changes.
• Any government entity can also file an application to the MOF suggesting additions and deletions to the list of QPBEs, which is subjected to the review and processing of the application by the MOF and acted upon by the Cabinet.
• QPBEs and government entities must provide all the relevant documents to the MOF evidencing the compliance with conditions mentioned in Article 9 of the Corporate Tax Law.

Important considerations to note:

• Even though the listed QPBEs shall be exempt from Corporate Tax,they are required to take Corporate Tax registration as of 1 October 2023 as per Federal Tax Authority Decision No. 7 of 2023 clause 1 Article 2.
• One of the eligibility conditions for QPBEs is that it conducts Business Activity that directly relate to its purpose. This condition is difficult to satisfy for Universities, where they have revenue from unrelated business activities that do not qualify for exemption.
• And that its income or assets are not available for the personal benefit.This condition is difficult to satisfy for  privately owned Universities.
• Any donations, grants or gifts made to listed QPBEs shall be a deductible expenditure for Corporate Tax purpose as per Article 33 of the Corporate Tax Law.

CorporationTax and Universities

Background

Non-profit organizations such as Universities supplement governmental efforts in promoting economic and social development and thus serve as partners in advancement of welfare activities. The revenue foregone by way of tax exemption is, therefore, employed effectively for achieving the nation’s developmental goals.

Internationally, charities and other public benefit organizations are also generally exempt from taxation.

The process of obtaining the exemption by the Universities is subjected to meeting the certain conditions specified in the law. The intention is said to ensure allowance of exemption is granted to the deserving institutions and avoiding misuse of beneficial provisions, which will eventually increase complexity in administration and compliances of these institutions.

There is a myth that universities simply do not pay tax, and therefore tax is not an issue.

Universities are varied and complicated organizations, most are non-profit making and therefore most of their income is exempt from corporate tax. However, some of its income may fall outside of those reliefs and will be subject to corporate tax.

The Universities that meet the relevant conditions are required to make an application to become eligible for preferential tax treatment, however some Universities are directly listed in the CD without having to make an application on the basis the list of QPBE’s provided by each Emirate government to the MoF.The Universities that are directly listed in the CD will still have to assess all its business activities and maintain the relevant documents to substantiate the compliance. This favorable tax position derives from their non-profit status.

When QPBE’s with exempt status engage in commercial activity, it may raise unfair competition concerns if the goods or services supplied by them are also supplied by non-philanthropic.

Let’s go through some of the areas across the sector where tax issues usually arise which is summarized below.

Charitable Activities

The main corporation tax relief pertaining to the University is an exemption available to charitable bodies on any surplus arising from charitable activity. In the University context, charitable activity is:

• The provision of education
• Research where the results are made publicly available, and
• Services that are beneficial to the community including the provision of health-related activity.

It is important to remember that the relevant test is whether the activity that gives rise to the profit is itself charitable, not how the surplus will be spent.

E.g. The provision of consultancy is not a charitable activity and is liable to corporate tax even if the income derived from the consultancy will be used to support educational activity.

Therefore, it is critical that Universities assesses all its business activity correctly from Corporation Tax perspective, to ensure if all its business activities fall within the exemption status. They may either be exempt from corporate tax or liable to corporate tax, there is no partial exemption available to them.

Some of University activities includes:

• Undergraduate and postgraduate degrees
• Courses provided to commercial entities
• Conferences and seminars
• Commercial research
• Nonprofit research through grants received

• Student and staff accommodation
• Day care centers in some Universities
• Rental of properties that are received as donations
• Rental of Lab facilities and charges for use of facilities for external trainings
• Leasing of excess space for café and other food joints
• Testing of samples or goods

Under the UK law activities that are ancillary to the charitable activity of the Universities such as the provision of catering and residential facilities to students. Property income (i.e., rent of surplus space or income from investment property) is also exempt.

The UAE Corporate tax law does not in itself limit these entities from engaging in commercial activity or even acquiring a surplus if that business activity directly relates to fulfilling its purpose (and surplus is not distributed as dividends or as unreasonably high salaries or payments).Entities must reinvest their surplus towards activities aimed at fulfilling their worthy purpose (Public Benefit).

Non-Charitable Activities

Areas that are non-charitable and therefore could give rise to a tax include:

• The provision of consulting
• Testing facilities; or
• Sales of goods that are not "educational".

Where a department in a university undertakes such activity and it generates a profit, the clarification from FTA must be obtained for the correct tax positions. Where applicable in some cases, it may be necessary for the Universities to restructure their business activities into taxable and exempt activities and may consider transferring their taxable business activities into a separate trading company or a wholly owned subsidiary (references are drawn from the UK law)

If these institutions engage in too much of commercial activity or do not reinvest the surplus into a worthy purpose, they fail to meet the criteria for exemption status and becomes subject to corporate tax on all its profits.  

Student Activities

Certain activities are undertaken by the beneficiaries of the Universities, for example, research. The beneficiaries of the University are students so any profit-making activity in the University that is undertaken by students would need to be assessed.

Funds used for non-charitable purposes.

The tax reliefs are all given on the provison that the surplus derived are applied for public benefit purposes. Hence when a university applies its funds for non-public benefit purposes, this can create a corporation tax liability (as well as regulatory problems)

The university should document how the funds will be used and carry out due diligence on the recipient of the funds, to demonstrate that they are being applied for its purposes (this does not apply to the purchase of goods or services in the normal course of business).

The Administrative Aspects

Therefore, even with the preferential tax treatment for both VAT and Corporate tax, the Universities are often subject to more compliance and documentation requirements.

From VAT perspective, certain Higher Education institutions that are owned or receives 50% of its funding directly from federal or local government, education services that meets the condition specified in the law are taxed at 0% which forms a major part of their revenue. Due to which they are often in a refundable position and are subject to greater scrutiny by FTA in terms of both compliance and the documentation requirements to process the refund claims.

It will be interesting to see if the Corporation tax law with the preferential tax treatment to the Universities follows the same precedence.

Under Corporation tax law, Universities may keep both their charitable business activities and non-charitable business activities (if any) separate.It will be burdensome for these institutions to isolate non charitable activities and pay corporate tax on those activities along with other documentation and compliance requirements.

There should be a safe harbor or a threshold of 5% for QPBE’s that is available to Extractive and Non-Extractive Natural Resource Business, where their business activities is ancillary or incidental to their main business and the Revenue of such other business in a Tax Period does not exceed 5% of the total Revenue is also exempt to relieve them from the additional compliance requirements.

Therefore, it’s clear that tax in universities remains a complex issue!

Having a robust finance system and audit trail and access to sufficient internal and external tax resources will continue to be critical.

Concluding remarks

Due to the complex nature of the Universities operations,more guidelines and clarifications would be needed in the due course to clarify the grey zones as the Corporate Tax law matures.

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