The Participation Exemption is an exemption
from Corporate Tax (“CT”) granted on dividends and other gains arising from the
shareholding of a taxable person. As per Article 23 of the Federal Decree Law
No. 47 of 2022 on Taxation of Corporation and Business, a Participation
Exemption is provided to a taxpayer with Participation Interest (“PI”) i.e., at
least 5% ownership interest in the shares or capital of a juridical person
(“Participation”).
Objective
- Elimination of double taxation on the
profits earned from investment in shares.
- Designing an equitable and streamlined
tax system enhances the jurisdiction's attractiveness.
Conditions
a) Hold or has the intention to hold the
PI for at least 12 months.
b) Participation (other than qualifying
free zone or exempt person) is subject to CT or any other similar tax of not
less than 9%.
c) Taxable person is entitled to 5% of
the distributed profits and liquidation proceeds.
d) No more than 50% of the
participation’s assets consist of ownership interest or entitlements that would
not qualify for exemption under CT.
Denial
of exemption in specified cases
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- No
exemption for 2 years if the participation interest is acquired in exchange
of ownership interest not meeting the exemption conditions or transfer that
was exempted under Article 26 or 27 of the CT Law.
- Any
income previously exempted will be included in the tax computation of the tax
period in which the ownership interest drops below 5% if PI is not held for
at least 12 consecutive months.
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How can Crowe help
- Analysis of existing business
structures, including ownership structures to evaluate the applicability of the
participation exemption.
- Assessing any gaps in meeting the
participation exemption conditions and providing recommendations to bridge the
gap.
- Determining the exempt and non-exempt
income to assess the potential tax costs arising in connection thereof.
- Advising on taxation of dividends and
capital gains on shares under the UAE CT law and applicable tax treaty.