Understanding Participating Interest Exemption in Corporate Tax

A Participating Interest is defined as a significant, long-term ownership interest in a juridical person that suggests some degree of control or influence over the Participation and that meets the certain conditions. 

Following cumulative conditions under which an ownership interest in a Participation will be considered a Participating Interest: 

• The Participating Interest represents a 5% or greater ownership interest in the Participation 

• The Participating Interest must be held, or intended to be held, for an uninterrupted period of at least 12 months 

• The Participation must be subject to Corporate Tax (or equivalent) of 9% or more (in UAE/ other country) 

• The ownership interest in the Participation entitles the holder to at least 5% of the profits and liquidation proceeds. 

• 50% or less of the assets of the Participation consist of non-qualifying ownership interests. 

Income  which shall not be taken into account by a Taxable Person in calculating their Taxable Income for Corporate Tax are :  

• Dividends and profit distributions received from a foreign Participation that is not a Resident Person. 

• Gains or losses on the transfer, sale, or other disposition of a Participating Interest( Subject to the 12 Month criteria/ 2 Years criteria). 

• Foreign exchange or impairment gains or losses in relation to a Participating Interest. 

Gains and losses in relation to a Participating Interest are exempt from Corporate Tax for losses realised on the liquidation of a Participation. 

Participation Exemption does not apply in the following circumstances: 

• Participation can claim a deduction for the dividend or other profit distribution made to the Taxable Person under an applicable tax legislation. 

• The Taxable Person has recognised a deductible impairment loss in respect of the Participating Interest, prior to the Participating Interest meeting the eligibility conditions. 

• The Taxable Person or a Related Party who is subject to Corporate Tax has recognised a deductible impairment loss in respect of a loan receivable from the Participation. The reversal of this  impairment loss (generally treated as taxable income) is exempted  from Corporate Tax up to the amount of income from the Participating Interest that did not benefit from the Participation Exemption 

The exemption provided is disapplied for a period of 2 years when the participation is acquired under the following circumstances: 

• Where the Participation is acquired in exchange for the transfer of an ownership interest that is not a Participating Interest 

• Where the Participation is acquired in a Business restructuring transaction and the Business restructuring relief is applied. 

• Where the Participation is acquired in exchange for a transfer of assets and liabilities within a Qualifying Group at no gain or no loss under 

Where the principal objective and activity is the acquisition and holding of shares or equitable interests and such ownership interests meets the conditions above, even if a Participation is not subject to Corporate Tax or a similar tax of at least 9%, shall be deemed to have met the 9% tax criteria. 

A Participation in a Qualifying Free Zone Person or an Exempt Person shall be treated as having met the subject to tax test of 9% subject to conditions.  

The Participation exemption for income received from the ownership interest in a Participation is a common mechanism to reduce or eliminate economic double taxation under a residence-based tax system. Generally, a business would have already been taxed on their profits and hence it becomes double taxation of the same profits earlier taxed , when again taxed in hands of recipient when distributed.  

The expenses incurred with respect to deriving such exempt income from Participation Interest shall be non-deductible expenditure for the purpose of Corporate Tax. The Participation exemption is a symmetrical exemption of income, which means, the qualifying capital, revaluation and foreign exchange gain/ loss, impairment loss, capital loss etc are not included in income or deduction. 

Participation exception does not need to make an election or file an application to the authority. If the relevant conditions are met, this exemption can be applied by the taxable person. 

If a Taxable Person did not hold the Participating Interest for an uninterrupted period of at least twelve months, and there was in fact no intention to do so, any income previously not taken into account under the Participation Exemption will be included in the calculation of Taxable Income. 

Minister to prescribe a minimum acquisition value above which an ownership interest in a juridical person will be treated as having met the minimum ownership requirement. 

The Participating Interest Exemption serves as a mechanism to mitigate economic double taxation and promote investment. While it offers tax benefits, businesses must navigate eligibility criteria and compliance requirements diligently. By understanding the nuances of this exemption, businesses can optimize their tax planning strategies and ensure regulatory compliance.