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Post By: Mark Thompson January 16 2024

Corporate Tax Update on Private Pension and Private Social Security Fund

Private pensions and social security funds are vital for financial stability in the UAE. In a bold move to foster equality and financial security for both employers and employees, the Ministry of Finance in the UAE has recently made significant changes to the regulations governing private pension funds and social security funds. The new regulations, outlined in Ministerial Decision No. 115 of 2023, specify the conditions for tax exemption and introduce novel guidelines for the administration and governance of these funds.

Private Pension Fund 

A private pension fund is a fund created to manage pension contributions and provide payments to individuals who have retired after reaching a defined retirement age. The General Pension and Social Security Authority (GPSSA) in the UAE has set forth the conditions under which private pension funds can be exempt from corporate taxes (“CT”). To qualify for the exemption, the fund must meet the following criteria:

  1. The fund comprises a pool of assets that have been assigned by law or contract as Pension Plan assets or acquired using Pension Plan contributions for the exclusive purpose of financing pension plan benefits.
  2. The fund grants pension plan members or beneficiaries with a right, entitlement or other contractual claim against its assets or earnings
  3. The fund's income solely comprises income as stated in Article (4) of the Ministerial Decision.
  4. The fund must have a licensed auditor.

You can also read: Resident and Non-Resident Persons for UAE Corporate Tax Purposes?

Guidelines for Deductible Contributions to a Private Pension Fund

Along with the exemption conditions, Ministerial Decision No. 115 also outlines regulations in relation to contributions to a private pension fund. It states that an employer, as a taxable individual, can deduct the entire amount contributed to private pension funds for their employees. This deduction is limited to a maximum of 15% of the total eligible compensation paid during the applicable tax period.

Private Social Security Fund

A private social security fund is a fund created by a private employer for the purpose of providing end-of-service benefits to employees. For private social security funds to qualify for corporate tax exemption, several stringent conditions must be met, including:

  1. The fund consists of assets that have been contributed to it or that have been legally or contractually assigned to it with the express intent of financing the End-of-Service Benefit.
  2. The fund’s income must only include income as specified in Article 4 of the Ministerial Decision.
  3. The fund must have a licensed auditor.

Permissible Sources of Income for Private Pension Fund and Social Security Fund

With regard to the income of funds, both private pension funds and private social security funds must earn their income from the following permissible sources only:

  • The fund may earn income from investments or deposits held for fulfilling its obligations, provided the fund doesn't engage in its own business operations.
  • Another source of income are underwriting commissions that are charged for the purposes of the fund.
  • It also includes rebates of charges paid by the fund to asset managers.
  • And other income derived from the investments made for the well-being of members or beneficiaries.

Implications for Employers and Employees

The legislative updates in regard to private pension and social security funds enhance parity between insurers from the government and private sectors, emphasizing a fairer distribution of pension benefits. Thus, employers must ensure strict adherence to the revised regulations governing private pension funds and social security funds.

For employees, these changes translate into potential modifications in pension contributions, particularly for new Emirati workers, who will experience a reduction in take-home pay and an increase in the accumulation of a more substantial pension fund. While this adjustment may initially affect disposable income, the long-term benefit is a more robust financial safety net after retirement.

You can also read: Is a Natural Person Eligible for the Application of the Small Business Relief?

In Conclusion

The recent updates to the regulations governing private pension funds and social security funds in the UAE highlight the nation's commitment to ensuring financial security for its workforce. It's essential for both employers and employees to familiarize themselves with the new requirements and proactively adapt their existing schemes to comply with the new regulations, fostering a seamless transition.

CDA as Your Tax Expert

As you navigate these changes, CDA - an esteemed accounting and auditing firm in Dubai, stands ready to guide businesses through the intricacies of such legislative updates, ensuring compliance and helping both employers and employees achieve a more secure financial future in the ever-evolving UAE landscape. We, with our best professionals in accounting, auditing, and tax consulting services, are well-geared to serve you with streamlined services.

Author

Mark Thompson

Full-stack Developer, Blogger, and Tech Enthusiast.

Mark specializes in digital marketing, SEO, and content strategy.