Article (23) of the Corporate Tax Law, titled "Participation Exemption," exempts from Corporate Tax income derived from a "Participating Interest," subject to specific conditions. A Participating Interest is defined as owning 5% or more of the shares or capital of another juridical person, provided it is held for at least 12 continuous months, along with other conditions relating to tax liability and asset composition.
What Income Does the Exemption Cover? (Article 22)
Article (22) provides that the following income and related expenditure are not taken into account in determining Taxable Income:
- Dividends and profit distributions received from a Resident juridical person.
- Dividends received from a Participating Interest in a foreign juridical person under Article (23).
- Any other income arising from a Participating Interest under Article (23).
Conditions for a "Participating Interest" (Article 23)
For an ownership interest to qualify as an exempt Participating Interest, all of the following conditions must be met:
- The Taxable Person holds, or intends to hold, the Participating Interest for an uninterrupted period of at least 12 months.
- The investee company is subject to Corporate Tax or a similar tax in its jurisdiction at a rate no lower than the 9% rate provided for in the UAE Corporate Tax Law.
- The interest entitles its holder to at least 5% of the profits available for distribution and at least 5% of liquidation proceeds on the Participation's cessation.
- The direct or indirect assets of the Participation do not consist of more than 50% of ownership interests or entitlements that would not have qualified for the exemption had the Taxable Person held them directly.
What Exactly Is Exempted?
As long as these conditions continue to be met, the following are excluded from Taxable Income: dividends received from a foreign Participation, gains or losses arising from transferring or disposing of the Participating Interest, and foreign-exchange or impairment gains or losses connected to it. Conversely, the exemption does not apply to losses incurred on liquidation of the Participation, or to certain cases involving a dividend deduction claimed by the distributing company or impairment losses incurred before the conditions were met.
What Happens if Ownership Falls Below 5%?
If the Taxable Person does not maintain an ownership interest of 5% or more in the Participation for an uninterrupted period of at least 12 months, any income that was previously disregarded under this exemption is included in Taxable Income for the Tax Period in which the ownership interest falls below 5%. The exemption is therefore not final once initially obtained; it remains conditional on the ownership percentage and holding period continuing to be met throughout the period the Participation is held.
Illustrative Example
A UAE company has owned 5% of the capital of a foreign company for at least 12 continuous months, that interest entitles it to at least 5% of distributed profits and liquidation proceeds, and the foreign company is subject to tax in its home country at a rate no lower than 9%. In this case, the dividends the UAE company receives from this Participation, as well as any capital gain from later selling the interest, are exempt from UAE Corporate Tax.
Legal References
- Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses — Articles (22) and (23).
For questions about your specific situation, you can ask the UAE Tax & Legislation Helper on Helpers, or consult a licensed chartered accountant.