Who is Qualifying Public Benefit Entity, is their income exempted from Corporate Tax?

A Qualifying Public Benefit Entity (QPBE) in the United Arab Emirates (UAE) refers to an organization that meets specific criteria and is established for the purpose of promoting public benefit rather than generating profits. QPBEs play a significant role in advancing social welfare, cultural development, education, healthcare, or other areas of public interest within the UAE. Recognizing their importance, the UAE government provides certain exemptions and benefits to QPBEs, including exemption from corporate tax. This favorable tax treatment aims to encourage the growth and sustainability of organizations dedicated to public benefit, fostering a more inclusive and prosperous society.

QPBEs are typically non-profit organizations or foundations that operate for the betterment of society. They may encompass a wide range of entities, such as charitable organizations, non-governmental organizations (NGOs), associations, and educational or research institutions. These entities are legally bound to prioritize their objectives of public benefit and work towards achieving positive social outcomes

The income of Qualifying Public Benefit Entities is Exempt from Corporate Tax subject to some conditions, we will discuss it in detail.
Conditions
a) Purpose: Established and operated for religious, charitable, scientific, artistic, cultural, athletic, educational, healthcare, environmental, humanitarian, animal protection or similar purposes; or as a professional entity, chamber of commerce or similar entity operated exclusively for the promotion of social welfare or public benefit.
b) Business Activity: Does not conduct any Business or Business Activity, except for activities directly related to fulfilling its purpose.
c) Income and Assets: Income and assets are used exclusively for the purpose for which the entity was established, or for the payment of associated necessary and reasonable expenses.
d) Benefit to Members: No part of income or assets is payable to or available for the personal benefit of any shareholder, member, trustee, founder, or settlor who is not a Qualifying Public Benefit Entity, Government Entity, or Government Controlled Entity.
e) Additional Conditions: Any other conditions prescribed in a Cabinet decision at the suggestion of the Minister.

Purpose

The purpose of a Qualifying Public Benefit Entity is the reason for its existence. It is the primary goal or mission that the entity was established to fulfill. Qualifying Public Benefit Entities are established and operated for specific purposes that fall under one of the following categories:
1. Religious, charitable, scientific, artistic, cultural, athletic, educational, healthcare, environmental, humanitarian, animal protection, or other similar purposes.
2. Professional entities, chambers of commerce, or similar entities that are operated exclusively for the promotion of social welfare or public benefit.
The purpose of a Qualifying Public Benefit Entity must be clearly stated in its governing documents, such as its articles of association or bylaws. The entity must demonstrate that its activities and expenditures are consistent with its stated purpose.
In order to maintain its exemption from Corporate Tax, a Qualifying Public Benefit Entity must ensure that its income or assets are used exclusively in the furtherance of its stated purpose, and that no part of its income or assets is payable to or available for the personal benefit of any shareholder, member, trustee, founder, or settlor that is not itself a Qualifying Public Benefit Entity, Government Entity, or Government Controlled Entity.
Overall, the purpose of a Qualifying Public Benefit Entity is to serve the public interest and contribute to the betterment of society by carrying out activities that are consistent with its stated mission.


Business Activity

In the context of Qualifying Public Benefit Entities, a Business Activity refers to any activity that generates income or profit for the entity through the provision of goods or services to third parties.
For example, if a charitable organization establishes a commercial printing press as a means of generating income to support its charitable activities, then the printing press would be considered a Business Activity. However, if the charitable organization only uses the printing press to produce its own marketing materials and does not offer printing services to third parties, then the printing press would not be considered a Business Activity.
It's important to note that while Qualifying Public Benefit Entities are generally exempt from Corporate Tax, engaging in certain types of Business Activities may result in the entity being subject to tax on the income generated from those activities. Therefore, it's important for Qualifying Public Benefit Entities to carefully consider any potential Business Activities and ensure that they comply with applicable tax laws and regulations.
Another example of a business that can be done by public benefit entities is the operation of a thrift store or charity shop, where donated items such as clothing, books, and household goods are sold to generate revenue that can be used to support the organization's charitable or social welfare activities. The thrift store can also provide employment or volunteer opportunities for individuals in need or looking to contribute to the community.
The Cabinet may prescribe certain conditions and limitations on the business activities and income of a Qualifying Public Benefit Entity to maintain its exempt status. This may include setting a percentage limit on the income that can be generated through business activities without affecting the entity's eligibility for exemption from Corporate Tax.
For example, the Cabinet may set a limit that only allows a maximum of 20% of a Qualifying Public Benefit Entity's total income to be generated through business activities. If the entity generates more than this limit, it may lose its exempt status and become subject to Corporate Tax on the additional income generated through business activities.

Income and Assets

This refers to the financial resources of the Qualifying Public Benefit Entity. To be eligible for tax exemption, a qualifying entity must meet the condition that its income and assets are used exclusively for the furtherance of its stated purpose.
For example, if a non-profit organization is established for the purpose of providing free education to underprivileged children, its income and assets should be used solely for that purpose. This means that any fees or donations received by the organization should be used to fund educational programs, buy educational materials, or pay for salaries and other necessary expenses related to running the organization. The organization should not use its funds for any other purposes or invest them for financial gain outside of its stated purpose.
Similarly, if an animal protection organization is established to provide care and shelter to abandoned or abused animals, its income and assets should be used solely for that purpose. This means that any donations or grants received by the organization should be used to fund animal welfare programs, provide food and medical care to animals, or pay for salaries and other necessary expenses related to running the organization. The organization should not use its funds for any other purposes or invest them for financial gain outside of its stated purpose.


Benefit to Members

No part of qualifying public benefit entities' income or assets is payable to, or otherwise available, for the personal benefit of any shareholder, member, trustee, founder, or settlor that is not itself a Qualifying Public Benefit Entity, Government Entity or Government Controlled Entity. However, expenses related to the fulfillment of the entity's purpose, such as paying a teacher for teaching in their professional capacity even though the teacher is a trustee, may be permissible.
Let us consider another example, Dr. Patel is a medical doctor who is also a trustee of a hospital that is established and operated as a Qualifying Public Benefit Entity. The hospital provides healthcare services to the local community and is exempt from Corporate Tax under the conditions set out in the applicable legislation.
As a trustee of the hospital, Dr. Patel is involved in the governance and oversight of the hospital's activities. He does not receive any personal benefit from the hospital's income or assets, and all income generated by the hospital is used exclusively to further its charitable purpose of providing healthcare services.
Dr. Patel is also employed by the hospital as a medical doctor and receives a salary for his services. This salary can be treated as an expense of the hospital and the restriction provided in clause d of article 9 of the Decree Law would not be applicable to this case.

Effective Date of Exemption
According to the UAE Federal Decree-Law No. 47 of 2022, the exemption for Qualifying Public Benefit Entities from Corporate Tax is effective from the beginning of the Tax Period in which the entity is listed in the Cabinet decision issued at the suggestion of the Minister, or any other date determined by the Minister.
This means that a Qualifying Public Benefit Entity must be officially listed by the Cabinet decision in order to be eligible for the exemption. The effective date of the exemption will depend on when the entity is officially listed. If the Cabinet decision is made before the start of a Tax Period, then the exemption will be effective from the beginning of that Tax Period. If the Cabinet decision is made during a Tax Period, then the exemption will be effective from the date specified in the decision or any other date determined by the Minister.
It is important to note that the exemption will only apply to income generated by the entity after the effective date of the exemption. Any income generated prior to the effective date will still be subject to Corporate Tax.

Compliance monitoring
Compliance monitoring refers to the process by which the government agency responsible for enforcing the tax law (in this case, the Authority) ensures that these entities are complying with the conditions that make them eligible for tax exemption.
To monitor compliance, the Authority may request any relevant information or records from the qualifying public benefit entity within the timeline specified by the Authority. This information may include financial statements, records of income and expenses, details of any business activities, and any other relevant documents. The Authority will use this information to verify that the entity is using its income and assets exclusively for the purposes for which it was established, that it is not paying any benefits to its members or founders and that it is not engaged in any business activity that is not directly related to fulfilling its purpose.
If the Authority determines that a qualifying public benefit entity is not in compliance with the conditions for exemption, it may take enforcement action, such as imposing penalties or revoking the exemption. Therefore, it is important for qualifying public benefit entities to maintain accurate and up-to-date records and to cooperate with the Authority's requests for information to ensure compliance with the tax law


Disclaimer: The information provided in this article is for general educational purposes and is not intended to serve as professional advice, whether financial, legal, tax-related, or any other field. Laws and regulations can change, and individual circumstances can vary widely. Relying solely on the information in this article for making important decisions is not recommended, and we disclaim any liability for actions taken without seeking appropriate professional consultation.