Understanding UAE's Participation Exemption

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The UAE Corporate Income Tax (CIT) Law provides for an important "participation exemption," for companies with a global presence. It is a provision designed to prevent double taxation of corporate profits.   

Let’s understand more about this exemption and the eligibility conditions. 

Understanding the Participation Exemption

The participation exemption allows UAE companies to exclude certain income from their taxable base. Specifically, dividends and other profit distributions received from foreign companies (referred to as "participations") are exempt from UAE CIT under specific conditions. This exemption aims to incentivize cross-border investments and encourage UAE companies to invest in foreign businesses.   

Key Conditions for Claiming the Exemption

Recently, the UAE issued the Ministerial Decision No. (302) of 2024 revising the provisions and eligibility conditions for claiming a participation exemption. 

The conditions for claiming the participation exemption are as follows:

1.Ownership Interest: The UAE company must hold at least a 5% ownership interest in the foreign company. Alternatively, the exemption may be applicable if the aggregated acquisition cost of the ownership interests in the subsidiary is at least AED 4 million, even if it doesn't represent a 5% shareholding.   

2.Holding Period: The UAE company must have held the ownership interest for an uninterrupted period of at least 12 months.   

3.Subject-to-Tax Test: The foreign company must be subject to corporate income tax or a similar tax in its country of residence at a minimum rate of 9%. This ensures that the foreign company is contributing to the tax base of its home jurisdiction.

4.Asset Test: Not more than 50% of the direct and indirect assets of the participation should consist of ownership interests or entitlements that would not have qualified for the participation exemption if held directly by the UAE company. This condition, which is applicable only where the participation is a related party, aims to prevent the abuse of the exemption by holding companies that primarily invest in passive assets.   

In certain cases, the participation exemption will not be applicable for 2 years, i.e., where a participation was acquired: (a) in exchange for transferring an ownership interest that itself did not qualify for the participation exemption, or (b) through an exempt transfer such as a qualifying tax group or a business restructuring relief. 

It is pertinent to note that where the foreign company is allowed to claim a deduction for dividends or other profits distributed, no participation exemption will be allowed in the UAE. This provision is made in the law to ensure that there is no double non-taxation of the dividend / distributed income. 

Conclusion

The participation exemption is a key feature of the UAE's CIT regime, designed to encourage international business activity and attract foreign investment. UAE companies can significantly benefit from this exemption, reducing their tax burden and enhancing their global competitiveness. Companies with global presence must consider the possibilities of claiming a participation exemption in consultation with their advisors. 

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