Participation & Foreign PE Exemptions – UAE Corporate Tax MD 302/2024
The Ministry of Finance of the United Arab Emirates (UAE) issued Ministerial Decision No. 302 of 2024, which became effective on December 11, 2024. This decision provides comprehensive guidelines on the Participation Exemption and Foreign Permanent Establishment Exemption under Federal Decree-Law No. 47 of 2022 (Corporate Tax Law).
This decision establishes the conditions under which ownership interests and foreign permanent establishments can qualify for tax exemptions, ensuring compliance with international tax standards. Additionally, it repeals Ministerial Decision No. 116 of 2023, although the same will continue to apply for tax periods that commenced before January 1, 2025.
Ownership Interest
For the purposes of Article 23 of the Corporate Tax Law, an ownership interest refers to various financial instruments but not be limited to, holding any one or a combination of the following instruments:
- Ordinary Shares
- Preferred Shares
- Redeemable Shares
- Membership and Partner Interests
- Other Securities, Capital Contributions and rights that entitle the owner to receive profits and liquidation proceeds.
Conditions for Ownership Interest Qualification
- A financial instrument qualifies as an ownership interest if classified as equity interest under the Taxable Person’s Accounting Standards.
- The Taxable Person must control the ownership interest and receive economic benefits.
- Islamic Financial Instruments, or a combination of arrangements may also qualify as ownership interests if they are classified as equity interests under the accounting standards issued by the AAOIFI.
- Ownership percentage is determined by total paid-up capital or equity contributions.
- A financial instrument qualifies as an ownership interest if classified as equity interest under the Taxable Person’s Accounting Standards.
Aggregation of Ownership Interests
To determine whether a Taxable Person meets the minimum ownership requirement or has a Participating Interest, the following considerations apply:
- Different types of ownership interests in the same juridical person are aggregated.
- Ownership interests held within a Qualifying Group (under Article 26 of the Corporate Tax Law) are considered collectively.
Transfer of Ownership Interests
- Exchange of Ownership Interests
If a Taxable Person exchanges an ownership interest in a juridical person for an ownership interest in another juridical person, the interests shall be treated as a continuous ownership interest, provided that:
- The original ownership interest was exchanged as a no gain or loss transfer under Article 27 of the Corporate Tax Law.
- The original ownership interest constituted a Participating Interest under Article 23 of the Corporate Tax Law.
- Successive Transfers and Exemption Period
The two-year period (referred in Clause 9 of Article 23 of CT Law) begins from the first exempt transfer under Article 27 of the CT Law and continues for subsequent transfers that meet such conditions, subject to conditions as mentioned above in Exchange of Ownership Interest.
- Adjustments to Taxable Income
If a Participation was acquired through an exempt transfer under Articles 26 or 27 of the CT 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 corresponding adjustments to its Taxable Income.
- Tax Adjustments in the Relevant Period
Any corresponding adjustments to the Taxable Income shall be applied during the tax period where the Clause 4 of Article 26 or Clause 6 of Article 27 applies.
Debt Instruments and Participation Exemption
Income derived from debt instruments issued by a participation is treated as income from a participating interest under Ministerial Decision No. 302 of 2024, provided such instruments are classified as equity interests under the applicable accounting standards.
Tax Residency and Effective Tax Rate Requirements
- A Participation meets the Subject to Tax requirement under Clause 2(b) of Article 23 of the Corporate Tax Law if it meets all the conditions mentioned below:
- The Participation is tax resident in another country or foreign territory that applies a corporate tax similar to UAE Corporate Tax.
- The statutory tax rate levied is at least 9%.
- The Participation must maintain this status throughout the tax period in which income or gains arise (Clause 5, Article 23).
- differences in tax treatment—such as reliefs, lower rates for specific income brackets, alternative taxes, or temporary exemptions do not disqualify a jurisdiction from being recognized as applying a tax similar to UAE Corporate Tax.
- A tax system is not considered similar to UAE Corporate Tax if:
- It applies only to specific
- The tax is refunded upon profit distribution.
- The tax is only levied when profits are distributed.
- A Participation may still qualify if it can demonstrate either:
- An effective tax rate of at least 9% on income or profits.
- If net profits are recalculated on the basis as provided under UAE Corporate Tax Law, the tax levied results in an effective tax rate of not less than 9%.
- If a jurisdiction does not impose corporate tax meeting the above criteria, a Participation may still qualify if it is subject to:
- A tax on income, equity, or net worth, or a combination of these.
- The tax levied results in an effective tax rate of at least 9% when calculated in accordance with the Accounting Standards.
Conditions for Holding Companies
A Participation qualifies as a Holding Company under Clause 3(a) of Article 23 of the Corporate Tax Law if it meets all of the following conditions:
- It is managed and directed in the relevant foreign territory.
- It complies with the requirements to submit any documents, records or information.
- It has adequate personnel and premises to support its activities.
- It does not engage in any other business activities beyond acquiring and holding shares or equitable interests.
- At least 50% of its total income (over the current and previous tax periods) comes from:
- Dividends
- Capital gains
- Other income from Participating Interests
Minimum Acquisition Cost
A Taxable Person is deemed to meet the minimum ownership requirement under Clause 11 of Article 23 if:
- The aggregated acquisition cost of ownership interests is equal to or exceeds AED 4,000,000.
- The calculation of acquisition cost includes:
- The value of equity interest, capital contributions, or consideration paid (in cash or kind) for ownership in the Participation.
- Subsequent capital infusions, after adjusting for any repayments.
- Acquisition-related expenditures, which must be capitalized as per as part of the acquisition cost of the Participating Interest.
- The value of equity interest, capital contributions, or consideration paid (in cash or kind) for ownership in the Participation.
- The value of equity interest, capital contribution, consideration paid, or repayment is determined at the time of the transaction using Article (43) of the Corporate Tax Law, without considering later adjustments under accounting standards.
- In the case of foreign Participations, the exchange rate applicable at the date of acquisition applies.
- If an ownership interest is partially sold, transferred, or otherwise disposed of, the acquisition cost must be proportionally reduced.
- If the minimum threshold is not maintained for an uninterrupted period of 12 months, any previously exempted income will be added to taxable income in the relevant tax period.
Application of the Asset Test
For paragraph (d) of Clause (2) of Article (23) of the Corporate Tax Law to be applicable, the Participation must qualify as a Related Party of the Taxable Person.
Assets of the Participation
The valuation of a Participation’s assets can be determined through:
- The consolidated balance sheet and its accounting asset values.
- Market valuation of direct and indirect ownership interests and other assets.
- The consolidated balance sheet and its accounting asset values.
This condition must be satisfied throughout the tax period.
Expenditure Related to Participating Interest Transactions
- Expenditures incurred for the acquisition, sale, transfer, or disposal of an entire Participating Interest or a part there of, are non-deductible under Article (22) and Article (28) of the Corporate Tax Law.
- Non-deductible expenditures include but not limited to, Professional fees, due diligence costs, litigation expenses, brokerage fees, stamp duties, and valuation costs and Refinancing costs.
- These expenditures must be capitalized as part of the acquisition cost of the Participating Interest.
- Interest expenses for acquiring and holding a Participating Interest shall be deductible under Chapter Nine of the Corporate Tax Law.
Income from Ownership Interests in a Participation
Under Ministerial Decision No. 302 of 2024, income derived from a Participation is exempt under Clause (5) of Article (23) of the Corporate Tax Law, provided it is received as an owner of ownership interests in the Participation. However, other income related to a Participation that is not directly derived from an ownership interest does not qualify for exemption.
Liquidation Proceeds and Losses
- A Participation is considered liquidated when it ceases to legally exist.
- Liquidation losses are calculated as the difference between the acquisition cost and the fair value of liquidation proceeds received by the Taxable Person.
- Articles 26 & 27 of CT Law do not apply when assets or liabilities are transferred to the taxable person due to liquidation.
- Losses realized on liquidation shall be reduced in the relevant Tax Period and the preceding seven Tax Periods, taking into account:
- Tax Losses transferred by the Participation.
- Dividends received that are exempt under Article (22) or (23) of the Corporate Tax Law.
- Adjustments for Market Value differences in asset or liability transfers.
- If the Participation was part of a Tax Group, further reductions shall apply in the relevant Tax Period and preceding (7) seven Tax Periods, as applicable:
- Tax Losses attributable to the Participation while it was a member of the Tax Group.
- Tax Losses attributable to the Participation while it was a member of the Tax Group.
- Dividends or other distributions eliminated within the Tax Group for tax purposes.
- A Tax Group cannot claim liquidation losses if the Participation left the Tax Group due to Article 10 of Ministerial Decision No. 301 of 2024.
Foreign Permanent Establishment Exemption
- A Taxable Person must fully offset all Tax Losses incurred by its Qualifying Foreign Permanent Establishments (FPE) against its aggregate Taxable Income from those establishments before electing the FPE Exemption under Article (24) of the Corporate Tax Law.
- If a Qualifying FPE is transferred to a Participation, the Taxable Person can only claim exemption on income from participation exceeding any unutilized tax losses from the FPE that have not been offset.
- The same rule applies to non-qualifying FPEs, where benefits under Article (23) can be claimed only on income exceeding unutilized Tax Losses from Non-Qualifying FPEs.
- A Taxable Person must fully offset all Tax Losses incurred by its Qualifying Foreign Permanent Establishments (FPE) against its aggregate Taxable Income from those establishments before electing the FPE Exemption under Article (24) of the Corporate Tax Law.
How RVG Can Help?
At RVG, our corporate tax specialists provide expert guidance on navigating UAE’s corporate tax exemptions under Ministerial Decision No. 302 of 2024. We assist businesses in:
- Structuring ownership interests to qualify for Participation Exemption.
- Ensuring compliance with Foreign Permanent Establishment (FPE) Exemption requirements.
- Evaluating tax residency and effective tax rate conditions for optimal tax planning.
- Advising holding companies on meeting exemption criteria.
- Maximizing tax benefits while ensuring regulatory compliance.
With our in-depth understanding of UAE tax laws, RVG ensures your business remains compliant while optimizing tax efficiencies. Reach out to us for strategic tax advisory and tailored solutions.
