The UAE companies that own a share in other companies have a dire question each tax period: will the dividends and capital gains on such investments be again taxed in the UAE? The participation exemption is the answer to that. As a part of the Corporate Tax system established by the Federal Decree-Law No. 47 of 2022, the specified provision eradicates the occurrence of taxation on the same investment income twice.

In the case of holding companies, cross-border subsidiaries in businesses and other corporate forms, this exemption has a direct impact on the amount of corporate tax that you pay, the deductions that you claim, and the manner in which you invest. The rules have been kept up to date – most recently, by Ministerial Decision No. 302 of 2024, which relates to tax periods beginning 1 January 2025.

What Is the Participation Exemption Under UAE Corporate Tax?

Participation exemption gives the opportunity to the UAE resident businesses to exclude some income as taxable ownership interest in the taxable income. When your UAE entity is holding shares or capital of another juridical person and satisfies the specified requirements, the dividends, capital gains, and foreign exchange gains, as well as impairment gains of such investment are not included in the UAE Corporate Tax.

The legal foundation sits in Article 23 of the Corporate Tax Law, supported by Ministerial Decision No. 116 of 2023 (for tax periods before 1 January 2025) and Ministerial Decision No. 302 of 2024 (for periods from 1 January 2025 onwards). Experienced corporate tax consultants in UAE can help determine which exemption route applies to your specific holding structure.

Domestic vs. Foreign Participation

Article 22 provides that the dividends received on a UAE resident company are tax-free without any further requirements. Article 23, which is known as the participation exemption is the exemption applicable to foreign investments, and in this case special requirements have to be met.

Conditions for Qualifying as a Participating Interest

The Corporate Tax Law places five fundamental conditions in Article 23 (2) that have to be fulfilled simultaneously. These are:

• Ownership requirement– UAE taxable person has to have a 5 per cent ownership stake in the shares or capital of a juridical person. Instead, this condition will be fulfilled with less than 5% ownership in case the historical acquisition cost is AED 4 million or above.
• Holding period – The ownership interest should have been continuously owned or should have been owned continuously during 12 months. In the case of capital gains, the actual holding period of 12 months is to be taken into consideration; intention is not enough.
• Subject to tax test – The participation should be liable to corporate tax or a similar tax at a statutory rate of at least 9 percent in its residence state.
• Profit entitlement- The ownership interest should give the taxable person at least 5% of the distributable profits and at least 5% of the liquidation proceeds. This is not applicable in the case where the AED 4 million acquisition cost condition is fulfilled.
• Asset test – Not over 50 per cent of the direct and indirect assets of the participation can be in the form of ownership interests which would otherwise not be the subject of exemption had they been held directly. After 2025, this test will only be used where the participation is a Related Party.

Key 2025 Amendments Under Ministerial Decision No. 302 of 2024

AED 4 Million Threshold Now Replaces All Three Tests

In MD 116 the 5% ownership condition was simply substituted with the AED 4 million acquisition cost alternative. The investors were still required to meet the profit entitlement and asset tests individually. MD 302 overcomes this: once the cost of acquisition is over AED 4 million you do not have to comply with the requirements of the ownership, profit entitlement, and asset test. This comes as a massive reprieve to minority investors in high-value foreign entities.

Statutory Rate Clarification

The new framework acknowledges the subject-to-tax test which is the statutory rate. When a subsidiary is situated in a country with a 12% statutory rate with local incentives and this would lower the effective rate to 7 per cent, the exemption applies. Instead, participation may be qualified by showing that it has an effective tax rate of 9 or above in the period.

Asset Test Limited to Related Parties

The 50 percent asset composition limit has been reduced to situations where it is a Related Party participation. In the case of arms-length and unrelated investments, this test no longer provides a barricade to asserting the exemption.

Foreign PE Loss Recapture

Since 2025, where a taxable person in the UAE used losses on taxable activities in a Foreign Permanent Establishment beforehand, these losses should be recaptured in full before the participation exemption is availed of income on converting that PE into a participation.

Types of Income Exempt Under the Participation Exemption

This is due to the fact that types of income that are exempt under the Participation Exemption are as follows:

• Dividends and other dividend payments on the foreign participation.
• Capital gains or losses on the transfer, sale or disposal of a participating interest.
• The gains or losses associated with foreign exchange of the interest involved.
• The impairment gains or losses concerning the participating interest.

The exemption is also symmetrical: in case you are eligible, capital losses, foreign exchange losses, and impairment losses of the same investment are equally non-deductible against other taxable income.

Treatment of Related Expenses

The expenses incurred in the acquisition, selling, or disposition of a participating interest such as professional fees, due diligence, or litigation expenses are not deductible. These are capitalized under the costs of acquisition. The interest paid on acquisition and maintenance of a participating interest is however deductible under the general interest limitation provisions.

Management overhead attributable to earning exempt income should be allocated carefully. Businesses working with qualified corporate tax consultants in UAE can categorize these costs correctly and avoid FTA compliance issues.

Participation Exemption and Free Zone Entities

Those who qualify as Free Zone Persons (QFZP) enjoy 0% corporate tax on qualifying income which can arguably restrict the practical necessity of participating exemption on qualifying income. Nonetheless, the income that does not meet the qualifying definition of the QFZP is subject to taxation at 9% and the exemption of participating comes into play in such circumstances. Investments made by exempt persons including government entities and qualifying investment funds are also exempted.

A Practical Example

One of the companies in Business Bay, Dubai, is a UAE mainland business, which owns 15 percent of a German subsidiary that is taxed at an approximate rate of 30 percent statutory. The retention has been more than two years. All requirements are satisfied: the ownership has to be more than 5, holding is more than 12 months, statutory rate should be more than 9, and the subsidiary is not a passive shell. The UAE does not tax dividends and capital gains obtained by this stake.

On the other hand, a UAE based organization on the Al Reem Island, Abu Dhabi, owns 3 percent of a foreign company purchased at AED 5 million. Even though the ownership falls short of the 5 percent, AED 4 million threshold is achieved. This is qualifying under the 2025 regulations without necessarily satisfying either the profit entitlement or asset tests.

Common Compliance Mistakes to Avoid

The exemption of participation is not an automatic one. Those that do not record eligibility or misuse the regulations are liable to reassessment by the FTA. The most common mistakes are:

• The lack of the documentation of the holding period of 12 months or the intent to hold at the time of purchase.
• Making an assumption that all the foreign dividends are exempt without checking the statutory tax rate in the foreign country.
• Expenses related to acquisitions and which ought to be capitalized are deducted.
• Overlooks loss recapture regulations on Foreign PE conversions.

Professional corporate income tax services ensure eligibility criteria are documented and the exemption is applied in full compliance with FTA requirements.

Why This Exemption Matters for UAE Businesses

As the Domestic Minimum Top-Up Tax (DMTT) will impact large multinational enterprises and the availability of R&D tax credits towards 2026, the participation exemption will continue to be a pillar of the tax system in the UAE that is friendly to investors. To businesses that have operations in Dubai, Abu Dhabi, ADGM and UAE free zones, the exemption offers significant tax planning to group restructurings, cross-border mergers and capital reallocation plans.

The company operates as Asad Abbas & Co. Chartered Accountants LLC in providing corporate tax compliance and corporate tax advisory services to more than 5,000 clients in 14+ industries. Our 40+ qualified (CPAs, CGMAs, CFMs, CMAs) professionals will assist holding companies, group structures, and multinational businesses in properly implementing the participation exemption on a tax period basis. We have over 10 years of experience in the UAE, which we add to every engagement in our offices in the Business Bay, Dubai, and Al Reem Island, Abu Dhabi.

Evaluate Your Eligibility

If your business holds ownership interests in domestic or foreign entities, a structured review can uncover tax savings and prevent compliance risks. Our corporate income tax services cover eligibility assessment, documentation, FTA return filing, and audit support.

Frequently Asked Questions

Q: What is the exemption of participation under UAE Corporate Tax?

A: This is a clauses in Article 23 of the UAE Corporate Tax Law that enables businesses that are qualified to exclude dividends, capital gains, and other associated income on ownership interest in other firms in their taxable income to avoid the possibility of paying tax twice.

Q: What are the requirements of exemption of participation in UAE?

A: The ownership interest has to satisfy five requirements: 5 per cent ownership (or AED 4 million cost of acquisition) and holding period of at least 12 months, foreign entity taxed at 9 per cent or above, 5 per cent profit entitlement and related parties asset composition test.

Q: What is the AED 4 million threshold of acquisition cost?

A: According to the Ministerial Decision No. 302 of 2024, in case the ownership interest is acquired at a price not less than AED 4 million, the 5% ownership, profit and asset tests are not obligatory. The holding period and subject-to-tax conditions are the only ones that remain.

Q: Do dividends of UAE companies not receive corporate tax?

A: Yes. Article 22 of the Corporate Tax Law provides that the dividends of UAE resident companies are tax-free. The conditions of detailed participation exemption provided under Article 23 are mainly used with regards to foreign entity dividends.

Q: How is there capital losses under the participation exemption?

A: The exemption is applied on gains and losses equally. Losses of capital, foreign exchange and impairment of a qualifying participating interest are not deductible against other income taxable to the taxpayer.

Q: What is the implication of the participation exemption on free zone companies?

A: 0% of the qualifying income taxes are reduced in QFZPs thus eliminating the participation exemption of qualifying income. But in the case of non-qualifying income in which there will be taxation of 9 percent, then there is the participation exemption of article 23.