Participation Exemption

The following income and related expenditure shall not be taken into account in determining the Taxable Income:

1. Dividends and other profit distributions received from a juridical person that is a Resident Person.
2. Dividends and other profit distributions received from a Participating Interest in a foreign juridical person as specified in Article 23 of this Decree-Law.
3. Any other income from a Participating Interest as specified in Article 23 of this Decree-Law.
4. Income of a Foreign Permanent Establishment that meets the condition of Article 24 of this Decree-Law.
5. Income derived by a Non-Resident Person from operating aircraft or ships in international transportation that meets the conditions of Article 25 of this Decree- Law.

Income from a Participating Interest shall be exempt from Corporate Tax, subject to the conditions of this Article.

A Participating Interest means, a 5% (five percent) or greater ownership interest in the shares or capital of a juridical person, referred to as a “Participation” for the purposes of this Chapter where all of the following conditions are met:

1. For the purposes of Article (23) of the Corporate Tax Law, an ownership interest shall include, but not be limited to, holding any one or a combination of the following instruments:
   1. Ordinary Shares.
   2. Preferred Shares.
   3. Redeemable Shares.
   4. Membership and Partner Interests.
   5. Other types of securities, capital contributions and rights that entitle the owner to receive profits and liquidation proceeds.
2. An ownership interest as referred to in Clause (1) of this Article, shall only be treated as such if it is classified as equity interest under the Accounting Standards as applied by the Taxable Person holding the ownership interest.
3. For the purposes of Article (23) of the Corporate Tax Law, a Taxable Person shall be treated as holding an ownership interest where the ownership interest is controlled by the Taxable Person and the Taxable Person has the right to the economic benefits produced by the ownership interest under the Accounting Standards as applied by the Taxable Person.
4. An Islamic Financial Instrument, or a combination of arrangements that form part of the same Islamic Financial Instrument shall be treated as an ownership interest for the purposes of Article (23) of the Corporate Tax Law where it is classified as equity interest under the accounting standards issued by the Accounting and Auditing Organization for Islamic Financial Institutions.
5. The percentage of ownership held through ownership interests as specified under Clause (1) of this Article shall be determined with reference to the total paid up capital of the Participation or the total equity interest contributions made to the Participation, as applicable.

1. For the purposes of determining whether a Taxable Person has a Participating Interest under Clause (2) of Article (23) of the Corporate Tax Law, the following shall apply:
   1. Different types of ownership interests in the same juridical person as specified under Article (2) of this Decision shall be aggregated.
   2. Ownership interests in the same juridical person held by members of a Qualifying Group, as per Clause (2) of Article (26) of the Corporate Tax Law, in which the Taxable Person is a member shall be aggregated with those of the Taxable Person.
2. The provisions of Clause (1) of this Article shall apply for the purposes of determining whether the minimum ownership requirement is satisfied under Clause (11) of Article (23) of the Corporate Tax Law.

1. For the purposes of Clause (11) of Article (23) of the Corporate Tax Law, a Taxable Person will be treated as having an ownership interest in the shares or capital of a juridical person that meets the minimum ownership requirement under Clause (2) of Article (23) of the Corporate Tax Law, and the conditions of paragraph (c) of Clause (2) of Article (23) of the Corporate Tax Law, where the aggregated acquisition cost of the ownership interests in that juridical person as provided for in Article (2) of this Decision is equal to or exceeds AED 4,000,000 (four million dirhams).
2. In calculating whether the minimum acquisition cost threshold under Clause (1) of this Article has been met, all of the following amounts may be aggregated:
   1. The value of the equity interest or capital contribution made or consideration paid in cash or in kind for ownership interests in the Participation by the Taxable Person.
   2. The value of any subsequent equity interest and capital contributions made to the Participation less the value of any equity interest or capital repayments made by the Participation to the Taxable Person.
   3. Expenditure incurred by the Taxable Person in relation to the acquisition or transfer of ownership interests in the Participation that shall be capitalised as part of the acquisition cost of the ownership interest in the Participation in accordance with Clause (1) of Article (11) of this Decision.
3. The value of an equity interest or capital contribution, consideration paid or repayment of equity interest or capital for the purposes of Clause (2) of this Article shall be determined at the time that the contribution or repayment was made, or the consideration was paid by applying Article (43) of the Corporate Tax Law, without taking into account any subsequent value adjustments made under the Accounting Standards applied by the Taxable Person holding the ownership interest.
4. In determining the acquisition cost in respect of an ownership interest in a foreign Participation, the applicable exchange rate at the date of acquisition or formation of the relevant ownership interest shall be used.
5. Where an ownership interest is partly sold, transferred, or otherwise disposed of, the aggregated acquisition cost shall be reduced in proportion to the average acquisition cost attributable to the part of the ownership interest that is sold, transferred or otherwise disposed of.
6. Where a Taxable Person holding the ownership interest does not meet the minimum acquisition cost threshold under Clause (1) of this Article for an uninterrupted period of at least (12) twelve months, any income previously not taken into account under Article (23) of the Corporate Tax Law shall be included in the Taxable Income in the Tax Period in which the ownership interest in the Participation did not meet the minimum acquisition cost threshold under Clause (1) of this Article.

Q.Is it compulsory or optional to aggregate the ownership interests held by members of a Qualifying Group for the purposes of determining whether a Participation exists?

A.For the purposes of establishing whether a 5% ownership interest in a Participation exists, the aggregation of ownership interests held by members of a Qualifying Group is compulsory.

Q.Can a 5% beneficial ownership without strict legal ownership qualify for the Participation exemption?

A.Yes, an ownership interest must have the following characteristics in order to be a Participating Interest: • It must include a right that entitles the owner to receive profits and liquidation proceeds; and it must be classified as equity interest under the Accounting Standards as applied by the Taxable Person holding the ownership interest; or • The ownership interest must be controlled by the Taxable Person and the Taxable Person must have the right to the economic benefits produced by the ownership interest under the Accounting Standards as applied by the Taxable Person.

The Taxable Person has held, or has the intention to hold, the Participating Interest for an uninterrupted period of at least (12) twelve months.

1. For the purposes of meeting the requirement under paragraph (a) of Clause (2) of Article (23) of the Corporate Tax Law, where a Taxable Person exchanges an ownership interest in a juridical person held by the Taxable Person for an ownership interest in another juridical person, these ownership interests shall be treated as the same continuous ownership interest where all of the following conditions are met:
   1. The original ownership interest has been exchanged for another ownership interest as a no gain or loss transfer in accordance with Article (27) of the Corporate Tax Law.
   2. The original ownership interest in the juridical person constitutes a Participating Interest under Article (23) of the Corporate Tax Law.
2. For the purposes of Clause (9) of Article (23) of the Corporate Tax Law and provided that the conditions under paragraphs (a) and (b) of Clause (1) of this Article are met, the two year period shall commence from the date of the first transfer that was exempted under Article (27) of the Corporate Tax Law and shall continue in respect of subsequent transfers that meet such conditions.
3. Where a Participation was acquired by the Taxable Person in exchange for the transfer of an ownership interest that was exempted under Article (26) or (27) of the Corporate Tax Law and Clause (4) of Article (26) or Clause (6) of Article (27) of the Corporate Tax Law subsequently applied to that transfer, the Taxable Person may make a corresponding adjustment to its Taxable Income to reverse any income which was previously taken into account due to the application of Clause (9) of Article (23) of the Corporate Tax Law.
4. For the purposes of Clause (3) of this Article, the Taxable Person shall make any necessary adjustments to their Taxable Income during the relevant Tax Period in which Clause (4) of Article (26) or Clause (6) of Article (27) of the Corporate Tax Law applies.

The Participation is subject to Corporate Tax or any other tax imposed under the applicable legislation of the country or territory in which the juridical person is resident which is of a similar character to Corporate Tax at a rate not less than the rate specified in paragraph (b) of Clause 1 of Article 3 of this Decree-Law [i.e. 9%].

1. A Participation shall be considered to have met the requirement of paragraph (b) of Clause (2) of Article (23) of the Corporate Tax Law for a given Tax Period when it is resident for tax purposes throughout this same Tax Period in another country or foreign territory that levies a tax that meets all of the following requirements:
   1. The tax is applied on a similar basis to Corporate Tax, taking into account the conditions set out in Clauses (2), (3), (4) and (5) of this Article.
   2. The tax is levied at a statutory rate not less than (9%) nine percent.
2. For the purposes of Clause (5) of Article (23) of the Corporate Tax Law, the Participation will be considered as having continued to meet the condition under paragraph (b) of Clause (2) of Article (23) of the Corporate Tax Law where the Participation meets the conditions of Clause (1) of this Article in the period in which the income or gains arise.
3. None of the following shall result in the tax imposed under the applicable legislation of the other country or the foreign territory in which the Participation is resident for tax purposes to not be considered a tax that is applied on a similar basis to Corporate Tax under paragraph (a) of Clause (1) of this Article:
   1. Differences in reductions and reliefs.
   2. Lower tax rates applicable to certain brackets of income.
   3. Targeted incentives or exemptions of a temporary nature.
   4. Application of alternative taxes on income or profits.
4. A tax imposed under the applicable legislation of the other country or foreign territory in which the Participation is resident for tax purposes shall not be considered a tax which is of a similar nature to Corporate Tax in any of the following cases:
   1. The tax is applicable only to selected activities.
   2. The tax paid is refunded at the time of distribution of the relevant profits or income.
   3. The tax is only due in the event of a distribution of profits or income.
5. A Participation shall also be considered to have met the requirement of paragraph (b) of Clause (2) of Article (23) of the Corporate Tax Law if it demonstrates to the Authority either of the following:
   1. It is subject to a tax on income or profits at an effective tax rate in the relevant Tax Period of not less than (9%) nine percent.
   2. If it recalculated its accounting net profits according to the basis provided for in the Corporate Tax Law, and the tax levied on such profits, then this would result in an effective tax rate of not less than (9%) nine percent.
6. A Participation that is resident for tax purposes in another country or foreign territory that does not impose a tax that meets the requirements of Clause (1) of this Article shall be considered to have met the requirement of paragraph (b) of Clause (2) of Article (23) of the Corporate Tax Law if it is subject to a tax charged in respect of income, equity or net worth, or a combination of any or all of these in that other country or foreign territory, and the tax levied results in an effective tax rate of not less than (9%) nine percent on the accounting profits of the Participation calculated in accordance with the Accounting Standards in the relevant Tax Period.

Q.Can the Participation exemption apply to dividends received from a Saudi company that is subject to Zakat at 2.5%?

A.Yes, on the basis that the corporate tax levied in KSA is applied on a similar basis to Corporate Tax in the UAE and is levied at the rate of 20%, the requirement for the Participation to be subject to Corporate Tax or a tax of a character similar to Corporate Tax at a rate of 9% or more is considered to be met for companies subject to Saudi Zakat.

The ownership interest in the Participation entitles the Taxable Person to receive not less than 5% (five percent) of the profits available for distribution by the Participation, and not less than 5% (five percent) of the liquidation proceeds on cessation of the Participation.

Q.Does the AED 4,000,000 minimum ownership requirement for the Participation exemption override the 5% entitlement tests for profits available for distribution and liquidation proceeds?

A.Yes, the minimum ownership requirement of AED 4,000,000 overrides the 5% ownership test in shares or capital as well as the 5% entitlement tests for profits and liquidation proceeds. This applies to income derived from a Participation for all Tax Periods starting on or after 1 June 2023.

Not more than 50% (fifty percent) of the direct and indirect assets of the Participation consist of ownership interests or entitlements that would not have qualified for an exemption from Corporate Tax under this Article if held directly by the Taxable Person, subject to any conditions that may be prescribed under paragraph (e) of this Clause.

For paragraph (d) of Clause (2) of Article (23) of the Corporate Tax Law to apply, the Participation must be a Related Party of the Taxable Person.

1. The determination of whether the condition under paragraph (d) of Clause (2) of Article (23) of the Corporate Tax Law is satisfied shall be made on the basis of either of the following:
   1. The consolidated balance sheet of the Participation and the accounting asset values reflected therein.
   2. A Market Value valuation of the direct and indirect ownership interests and other assets of the Participation.
2. The condition under paragraph (d) of Clause (2) of Article (23) of the Corporate Tax Law should be met throughout the Tax Period.

Q.The asset test for the Participation exemption states that a Participation does not qualify for the Participation exemption if more than 50% of the Participation’s direct and indirect assets consists of ownership interests that by themselves would not qualify for the Participation exemption if held directly by the Taxable Person. Ministerial Decision No. 302 of 2024 limited this test to Participations that are Related Parties of the Taxable Person. Does this limitation apply to all Tax Periods, or just those starting on or after 1 January 2025?

A.The limitation of the asset test to Related Parties of the Taxable Person applies only for Tax Periods starting on or after 1 January 2025.

Any other conditions as may be prescribed by the Minister.

A Participation shall be treated as having met the condition under paragraph (b) of Clause 2 of this Article where all of the following conditions are met:

1. The principal objective and activity of the Participation is the acquisition and holding of shares or equitable interests that meet the conditions of Clause 2 of this Article.
2. The income of the Participation derived during the relevant Tax Period or Tax Periods substantially consists of income from Participating Interests.

1. For the purposes of paragraph (a) of Clause (3) of Article (23) of the Corporate Tax Law, the Participation must satisfy all of the following conditions:
   1. Be directed and managed in the relevant other country or foreign territory.
   2. Comply with the requirement to submit any documents, records or information to the relevant authority under the laws and regulations applicable to such Participation in the relevant other country or foreign territory.
   3. Have adequate personnel and premises for the acquisition and holding of the shares or equitable interests in the relevant other country or foreign territory, having regard to the level of activity carried on by the Participation and the extent to which those activities are performed on behalf or for the benefit of the Participation by another Person in that other country or foreign territory.
   4. Not conduct any other activities other than those that are incidental or ancillary to the acquisition and holding of shares or equitable interests.
2. A Participation shall be considered as having met the condition of paragraph (b) of Clause (3) of Article (23) of the Corporate Tax Law where (50%) fifty percent or more of its income during the relevant Tax Period and the preceding Tax Period on average consisted of Dividends, capital gains and other income from Participating Interests.

Q.Can the Participation exemption apply to dividends received from a holding company taxed at less than 9% if the ultimate source of the income is a company taxed at 9% or more?

A.Yes. There are special rules that allow a foreign holding company taxed at less than 9% to be treated as a Participation as long as certain conditions are met. The holding company must have the principal objective and activity of holding shares or equitable interests that meet the conditions of the Participation exemption and it must: a. Be directed and managed in the relevant other country or foreign territory. b. Comply with the requirement to submit any documents, records or information to the relevant authority under the laws and regulations applicable to the Participation in the relevant other country or foreign territory. c. Have adequate personnel and premises for the acquisition and holding of the shares or equitable interests in the relevant other country or foreign territory, having regard to the level of activity carried on by the Participation and the extent to which those activities are performed on behalf or for the benefit of the Participation by another Person in that other country or foreign territory. d. Not conduct any other activities other than those that are incidental or ancillary to the acquisition and holding of shares or equitable interests. e. Have 50% or more of its income during the relevant Tax Period and the preceding Tax Period on average consisting of dividends, capital gains and other income from Participating Interests.

A Participation in a Qualifying Free Zone Person or an Exempt Person shall be treated as having met the condition under paragraph (b) of Clause 2 of this Article, subject to any conditions that may be prescribed by the Minister.

Where the conditions of Clause 2 of this Article continue to be met, the following income shall not be taken into account in determining Taxable Income:

1. Dividends and other profit distributions received from a foreign Participation that is not a Resident Person under paragraph (b) of Clause 3 of Article 11 of this Decree-Law.
2. Gains or losses on the transfer, sale, or other disposition of a Participating Interest (or part thereof) derived after expiry of the time period specified in paragraph (a) of Clause 2 or Clause 9 of this Article.
3. Foreign exchange gains or losses in relation to a Participating Interest.
4. Impairment gains or losses in relation to a Participating Interest.

1. Income provided for in Clause (5) of Article (23) of the Corporate Tax Law that is derived from a Participation shall be exempt insofar it is received by a Taxable Person in his capacity as owner of an ownership interest or ownership interests in the Participation.
2. Income derived in any other capacity than that mentioned in Clause (1) of this Article and income derived in relation to, but not directly from, an ownership interest in a Participation shall not be exempt from Corporate Tax.

Where a Taxable Person has a Participating Interest in a Participation, income from a debt instrument issued by that Participation that is not an ownership interest under paragraph (e) of Clause (1) of Article (2) of this Decision shall be treated as income from a Participating Interest provided that such instrument is classified as equity interest under the Accounting Standards applied by the Taxable Person.

Q.Does the Participation exemption apply to unrealised fair value gains or losses, if a Taxable Person has not made an application to be taxed on the realisation basis?

A.Fair value gains or losses are not covered by the Participation exemption, but impairment gains or losses are covered. Whether or not the movement in the valuation of an item is an impairment gain or loss or a fair value gain or loss should be determined by reference to IFRS.

Q.Can a dividend be exempt under the Participation exemption if it is paid out of profits that arose before the acquisition of a Participation?

A.Yes, dividends sourced from retained earnings accumulated in financial years prior to the acquisition of a Participation qualify for the Participation exemption if all the other qualifying conditions are met.

1. Expenditure incurred in relation to the acquisition, sale, transfer, or disposal of an entire Participating Interest or part of a Participating Interest shall not be deductible in accordance with Article (22) and paragraph (b) of Clause (2) of Article (28) of the Corporate Tax Law.
2. Expenditure referred to in Clause (1) of this Article shall include, but not be limited to, any of the following:
   1. Professional fees.
   2. Due diligence costs.
   3. Litigation costs.
   4. Commissions and brokerage fees.
   5. Stamp duty, registration duties and other irrecoverable taxes.
   6. Appraisal and valuation costs.
   7. Refinancing costs.
3. Interest expenditure incurred in relation to the acquisition and subsequent holding of a Participating Interest shall be deductible subject to Chapter Nine of the Corporate Tax Law.
4. The expenditure as specified in Clause (1) of this Article shall be capitalised as part of the acquisition cost of the Participating Interest.

The exemption under this Article shall not apply to income derived by the Taxable Person from a Participating Interest insofar as:

1. the Participation can claim a deduction for the dividend or other distributions made to the Taxable Person under the applicable tax legislation;
2. the Taxable Person has recognised a deductible impairment loss in respect of the Participating Interest prior to the Participating Interest meeting the conditions of Clause 2 of this Article;
3. the Taxable Person or its Related Party who is subject to Corporate Tax under this Decree-Law has recognised a deductible impairment loss in respect of a loan receivable from the Participation.

Where the impairment loss referred to in paragraph (c) of Clause 6 of this Article is reversed in a subsequent Tax Period, the associated income of the Taxable Person shall be exempt from Corporate Tax in that Tax Period up to the amount of income from the Participating Interest that was not exempted under paragraph (c) of Clause 6 of this Article.

The exemption under this Article does not apply to a loss realised on the liquidation of a Participation.

1. For the purposes of Clause (8) of Article (23) of the Corporate Tax Law, a Participation shall be considered liquidated if it ceases to have legal existence.
2. A loss realised on the liquidation of a Participation for the purposes of Clause (8) of Article (23) of the Corporate Tax Law shall be calculated as the difference between the acquisition cost of the Participating Interest determined in accordance with Article (8) of this Decision and the fair value of the liquidation proceeds received by the Taxable Person.
3. The provisions under Articles (26) and (27) of the Corporate Tax Law shall not apply where assets or liabilities are transferred to the Taxable Person as a result of a liquidation as specified under Clause (1) of this Article.
4. A loss realised by the Taxable Person on the liquidation of a Participation as calculated under Clause (2) of this Article shall be reduced by the following in the relevant Tax Period and preceding (7) seven Tax Periods, as applicable:
   1. Tax Losses transferred by the Participation or its Participations to the Taxable Person or any of the Taxable Person's Related Parties.
   2. Dividends or other profit distributions received by the Taxable Person from the Participation that are exempt under Article (22) or (23) of the Corporate Tax Law.
   3. The difference between the Market Value and the amount of consideration paid for an asset or liability which was transferred between the Taxable Person or the Taxable Person's Related Parties and the Participation or its Participations where the Market Value exceeds the amount of consideration paid insofar such difference has not already been taken into account by the Taxable Person under paragraph (a) or (b) of this Clause or under Articles (20) and (34) of the Corporate Tax Law.
   4. Any adjustments taken into account under paragraph (a) or (c) of this Clause by the Participation being liquidated in determining losses realised on the liquidation of its Participations insofar such adjustment has not already been taken into account by the Taxable Person under paragraph (a), (b) or (c) of this Clause.
5. Without prejudice to Clause (4) of this Article, where the Participation was a member of a Tax Group, any liquidation loss recognised in relation to that Participation by the Tax Group or the Parent Company or any of its Related Parties shall be reduced by the following in the relevant Tax Period and preceding (7) seven Tax Periods, as applicable:
   1. Tax Losses attributable to the Participation while it was a member of the Tax Group calculated in accordance with Article (7) of Ministerial Decision No. 301 of 2024 which have been taken into account in determining the Taxable Income of the Tax Group.
   2. Dividends or other profit distributions made by the Participation while it was a member of the Tax Group that were eliminated for the purposes of determining the Taxable Income of the Tax Group under Article (42) of the Corporate Tax Law.
6. A loss cannot be realised by a Tax Group on the liquidation of a Participation where the Participation leaves the Tax Group due to the application of Article (10) of Ministerial Decision No. 301 of 2024.

The exemption under this Article shall not apply for a period of (2) two years where a Participation was acquired in exchange for the transfer of an ownership interest that did not meet the conditions of Clause 2 of this Article or a transfer that was exempted under Article 26 or 27 of this Decree-Law.

Where a Taxable Person fails to hold a 5% (five percent) or greater ownership interest in the Participation for an uninterrupted period of at least (12) twelve months, any income previously not taken into account under this Article shall be included in the calculation of the Taxable Income in the Tax Period in which the ownership interest in the Participation falls below 5% (five percent).

The Minister may prescribe that an ownership interest in the shares or capital of a juridical person meets the minimum ownership requirement under Clause 2 of this Article where the acquisition cost of that ownership interest exceeds a threshold specified by the Minister.