EXEMPT INCOME UNDER CORPORATE TAX

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Both resident and Non Resident is liable to pay tax under corporate tax if the conditions for being a resident and nonresident satisfies. But there are certain income and related expenses defined it ARTICLE 22, which will not be taken into consideration for calculation of taxable profit which is as follows -

  1. Income from foreign Permanent establishment that satisfies the conditions.
  2. Income received by Non-resident from operating aircraft or ships in international transportation that meets conditions.
  3. Profit shares and dividend received from a resident company.
  4. Forex loss or gain.
  5. Dividend and profit distribution received from a foreign company (foreign dividend) who is not a resident in UAE (no Place of Effective Management in UAE).
  6. Dividend and profit share from participating interest in foreign juridical person as per Article 23 (defined below)
  7. Gain or loss on the transfer, sale of a participation interest (capital gain) derived after 12 months.
  8. Any other income from participating interest as per Article 23
  9. Impairment gain or loss in relation to the participating interest.

Article 23- Participation Exemption

 A Participation Exemption is provided to a taxpayer with Participation Interest (“PI”) i.e., at least 5% ownership interest in the shares or capital of a juridical person.

The conditions that follows for the income a taxpayer with Participation Interest to be exempted from corporate tax is as follows –

  1. The intention to hold the shares should be continuous at least for 12 months.
  2. Principle objective of the company should be holding of shares or equitable interest.
  3. The profit of the company in which shares are held should be subject to at least 9 % corporate tax. The company should pay 9% tax either in UAE or outside UAE and dividend is transferred after paying the tax.
  4. Shareholding and profit distribution percentage should be at least 5%.
  5. 50% or more direct and indirect assets that would not be eligible for corporate tax exemption.
  6. Any other conditions prescribed by the minister.

The exemption under Participation Interest is not applicable if/for –

  1. The taxable person in UAE considered the participation interest as impairment loss before meeting the 12 months criteria, then exemption is not applicable.
  2. The taxable person or related party who is subject to CT considered the loan receivable from participation as deductible impairment loss
  3. The impairment loss is reversed by the taxable person in the subsequent tax period, the portion of the amount loss which is reversed (which was not subject to exemption) will be exempted in the year of reversal.

Impairment loss means the real value of the asset is less than the book value, in that case, company may decide to write off the value

  • The case when the subsidiary company is claiming the dividend declared  or other transactions to UAE company as expense in the applicable tax jurisdiction
  • The loss realized on the liquidation of participation.
  • If the acquisition of participation interest was done in exchange of transfer of ownership which does not meet 12 month criteria, the exemption from such participation interest will not be applicable for 2 years.
  • The threshold of amount is set by authority and if the taxable person acquired the shares with the price which crosses the threshold, even if it is less than 5%, the participation interest exemption will be applicable.

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