UAE Ministerial Decision No. 116 of 2023 on Participation Exemption

The Ministry of Finance (MoF) has issued a Ministerial Decision No. 116 of 2023 on the Participation Exemption for the purpose of Article 23 of Corporate Tax Law, which specifies that the income from Participating Interest is exempt from Corporate Tax.

Further, according to clause (2) of Article 23, a Participating Interest refers to 5% or greater ownership in the shares or capital of a juridical person (Referred to as “Participation”)

The Ministry clarifies various aspects and conditions for availing of Participation Exemption. Below are some key highlights of the decision:

• The Ownership interest includes holding any one or a combination of Ordinary Shares, Preference Shares, Redeemable Shares, Membership and Partner interest, and other securities that entitle the owner to profits and liquidation proceeds. To be considered an ownership interest, it must be classified as equity interest according to the accounting standards applied by the Taxable Person.
• For computing the 5% threshold, all types of ownership interest in the same juridical person are to be aggregated. This would even include the interest held by members of the Qualifying Group
• Even income from debt instruments held by the Taxable Person would qualify as Participating Interest if they were classified as equity interest as per the Accounting Standards followed.
• The juridical person in which the ownership interest is held should be subject to a minimum tax rate of 9% in its home country. There are additional criteria regarding reductions, reliefs, tax rates, incentives, and exemptions. If the participation cannot meet these conditions, it must be subject to a tax on income, equity, or net worth in the other country or territory, resulting in an effective tax rate of at least 9%.
• Where the aggregate cost of acquisition of ownership interest is equal to or more than AED 4 Million, the taxable person shall be treated as having participating interest even if the 5% threshold is not met. The calculation includes the value of equity interests, capital contributions, repayments, and relevant expenses.
• To determine if the condition related to the assets of the participation as mentioned under paragraph (d) of Clause (2) of Article (23) of the Corporate Tax Law is met, the decision clarifies that it can be assessed based on either the consolidated balance sheet of the Participation or through a Market Value valuation of ownership interests and assets.
• Expenditure related to the acquisition, sale, transfer, or disposal of a Participating Interest, including professional fees, due diligence costs, litigation costs, and more, is not deductible. However, interest expenditure in relation to the acquisition and holding of a Participating Interest is deductible. Such expenditure is capitalized as part of the acquisition cost of the Participating Interest.
• A Participation is considered liquidated when it ceases to exist legally. In such cases, a liquidation loss is calculated as the difference between the acquisition cost of the Participating and the fair value of the liquidation proceeds. The liquidation loss is adjusted for tax losses, exempt dividends, and income or gains on transfers between the Taxable Person and the Participation.
• When a Taxable Person utilizes a Tax Loss from a Foreign Permanent Establishment, that Tax Loss must be fully offset by the Taxable Income from the Foreign Permanent Establishment before electing the Foreign Permanent Establishment exemption or benefiting from provisions under Article (23) of the Corporate Tax Law.