Participation Exemption UAE: Dividends and Capital Gains

Participation exemption regime avoids double taxation by exempting a UAE business from paying corporate tax on dividends, profit distributions, and capital gains from qualifying local or foreign subsidiary holdings.

In other words, the exemption is designed to prevent double taxation on the same income — first in the company that earned the profits, and again when those profits are received by the UAE shareholder.

Article 23 of the UAE Corporate Tax Law provides the participation exemption for income derived from a qualifying Participating Interest.

Ministerial Decision No. 302 of 2024 amended certain rules regarding participation exemption in the UAE.

Participation exemption can therefore make the UAE attractive for multinational groups establishing regional headquarters.

What is the participation exemption under UAE Corporate Tax Law (Article 23)?

Generally, the UAE has a corporate tax rate of 9% on taxable income above the applicable threshold.

The exemption can apply to qualifying dividends and other profit distributions, as well as income from the disposal of the participating interest.

What is a qualifying participating interest?

A Participating Interest is an ownership interest in the shares or capital of a juridical person that satisfies the conditions in Article 23.

The FTA specifically describes the regime as applying to qualifying participation income from both UAE and foreign investments, subject to the applicable conditions.

How Does the Participation Exemption Affect Taxable Income?

Qualifying income from the participation is exempt from UAE Corporate Tax. This means the amount does not form part of the taxable income, so the company can receive that qualifying income without paying tax on it within the tax period.

The exemption can cover income received by the taxable person in its capacity as owner of the ownership interest.

Income received in a different capacity, or income merely related to the ownership interest rather than derived directly from it, is not automatically exempt.

For founders using a UAE holding company, it is important to understand what the participation consists of and whether the income derived is directly from the qualifying investment, rather than assuming that all related income is exempt.

What Dividends and Gains or Losses Qualify Under Article 23?

The participation exemption can cover foreign dividends and other profit distributions received from a foreign entity that is not a Resident Person.

It can also cover gains or losses arising from the transfer, sale or other disposal of a Participating Interest.

Under MD 302, a Participation is considered liquidated when it ceases to have legal existence. However, a loss realized on the liquidation of a Participation is not covered by the participation exemption.

How does a UAE taxable person qualify for the Participation Exemption?

The ownership test is only one condition. The taxable person must also satisfy the relevant holding-period, subject-to-tax, profit-entitlement, and asset-composition requirements where applicable.

The standard minimum ownership test requires the taxable person to hold at least 5% of the shares or capital of the participation.

There is an alternative minimum acquisition cost test: the ownership interest can qualify where the aggregated acquisition cost is at least AED 4 million. Different types of ownership interests in the same juridical person can be aggregated when determining whether the minimum ownership requirement is met.

The ownership interest can include:

• ordinary shares;
• preferred shares;
• redeemable shares;
• membership and partner interests; and
• other securities, capital contributions or rights that provide entitlement to profits and liquidation proceeds.

The interest must generally be classified as an equity interest under the applicable accounting standards.

Ownership interests held by members of the same Qualifying Group can also be aggregated in certain circumstances.

The AED 4 million threshold provides an alternative and simpler way to meet the minimum ownership requirement where the ownership percentage is below 5%.

What Is the Holding Period Test for a Qualifying Ownership Interest?

The holding period test requires the Participating Interest to be held, or intended to be held, for an uninterrupted period of at least 12 months.

For certain participation income, the exemption can apply before 12 months have elapsed if the taxable person intends to hold the interest for an uninterrupted 12-month period.

However, gains or losses on the sale, transfer or other disposal of the Participating Interest generally require the 12-month holding period to have been met.

The company should retain evidence supporting the acquisition date, ownership interest, and intended holding period.

Profit entitlement and liquidation proceeds

Where the transaction qualifies for Business Restructuring Relief and meets the relevant conditions, the original holding period may continue to count.

If you transfer a qualifying ownership interest as part of a tax-neutral transaction, you may be able to carry over the original holding period. In other words, the transfer does not necessarily reset the 12-month clock, provided the conditions for the relevant no-gain-or-loss treatment are met.

For example, this can be particularly useful for a UAE resident company reorganizing its group structure.

The exemption can also cover certain income and losses relating to the participation, including qualifying foreign exchange gains or losses and impairment gains or losses. Dividends and other profit distributions are subject to the applicable participation conditions.

What is the Subject to Tax Test for a Foreign Participation?

For a foreign participation, the subject-to-tax test is essentially about whether the foreign subsidiary is already paying tax on its profits at a sufficient rate.

Under the current UAE rules, a foreign participation will generally need to be subject to a tax similar to UAE Corporate Tax at a rate of at least 9%.

This helps ensure that the participation exemption is not being used to exempt income that has not been subject to a comparable level of taxation elsewhere.

For UAE-to-UAE dividends, the rules are simpler. Dividends received from a UAE Resident Person are generally exempt from Corporate Tax, so a UAE company receiving dividends from another UAE company does not need to apply the foreign participation subject-to-tax test to that domestic dividend.

How does the AED 4 Million Acquisition Cost Test work? (Example)

Under MD 302, a taxable person can be treated as meeting the minimum ownership requirement where the aggregated acquisition cost of ownership interests in the juridical person is at least AED 4 million.

For the minimum acquisition cost test, the following may be included in the computation:

• cash or in-kind consideration paid for the ownership interest;
• subsequent equity interests and capital contributions, less capital repayments; and
• certain expenditure connected with acquiring or transferring the ownership interest that is capitalized into its acquisition cost.

For a foreign participation, the applicable foreign exchange rate at the date the ownership interest was acquired or formed is used.

What Is the Asset Composition Test Under the UAE Corporate Tax Law?

The asset test looks at the participation’s direct and indirect assets. The asset composition test looks at the participation’s direct and indirect assets. Where the test applies, no more than 50% of those assets should consist of ownership interests or entitlements that would not themselves qualify for the participation exemption if held directly by the UAE taxable person.

What Should Founders Check Before Claiming the Participation Exemption?

Before diving into the specifics, always remember that strict documentation is required to ensure compliance with holding periods and tax rates.

• Ownership interest Is the investment at least 5%, or does the acquisition cost meet the AED 4 million threshold?
• Acquisition cost Is the company maintaining documentation supporting the acquisition cost rather than relying on current fair value?
• Holding period test Has the interest been held, or is it intended to be held, for at least 12 uninterrupted months?
• Profit entitlement Does the ownership interest provide the required entitlement to profits and liquidation proceeds?
• Subject to tax If it is a foreign participation, does the investment satisfy the applicable foreign tax requirements?
• Asset composition Does the Related Party asset test apply, and if so, is the 50% condition satisfied?
• Income type Is the income or loss a qualifying dividend, other profit distribution, disposal gain/loss, foreign exchange gain/loss or impairment gain/loss? (Note that a loss realized on liquidation is not covered by the participation exemption.)
• Tax Period Are you applying the correct rules for the tax period concerned? MD 302 applies to Tax Periods commencing on or after 1 January 2025.
• Financial statements Make sure the accounting classification and supporting records are consistent with the position being taken for UAE Corporate Tax.