In the ever-evolving landscape of corporate taxation, the UAE has emerged as a dynamic hub for international businesses. One of the key incentives offered by the UAE’s corporate tax framework is tax relief and exemptions. This fosters economic growth and attracts foreign investment. One of the key exemptions is the “Participation Exemption”. In this blog, we’ll delve into the intricacies of participation exemption in the UAE’s corporate tax system. We will explore how it operates, who can benefit from it, and the advantages it offers to the UAE’s businesses.
What is a Participating Interest?
Participation exemption applies to a participating interest; therefore, there is a need to understand the term. A participating interest pertains to ownership or investment in a business. It entitles the holder to actively participate in the management and decision-making of that business. It is often used in the context of partnerships, where multiple parties collaborate to achieve common goals.
Participation Exemption in the UAE’s Corporate Tax
As per Clause 1 of Article 23 of Federal Decree-Law No. 47 of 2022, income from participating interest shall be exempt from corporate tax. However, it is subject to the conditions mentioned in Clause 2 of the Article.
A participating interest means a 5% or greater ownership interest in the shares or capital of a juridical person (participation). The following conditions should be met under which an ownership interest in participation will be considered a participating interest:
a) The taxable person must have maintained or intend to maintain the participating interest continuously for a minimum period of twelve months.
b) The participation must be subject to corporate tax or an equivalent tax, as per the relevant legislation of the jurisdiction where the legal entity is based, at a rate equal to or greater than 9%.
c) The ownership interest in the participation must entitle the taxable person to receive no less than 5% of distributable profits from the participation and no less than 5% of liquidation proceeds upon the participation’s termination.
d) Not more than 50% of the direct and indirect assets of the participation should comprise ownership interests or entitlements that would not have qualified for a corporate tax exemption under this Article if held directly by the taxable person, subject to any conditions specified by the Minister.
e) Any additional conditions as determined by the Minister may also apply.
Incomes Excluded from Taxable Income
If the above conditions are met, the following incomes shall not be taken into account in determining taxable income:
a) Dividends and other income distributions received from foreign participation that do not meet the criteria of a resident person as defined in corporate tax law.
b) Profits or losses resulting from the transfer, sale, or any other form of disposition of a participating interest (or a portion thereof) occurring after the stipulated time frame specified in Clause 2 or Clause 9 of Article 23.
c) Gains or losses related to foreign exchange fluctuations concerning a participating interest.
d) Impairment gains or losses with respect to a participating interest.
When does a participation exemption not apply?
The participation exemption does not extend to income obtained by the taxable person under the following circumstances:
a) When the participant is eligible for a deduction on dividends or other disbursements made to the taxable person in accordance with the applicable tax laws.
b) If the taxable person has acknowledged a deductible impairment loss concerning the participating interest before the conditions set forth in Clause 2 of this Article are satisfied.
c) When the taxable person or any related party, subject to corporate tax under this decree-law, has acknowledged a deductible impairment loss related to a loan receivable from the participation.
There are a range of incentives within the UAE’s corporate tax framework. Among these, the participation exemption shines as a valuable gem. This exemption extends to those who meet specific conditions, allowing them to reap the benefits of tax reliefs and exclusions. Understanding the intricacies of this exemption, its eligibility criteria, and the exclusions it offers is pivotal for UAE businesses. It’s a testament to the UAE’s commitment to fostering economic growth and enticing foreign investments.
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