Demystifying Participation Exemption in UAE's Corporate Tax
The introduction of Corporate Tax (CT) in the UAE brought a wave of adjustments for businesses. While CT helps streamline the tax system, double taxation on dividends and capital gains can be a concern. Thankfully, Article 23 of the CT Law offers a participation exemption, and Ministerial Decision No. 116 of 2023 provides the nitty-gritty details. Let’s unpack this beneficial provision for UAE businesses.
What is the Participation Exemption?
The participation exemption allows businesses to avoid double taxation on certain income derived from qualified foreign participations. This means dividends and capital gains received from these holdings are exempt from UAE CT, preventing unnecessary tax burdens.
Qualifying for the Participation Exemption: Key Requirements
Ministerial Decision No. 116 of 2023 lays out the specific criteria for availing this exemption. Here are some key points to remember:
- Minimum Ownership Threshold:You must hold a minimum aggregate ownership interest of 5% in the foreign participation (think shares or voting rights). Ministerial Decision No. 116 helpfully clarifies how to combine different ownership rights to meet this threshold.
- Holding Period: You need to have continuously held, or intend to hold, the participation interest for at least 12 months. Exceptions exist for specific business restructuring scenarios.
- Foreign Participation Requirements: The foreign participation must be subject to a corporate tax (CT) or a similar tax in its resident jurisdiction. This foreign tax rate needs to be at least9%, aligning with the UAE's CT rate.
- Profit and Liquidation Rights: Your ownership stake should entitle you to receive at least 5% of both the distributed profits and liquidation proceeds of the foreign participation.
- Asset Composition: The foreign participation's assets with ownership interests that wouldn't qualify for the exemption cannot exceed 50% of its total assets..
Benefits of the Participation Exemption
By offering this exemption, the UAE aims to:
- Promote Foreign Investment: This exemption makes the UAE a more attractive destination for foreign investors.
- Reduce Double Taxation: Businesses can reinvest their income from foreign participations without additional tax burdens.
- Boost Economic Growth:Increased foreign investment and efficient tax structures contribute to overall economic development.