What businesses should know about ‘participation exemption’ facets
The United Arab Emirates (UAE) has introduced a corporate tax regime that includes a notable feature known as the ‘participation exemption.‘ This provision is designed to exempt certain types of income, such as dividends and capital gains, from corporate tax, provided specific conditions are met. Understanding these conditions is crucial for businesses aiming to optimize their tax strategies within the UAE.
Key conditions for participation exemption
To qualify for the participation exemption, it must relate to participating interest. The following criteria need to be satisfied to be qualified as participating interests:
- Ownership threshold The business must hold at least a 5% ownership interest in the subsidiary company. Alternatively, if the ownership interest is less than 5%, the exemption can still apply if the acquisition cost exceeds AED 4 million.
- Holding Period: There should be an uninterrupted holding period of at least 12 months, or an intention to hold the participation for at least 12 months.
- Taxation of Subsidiary: The subsidiary must be subject to corporate tax or a similar tax in its jurisdiction at a rate not less than 9%. If the statutory corporate tax rate in the foreign jurisdiction is below 9%, a recalculation of the subsidiary’s tax base to apply UAE corporate tax principles is required.
Implications of small business relief on participative exemption:
As regards to participation in business that has elected for small business relief will already meet the tax text mentioned above. Electing small business relief does not prevent businesses from being qualified as participating interests.
Businesses that have elected small business relief would not need to consider participative exemption since it is treated as having no taxable income. If the threshold of small business relief (revenue of AED 3 million) exceeds, then businesses can consider participative exemption.
Exempt income and loss
Following income and loss become exempt from corporate tax if the conditions of participating interest meet:
- Gains or losses on transfer, sale, or other disposition of participating interest, whether derived from resident person or a nonresident person.
- Dividends and other profit distributions received from participating interest that is nonresident.
- Foreign exchange gains or losses.
- Impairment gains or losses.
Implications for Businesses
By meeting these conditions, businesses can benefit from tax exemptions on income derived from qualifying shareholdings, thereby enhancing their overall tax efficiency. This regime is particularly beneficial for companies with significant investments in subsidiaries, as it prevents double taxation on the same income.
However, it’s essential for businesses to conduct thorough due diligence to ensure compliance with all stipulated requirements. Engaging with tax professionals or consulting firms can provide valuable insights and guidance tailored to specific business structures and investment portfolios.
In conclusion, the participation exemption under the UAE corporate tax law offers a strategic advantage for businesses with qualifying investments. By understanding and adhering to the specified conditions, companies can effectively optimize their tax liabilities and align with the UAE’s tax regulations.
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