Public sector entities and UAE Corporate Tax: Exemptions and emerging challenges

Corporate tax exemptions for public entities safeguard the use of public resources by recognising their role in serving public interest and avoid the needless recirculation of government funds through taxation. For government-controlled entities (GCEs), the exemptions support the delivery of strategic services and infrastructure which aligns with national priorities.

The UAE's recently introduced corporate tax regime, with its competitive 9% headline rate of tax, offers broad exemptions for core public functions. However, the reality for publicly owned companies, particularly those structured as GCEs, is far more nuanced. In light of the continuously evolving corporate tax landscape, public sector groups must carefully evaluate their structures and tax obligations.  

Core exemptions and their scope

Under the UAE corporate tax framework, whilst standard government bodies (federal and local governments, ministries, departments and public institutions) enjoy a largely straightforward exemption, GCEs and similar bodies must satisfy specific conditions to access the exemption.

Not every GCE or its activities qualify for exemption. A GCE is any juridical person, directly or indirectly wholly owned and controlled by a government entity, as specified in a Cabinet Decision. Only GCEs performing mandated activities, as set out in their founding legal instrument and listed in a Cabinet Decision, can benefit from corporate tax exemption.

Commercial or ancillary operations falling outside this mandate are subject to corporate tax. A state-owned infrastructure company, for example, may find its regulated utility services exempt, while other trading arms conducting non-mandated activities would likely fall within the scope of corporate tax.

Where a government entity or GCE conducts non-mandated activities, it is treated as an independent business and must maintain separate financial statements, standalone tax calculations, and arm’s length pricing on all transactions between the exempt “core” and the taxable segment.

Qualifying public benefit entities (such as approved charities and similar organisations) can also generally secure exemption provided they dedicate their activities to public welfare and commit their assets exclusively for the qualifying purposes.

When activities straddle the line

In practice, the line between “mandated” and “commercial” activities is often not clear-cut for larger GCEs. Whilst published guidance is developing, many public sector bodies are navigating complex grey areas. 

Distinguishing between exempt and taxable activities can be complex for GCEs, as uncertainty in determining whether an activity falls within scope of their statutorily mandated activities may result in incorrect tax treatment. 
Transfer pricing rules further exacerbate these challenges, as transactions between mandated and non-mandated segments must reflect market terms, with robust documentation maintained contemporaneously.

Although some exempt entities are not required to register for corporate tax, certain exempt entities are not entirely free from administrative obligations. Many must register for corporate tax to allow the FTA to monitor ongoing compliance.

Group dynamics amplify challenges

In diversified public sector groups, multiple subsidiary layers intensify these complexities. A GCE parent may retain exemption for mandated operations, yet its subsidiaries could be subject to tax depending on the nature of their activities. Sovereign funds with commercial arms will require entity-by-entity eligibility assessments, and mixed structures involving free zones, mainland operations, or foreign entities can create permanent establishment risks and residency uncertainties.

Tax grouping allows consolidation as a single taxable person, but exempt government entities and GCEs (even if they conduct business) cannot form or join a tax group. Additionally, these exempt entities are ineligible for reliefs related to business restructuring and transfers of tax losses. 

Pillar Two and DMTT

Large public bodies must now also grapple with Pillar Two, as the UAE has introduced the domestic minimum top-up tax (DMTT) to ensure a 15% minimum effective tax rate for in-scope multinational groups. The DMTT legislation has specific exemptions for government entities, and groups will therefore need to assess eligibility for any relief under the rules. Pillar Two brings its own obligations, including filings and assessments to determine scope, with potential top-up tax. 

Strategies for navigating the landscape

Public entities should assess their activities and embed clear policies to maintain eligibility for available reliefs and exemptions. Implementing segregated accounting, transfer pricing frameworks, and group-wide standard operating procedures are essential, backed by regular internal reviews and strong governance structures.

The UAE corporate tax regime strikes a balance in ensuring fiscal neutrality and competitive fairness, whilst preserving its tax base in parallel. As the tax framework evolves, with entities adapting from a tax-free environment, a proactive, well-governed approach to tax management remains the cornerstone of sustained operational resilience. 

This article was originally adapted and published in the Lexis Middle East Gulf Tax, Winter 2025 Edition.