UAE free zone companies can distribute dividends to shareholders with no withholding tax in the UAE. However, the treatment of dividends under UAE Corporate Tax and the implications for Qualifying Free Zone Person (QFZP) status require careful planning.
No Withholding Tax on Dividends
The UAE does not impose withholding tax on dividends paid to shareholders — whether individual or corporate, UAE or foreign. This applies to free zone and mainland companies. This makes UAE free zone holding structures very tax-efficient for distributing profits to foreign investors.
Dividends Received — Are They Taxable?
A UAE free zone company that receives dividends from another UAE company (mainland or free zone) can treat those dividends as exempt income under the Participation Exemption, provided it holds at least 5% of the paying company’s shares. Dividends received from foreign subsidiaries are also generally exempt if the participation exemption conditions are met.
Impact on QFZP Status
Dividends received from UAE-mainland operations (i.e., trading with mainland companies) may constitute non-qualifying income for QFZP purposes. If non-qualifying income exceeds the de minimis threshold (AED 5 million or 5% of total revenue), the free zone company loses its QFZP 0% status for the entire year and pays 9% CT on all income. Structure dividends from mainland operations carefully to avoid this threshold breach.
Dividend Distribution Steps
1. Pass a board/shareholder resolution approving the dividend. 2. Ensure the company has sufficient distributable reserves (net profits after deducting losses). 3. Update share registers and issue dividend payment notices. 4. Transfer funds to shareholders’ accounts. 5. Record the dividend payment in the company’s accounting records. There is no requirement to notify the free zone authority or FTA for routine dividend distributions.