Are capital gains subject to Corporate Tax?

Article 23 – Participation Exemption 1. Income from a Participating Interest shall be exempt from Corporate Tax, subject to the conditions of this Article. 2. A Participating Interest means, a 5% (five percent) or greater ownership interest in the shares or capital of a juridical person, referred to as a “Participation” for the purposes of this Chapter where all of the following conditions are met: a. The Taxable Person has held, or has the intention to hold, the Participating Interest for an uninterrupted period of at least (12) twelve months. b. The Participation is subject to Corporate Tax or any other tax imposed under the applicable legislation of the country or territory in which the juridical person is resident which is of a similar character to Corporate Tax at a rate not less than the rate specified in paragraph (b) of Clause 1 of Article 3 of this Decree-Law. c. The ownership interest in the Participation entitles the Taxable Person to receive not less than 5% (five percent) of the profits available for distribution Federal Decree-Law No. 47 of 2022 and its amendments – Unofficial translation (as published by the Ministry of Finance) 29 by the Participation, and not less than 5% (five percent) of the liquidation proceeds on cessation of the Participation. d. Not more than 50% (fifty percent) of the direct and indirect assets of the Participation consist of ownership interests or entitlements that would not have qualified for an exemption from Corporate Tax under this Article if held directly by the Taxable Person, subject to any conditions that may be prescribed under paragraph (e) of this Clause. e. Any other conditions as may be prescribed by the Minister. 3. A Participation shall be treated as having met the condition under paragraph (b) of Clause 2 of this Article where all of the following conditions are met: a. The principal objective and activity of the Participation is the acquisition and holding of shares or equitable interests that meet the conditions of Clause 2 of this Article. b. The income of the Participation derived during the relevant Tax Period or Tax Periods substantially consists of income from Participating Interests. 4. A Participation in a Qualifying Free Zone Person or an Exempt Person shall be treated as having met the condition under paragraph (b) of Clause 2 of this Article, subject to any conditions that may be prescribed by the Minister. 5. Where the conditions of Clause 2 of this Article continue to be met, the following income shall not be taken into account in determining Taxable Income: a. Dividends and other profit distributions received from a foreign Participation that is not a Resident Person under paragraph (b) of Clause 3 of Article 11 of this Decree-Law. b. Gains or losses on the transfer, sale, or other disposition of a Participating Interest (or part thereof) derived after expiry of the time period specified in paragraph (a) of Clause 2 or Clause 9 of this Article. c. Foreign exchange gains or losses in relation to a Participating Interest. d. Impairment gains or losses in relation to a Participating Interest. 6. The exemption under this Article shall not apply to income derived by the Taxable Person from a Participating Interest insofar as: a. the Participation can claim a deduction for the dividend or other distributions made to the Taxable Person under the applicable tax legislation; Federal Decree-Law No. 47 of 2022 and its amendments – Unofficial translation (as published by the Ministry of Finance) 30 b. the Taxable Person has recognised a deductible impairment loss in respect of the Participating Interest prior to the Participating Interest meeting the conditions of Clause 2 of this Article; c. the Taxable Person or its Related Party who is subject to Corporate Tax under this Decree-Law has recognised a deductible impairment loss in respect of a loan receivable from the Participation. 7. Where the impairment loss referred to in paragraph (c) of Clause 6 of this Article is reversed in a subsequent Tax Period, the associated income of the Taxable Person shall be exempt from Corporate Tax in that Tax Period up to the amount of income from the Participating Interest that was not exempted under paragraph (c) of Clause 6 of this Article. 8. The exemption under this Article does not apply to a loss realised on the liquidation of a Participation. 9. The exemption under this Article shall not apply for a period of (2) two years where a Participation was acquired in exchange for the transfer of an ownership interest that did not meet the conditions of Clause 2 of this Article or a transfer that was exempted under Article 26 or 27 of this Decree-Law. 10. Where a Taxable Person fails to hold a 5% (five percent) or greater ownership interest in the Participation for an uninterrupted period of at least (12) twelve months, any income previously not taken into account under this Article shall be included in the calculation of the Taxable Income in the Tax Period in which the ownership interest in the Participation falls below 5% (five percent). 11. The Minister may prescribe that an ownership interest in the shares or capital of a juridical person meets the minimum ownership requirement under Clause 2 of this Article where the acquisition cost of that ownership interest exceeds a threshold specified by the Minister.

This will apply to reversals of partial impairments on the Participating Interest. It is also applicable in respect of any other income type covered by the Participation Exemption including Dividends and capital gains in respect of a Participating Interest.108 Generally, any income or gain resulting from the reversal of impairments in respect of a Participating Interest would also fall under the Participation Exemption and, therefore, be treated as exempt from Corporate Tax. However, if an impairment loss recognised in relation to a Participating Interest was deductible from Taxable Income (i.e. prior to the ownership interest becoming a qualifying Participating Interest, as otherwise it would not have been deductible), Article 23(6)(b) of the Corporate Tax Law provides that any subsequent income that would otherwise be exempt under the Participating Exemption is not exempt, up to the amount of the impairment loss that was treated as deductible for Corporate Tax. Article 23(6)(b) of the Corporate Tax Law applies to juridical persons that are Resident Persons as well as Non-Resident Persons. Example 23: Capital gain and impairment loss in relation to a Participating Interest Company A holds 100% of the shares of Company D (acquisition cost AED 100,000), both are incorporated and resident in the UAE. Company A performs a write-down on the shares of Company D in the amount of AED 70,000. At this time Company D does not qualify as a Participating Interest and Company A treats the impairment loss as deductible for Corporate Tax purposes. In the following year, the shares of Company D are sold for AED 120,000. By this time Company D qualifies as a Participating Interest. The capital gain resulting from the disposal of the shares of Company D of AED 90,000 (AED 120,000 – AED 30,000) is treated as follows: • • AED 70,000 is not exempt from Corporate Tax due to the impairment loss being treated as deductible. The remaining gain of AED 20,000 is exempt from Corporate Tax under the Participation Exemption. In circumstances where a Taxable Person has made both deductible impairment losses and non-deductible impairment losses, the question arises as to how the impairment losses are matched with any income which might be covered by the Participation Exemption. The wording of Article 23(6) of the Corporate Tax Law is clear that the Participation Exemption does not apply “insofar as” there has been a 108 Article 23(5) of the Corporate Tax Law. Corporate Tax Guide | Exempt Income: Dividends and Participation Exemption | CTGEXI1 59