Understanding UAE’s Corporate Tax Law :The Participation Exemption

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In the corporate world, taxes are an undeniable part of doing businesses. Companies owning shares usually find themselves obligated to pay tax on dividends received or capital gains upon the sale of these shares. However, for businesses operating in the United Arab Emirates (UAE), a provision in the Corporate Tax law (Federal Decree No. 47 of 2022), often referred to as the “Participation Exemption”, provides a break from this rule.

What does this entail and how can your company benefit from it? In this blog post, we shall delve into the details of this exemption.

A Glimpse at Article 23 of the CT Law

The Participation Exemption is stated under Article 23 of the Corporate Tax law. In essence, it dictates that income derived from a “Participating Interest” is exempted from Corporate Tax, provided that certain conditions are met. A Participating Interest denotes a 5% or greater ownership interest in the shares/capital of a legal entity, referred to as a “Participation.”

Key Conditions for a Participating Interest:

  1. Duration of Ownership: The Taxable Person must hold, or have the intention to hold, the Participating Interest for an uninterrupted period of at least twelve months.
  2. Corporate Tax in the Relevant Jurisdiction: The Participation must be subject to Corporate Tax or a similar tax in the country or territory of residence at a rate not less than specified in the Corporate Tax Law.
  3. Profit Entitlement: The ownership interest in the Participation should entitle the Taxable Person to receive at least 5% of the profits available for distribution and 5% of the liquidation proceeds.
  4. Asset Composition: Not more than 50% of the direct and indirect assets of the Participation should consist of non-qualifying ownership interests.
Understanding UAE’s Corporate Tax Law :The Participation Exemption

What Does it Mean for Your Company?

This provision means that the income your company earns from a Participating Interest, such as dividends and capital gains, is exempt from Corporate Tax, assuming that certain conditions, stated in Article 23, are satisfied.

As an illustration, consider a scenario where your UAE company owns a Netherlands Company (Participating Interest). If your company receives dividends from this, and later sells these shares, thus receiving capital gains, then the income from both these activities can be exempt from Corporate Tax. But, and this is a vital clause, the following conditions should be met:

  1. The UAE company must hold or have the intent to hold, the Participating Interest for 12 consecutive months.
  2. The Participation must be subject to Corporate Tax, or a similar tax, in the country where it is resident.
  3. The ownership interest of the UAE Company entitles it to at least 5% of the profits and liquidation proceeds.
  4. 50% or less of the assets of the Participation consist of non-qualifying ownership interests.
  5. The Participation Interest must meet any other conditions as may be prescribed by the Minister.

Implications for Your company’s Taxable Income

Based on this law, the following income will not be counted in calculating your company’s Taxable Income for Corporate Tax:

  1. Dividends and profit distributions received from a foreign Participation that isn’t a Resident Person.
  2. Gains or losses on the transfer, sale or other disposition of a Participating Interest.
  3. Foreign exchange or impairment gains/losses related to a Participating Interest.

This blog does not explore the impacts of any relevant double taxation treaty. It provides an overview of the CT Law’s specific rule and its potential benefits to your company. For a detailed consultation personalized to your company’s unique situation, contact N. R. Doshi & Partners

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