UAE CT Update| Ministerial Decision on Participation Exemption

Article 23 of the Federal Decree Law No. 47 of 2022 (‘the CT Law’) provides that, subject to compliance of conditions as may be prescribed by the Minister through a Decision, Income from participating interest of a taxable person shall be exempt from levy of Corporate Tax, provided ownership interest of 5% or more in shares or capital of a Juridical Person have been held for a continuous period of twelve (12) months, where the Juridical person (being resident or non-resident) is subject to Corporate Tax @ 9% or more, and not more than 50% of assets (direct or indirect) of Juridical Person shall consist of ownership interest or entitlement that would not have qualified for exemption from Corporate Tax under Article 23 of the CT Law.

The Ministry of Finance (‘MoF’) has issued Decision No. 116 of 2023 on 10 May 2023, which has been made effective from 11 May 2023, clarifying operative aspects to be considered for claiming  exemption, by a Taxable Person.

1. Ownership interest and calculation of the threshold percentage for ownership interest: For the purpose of CT Law, ownership interest has been defined to include investment in any one or combination of:

1. ordinary shares;
2. preferred shares;
3. redeemable shares;
4. members or partners interest;
5. other types of securities (including investment in Islamic Financial Instruments or arrangements), capital contributions, rights that entitles the owner to receive profits and liquidation proceeds.

   Ownership interest shall mean, where the interest is being treated/ classified as “Equity” under the Accounting Standards being followed by the Taxable person and the Taxable person has the right to receive economic benefits (legal and beneficial ownership) produced by the ownership interest.

   Ownership interest has to be calculated basis the total paid-up capital or total equity interest contributions made to the participation (i.e. the juridical person in which the Participating Interest is held).

2. Aggregation of ownership interest: Among other conditions to be complied with, CT Law also provides that a minimum of 5% of ownership should be held in the shares or capital of the Juridical person and while calculating this threshold aggregate of different types of ownership interest in the same juridical person should be done.

   Where the Taxable person is a member of Qualifying Group (as per Article 26 of the CT Law), the aggregate of the investments made by all the members of the Qualifying Group has to be considered for calculation of the ownership interest.

3. Transfer of ownership interest: To be treated as continuous period of ownership, following conditions must be met by a Taxable Person, where the ownership interest in one Juridical Person is exchanged by the Taxable Person with ownership interest in other Juridical Person:

1. Ownership interests have been exchanged in accordance with Article 27 of the CT law, i.e., in accordance with the provisions of Business Restructuring Relief;
2. Ownership interest in the Juridical Person should qualify as participating interest as provided in Article 23 of the CT Law.

4. Income from Debt Instruments to be treated as Income from Participating Interest: Where the Debt Instrument has been classified as “Equity Interest” basis the Accounting Standards being followed by the Taxable Person, any income earned from such Debt Instruments should be treated as income from participating interest.
5. Subject to Tax: The Participation shall be “Subject to Tax” in its respective jurisdiction (outside of UAE) at a rate of not less than 9% i.e. the headline corporate tax rate in the UAE. “Subject to Tax” test would be considered as satisfied, where:

1. An effective tax rate of 9% or more is being applied on the income of the participation; or
2. An effective tax rate of 9% or more has been arrived basis the calculation being made following the provisions of UAE CT Law.

6. Holding Company: Where the participation is a Holding Company with principal activity of holding of shares and income substantially consisting of income from participating interests, the condition of Corporate Tax of 9% or more shall be shall be considered to have been met, where:

1. It is being directed and managed in its respective foreign jurisdiction;
2. Complies with the documentation and reporting requirements of its Country Laws;
3. Have adequate personnel and premises for acquisition and holding of shares;
4. Shall not conduct any activity other than those incidental or ancillary to the acquisition and holding of shares.

7. Minimum Acquisition Cost: Where the ownership interest by a Taxable Person in the Participation equals to or exceeds acquisition cost of AED Four million (AED 4 Million), the criteria of five percent (5%) of ownership interest in the share or capital of juridical person shall be considered to have been met.

   In calculating the amount of AED Four Million, the investment made by a taxable person in the participation is to be off-setted with the amount of investment made by the participation in the taxable person

   Where the ownership interest has been acquired outside UAE in a currency other than AED, conversion rate as provided by Central Bank of UAE, of the date of acquisition has to be used for quantifying the amount of ownership interest.

   Where the taxable person does not meet the minimum acquisition threshold ownership interest for an uninterrupted period of twelve (12) months, any income previously not considered because of participation exemption shall be included for calculation of taxable income of the tax period in which the minimum acquisition threshold is not met.

8. Assets of the participation: To ensure that the benefits proposed under the participation exemption are not misused, the CT Law provides that, no more than fifty percent (50%) of the assets owned directly or indirectly may consist of ownership interests or entitlements that would not qualify for participation exemption (throughout the tax period) had the assets been directly held by the taxable person, determined basis the:

1. Carrying value of the assets (Accounting value) presented in the consolidated Balance Sheet; or
2. Market value of the direct and indirect ownership interest and other assets of the participation.

9. Expenditure incurred for acquisition and Disposal of Participating Interest: Where income from participating interest qualifies to be an exempt income, any expense incurred (except for interest) on the acquisition, sale, transfer or disposal of participation interest (in full or part) shall not be considered as tax deductible expenditure for the taxable person. Expenditures for this purpose shall include but not limited to professional fees, due diligence costs, litigation costs, commission and brokerage fees, stamp duty, registration duties, appraisal and valuation costs.

   Any interest expense recorded shall be allowed basis the 30% of EBIDTA.

10. Income from ownership interest in a Participation: Taxable Person should derive the income from the participation as an owner of the participative interest. Income from participative interest will not be exempt where the taxable person does not receive the income in the capacity of owner.
11. Liquidation Proceeds and Losses: Where the Participation ceases to have legal existence and has suffered liquidation losses, participation exemption on such losses shall not be available. Liquidation losses shall be calculated by adjusting (a) Acquisition cost of Taxable Person; with (b) Disposal (part) made in the participation, if any, and (c) Fair value of the liquidation proceeds received by the taxable person;

    Liquidation loss shall be adjusted in the relevant tax period and the preceding tax period with (a) tax losses transferred by the participation to the taxable person, (ii) exempt dividends or other profits received from the participation, (iii) income on transfer of assets or liabilities between taxable person and the participation not taken into account under transfers within a qualifying group or business restructuring relief.

12. Foreign PE Tax Losses: Tax losses previously utilised from a Foreign PE of the Taxable Person shall be fully adjusted by the Taxable person in subsequent tax periods, before the Taxable Person:

1. Elects to apply for tax exemption of the Foreign PE; or
2. Income arising from the foreign PE can benefit from the participation exemption under the CT Law.

Key takeaways:  The Decision mandates several operative aspects to be considered while claiming exemption of income due to ownership interests in the shares or capital of a juridical person in accordance with the conditions referred in the Article 23 of the CT law.

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