Participation Exemption and Foreign Permanent Establishment Exemption Explained: UAE Corporate Tax Perspective
The Corporate tax in the UAE federal degree law No. 47 of 2022 is defining that how businesses need to be taxed, among which two exemptions are there to support tax transparency in the UAE. Participation Exemption and the Foreign Permanent Establishment (PE).
Via this blog, we will discuss both exemptions in detail and understand how your business can benefit from the given provisions.
1. What do you mean by a Participation Exemption?
The participation exemption is a relief mechanism that empowers a UAE company to prevent income from qualifying shareholdings from its taxable income. It contains capital gains, dividends and income from a participating interest in another entity.
Motive of the Participation Exemption
The purpose of this exemption is to bypass double taxation when a Company from the UAE get any income, for example, "dividends" from a foreign branch. This income is mostly taxed in the home country or country of origin. Levying tax again in the UAE would lead to economic double taxation, which the UAE Tax regime seeks to eliminate.
2. There are some conditions for Participation Exemption
To qualify for the participation exemption, we have to meet certain conditions below
a. Ownership Interest
The UAE Company must hold at least 5% of the shares, worth 5M AED, in the foreign entity
b. Minimum Period for holding
The foreign entity's interest must have been held for at least 12 months in a row, or there must be a plan to hold it for that long.
c. Minimum 9% tax in a jurisdiction.
The foreign company in which the interest is held must pay corporate tax not least 9% in its home country. Or it should be equivalent.
d. Income from Non-Qualifying activities.
The foreign entity's Income should be less than 50% from the Non non-qualifying activities like interest, capital gains, or royalties. This rule is to ensure that the company's intention is not be there to avoid taxation.
e. Tax avoidance should not be there
The benefit must not be used to avoid tax or gain the tax advantages; otherwise, FTA may deny the exemption under the rule (GAAR), General Anti-Abuse Rules.
3. Is income exempt under Participation Exemption?
Once the given conditions are met, the following incomes from the participating interest are exempt from the UAE corporate tax regime.
- Capital Gains
- Dividends, or Bonus
- Foreign exchange gains related to the Participating Interest
- Detrimental gains or losses if related to the accounting
4. Foreign Permanent Establishment (PE) Exemption means?
Permanent establishment PE means a place of business from where a UAE resident company does business in another country. The Tax Law of the UAE allows that income from a foreign PE to be excluded from the taxable income, but it is subject to conditions.
This law ensures that the income or profit earned from an outside country should not be taxed in the United Arab Emirates UAE.
5. There are certain conditions for Foreign PE Exemption
To qualify permanent establishment exemption, the given criteria/conditions must match
a. Identification of Permanent establishment PE under Foreign Law
The foreign authority must accept the UAE entity as having a Permanent Establishment and tax the PE's income for corporate tax or similar tax.
b. Minimum Tax Rate Requirement
The total income must be taxed at least 9%, not less than this.
c. Efficient Taxation
The Foreign PE should not be taking advantage of any tax regime which reduces its tax rate to under 9%.
d. Separate Accounting
Income and expenses of the PE should be separate from the UAE entity's income, and should maintain the proper books and documentation in case the FTA come to know they must have proper details for that.
6. Foreign Tax Credit vs. PE Exemption
If an entity does not claim the PE exemption, it is possible to obtain a foreign tax credit for an amount paid abroad as tax, only up to the amount of any UAE Corporate Tax that would have been applicable.
On the same income, a business can't obtain both the exemption and the foreign tax credit, so the selection of the optimal choice will need to be made, as the most beneficial choice depends on the effective levy of tax.
7. Documentation and Compliance
The availability of these exemptions provides substantial tax planning opportunities for multinational groups and investment holding structures. Businesses can:
- Structure group companies to benefit from participation exemption.
- Expand operations abroad through PEs with confidence in UAE tax neutrality.
- Optimise profit repatriation strategies without suffering double taxation.
The Federal Tax Authority (FTA) may request this documentation at any time, so businesses must maintain organised and up-to-date records.
8. Strategic Implications for Businesses
The fact that these exemptions are available means the tax planning options available to multinational groups and investment holding structures are significant:
- Multinational groups can now structure group companies to benefit from participation Exemption
- Multinational groups can feel comfortable expanding their operations abroad through PEs with the confidence of UAE tax neutrality.
- Multinational groups can seek to optimise their profit repatriation without double taxation.
9. When Exemptions May Not Apply
The FTA maintains the right to deny exemptions if:
- The entity is part of a sham or abusive arrangement.
- There is no economic substance, or
- The foreign entity is subject to advantageous tax regimes to attract passive income.
In this instance, the income may be taxable in the UAE, despite having already been subject to foreign taxes.
Conclusion
The Participation Exemption and Foreign PE Exemption were both introduced to position the UAE as a jurisdiction that is competitive on a global scale for international business. These exemptions provide certainty, very little risk of double taxation, and allow businesses to expand around the globe with little tax leakage.
However, businesses will only realise those benefits if they meet all detailed conditions and maintain compliance. A Tax advisor or Tax agent registered with the FA can help determine if you are eligible for the Exemptions, and will also ensure your investments and operations in the UAE Corporate Tax environment is structured efficiently.
Need Help?
At Flying Colour Tax Consultant LLC, we specialise in UAE Corporate Tax advisory, structuring, and compliance. Our experienced tax agents can help you determine whether your foreign investments or business activities qualify for exemptions and ensure you maximise tax efficiency while remaining compliant.
To learn more about UAE Corporate Tax: Participation and Foreign PE Exemptions, book a free consultation with one of the Flyingcolour team advisors.
Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.