Participation exemption: what it means in UAE tax.

What participation exemption means

Also called: Participating Interest exemption.

The participation exemption stops the same profits being taxed twice as they move up a chain of companies. Under Article 23 of the Corporate Tax Law, income from a Participating Interest, including foreign dividends and gains on selling the shares, is left out of taxable income when the conditions are met.

A Participating Interest is broadly a holding of at least 5% in a company that is itself taxed at a rate of at least 9%, held or intended to be held for at least 12 months without a break. Ministerial Decision No. 116 of 2023 adds an alternative to the 5% test: a holding whose acquisition cost is AED 4,000,000 or more.

For an SME, this matters when a UAE company owns shares in a foreign company or plans to sell a stake. Dividends from UAE companies are already exempt under Article 22, so the participation exemption is most useful for foreign dividends and for capital gains on any qualifying holding.

How it works

• Hold at least 5% of the shares or capital, or a holding that cost at least AED 4,000,000, for an uninterrupted 12 months or with the intention to do so.
• The company held must be subject to Corporate Tax or a similar tax at a rate of at least 9%. Holding companies, Qualifying Free Zone Persons and Exempt Persons can be treated as meeting this test in set conditions.
• The holding must give at least 5% of distributable profits and liquidation proceeds, and not more than 50% of the company's assets can be holdings that would not themselves qualify.
• Exempt amounts include foreign dividends, gains and losses on disposal after the holding period, and related foreign exchange and impairment gains or losses.
• If the holding falls below 5% before 12 months have passed, income previously exempted is brought back into taxable income in that period.

Worked example

A Dubai holding and trading company sells a 20% stake it has held for three years in a foreign distributor taxed at 20% in its home country. It makes a gain of AED 1,500,000. Its other profit for the year is AED 500,000.

Operating profit	AED 500,000
Gain on sale of 20% stake	AED 1,500,000
Accounting profit	AED 2,000,000
Less exempt gain on Participating Interest	AED 1,500,000
Taxable income	AED 500,000
First 375,000 at 0%	AED 0
Remaining 125,000 at 9%	AED 11,250

Without the exemption, taxable income of AED 2,000,000 would give Corporate Tax of AED 146,250, so the exemption saves AED 135,000.

Common mistakes

• Selling shares before the 12 month holding period ends and still claiming the exemption.
• Ignoring the 9% minimum tax condition when the foreign company is in a low tax or no tax country.
• Claiming the exemption on a loss realised when the company held is liquidated. Article 23 does not exempt that loss.

The law

• Federal Decree-Law No. 47 of 2022, as amended, Article 23 (Participation Exemption)
• Ministerial Decision No. 116 of 2023 on the Participation Exemption, Article 8 (AED 4,000,000 minimum acquisition cost)
• Cabinet Decision No. 116 of 2022, Article 2 (AED 375,000 at 0%)

Frequently asked questions

Do we need the participation exemption for a dividend from a UAE company?

Usually not. Article 22 already exempts dividends from UAE resident companies. The participation exemption is mainly needed for foreign dividends and for gains or losses when shares are sold.

Can we hold less than 5% and still qualify?

Yes, if the aggregated acquisition cost of the holding is AED 4,000,000 or more, under Article 8 of Ministerial Decision No. 116 of 2023. The other conditions still apply.

Related terms

Exempt income · Corporate Tax group · Taxable income · Related party. See every term in the UAE tax glossary.

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