All About Participation Exemption Under UAE Corporate Tax

Business entities in UAE have faced a significant transition after the introduction of the UAE corporate tax in the year 2023. The businesses in the UAE are now expected to comply with the regulations of the new regime. With stringent compliance requirements, there are many exemptions and deductions that are available for the businesses. The taxable entities must be aware of the regulations and the criteria in order to avail the exemptions and deductions whereby it could reduce the tax expenses. In this blog, we have shed light on the participation exemption and the conditions that are to be met to be eligible for the participation exemption.

Participation Exemption

A participation exemption has been provided under the CT regime with the motive of avoiding any double taxation on any income that might be derived from the qualified foreign participation. In fact, any dividends and the capital gains received from any such holdings would be exempt from UAE corporate tax to avoid the tax burdens.

The exemptions provided under the participation exemption might include exemption of the foreign dividend, capital gains or losses, foreign exchange gains or losses, and impairment gains or losses.

The participation exemption rules as per the CT regime include the definition and conditions related to the participating interest, clarifying the different income and losses that are eligible for exemption under the participation exemption and the consequences of failing to meet the conditions of the participation exemption.

Condition to be Met Related to Participation Interest for Being Eligible for Participation Exemption

In order to be eligible for the participating interest, there are certain conditions that must be met to avail the exemptions under the participation exemption. The conditions include the following:

1. There must be participation interest that includes at least 5% or more of the ownership interest, also known as the minimum ownership test.
2. The ownership interest could also be considered as satisfied if the acquisition cost of the ownership interest exceeds or is equal to AED 4 million, which is also known as the minimum acquisition cost test.
3. For the period of at least 12 months, the said participation interest must be held, or there must be an intention to hold it for such a period, also known as the holding period test.
4. Participation would be subjected to the CT or any other equivalent foreign CT at the rate of 9%, also known as the subject to tax test.
5. At least 5% of the profit and any of the liquidation proceeds should be entitled to the holder of ownership interest in the participation, which is also known as the entitlement to profits and liquidation proceeds test.
6. The last condition includes the asset test, where not more than 50% of the direct or any indirect asset of the specific participation must include the ownership interests, which result in the non-qualification for the participation exemption if it is held directly.

These conditions are to be met to ensure the participation interest whereby to get the participation exemption.

If there is less than 5% shareholding, then the alternative condition of the minimum acquisition cost test should be met, where the taxable person is considered to have the participation interest if the cost related to the acquisition is more than or equivalent to AED 4 million.

How Can CDA Assist?

CDA, being one of the leading accounting and auditing firms in Dubai, has a well-trained tax team with all the required knowledge, enabling the client to ensure compliance with the prevailing tax regimes. With our tax professional, we assist you in reducing the tax expenses and in identifying the exemptions and deductions for which the clients would be eligible. Our experts are always at your hand to ensure that the conditions related to the exemptions and other tax allowances are met, thereby reducing your tax burden.

To know more about the tax services from our team, connect with our team now.