How are foreign exchange gains and losses treated for Corporate Tax?

Article 6 – Foreign Exchange Movements For the purposes of the General Interest Deduction Limitation Rule, all foreign exchange gains and losses accruing from Interest shall be considered Interest.

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.

deductible. The use of the phrase “in relation to” a Participating Interest means that the foreign exchange gain or loss must arise from, or by reason of, or in connection with the Participation Interest. The following discusses foreign exchange gains or losses which can be considered to arise “in relation to” a Participating Interest. 6.3.1. Increase or decrease in value of Participating Interest due to exchange rate fluctuation A foreign exchange gain or loss can be realised or unrealised. A gain or loss realised on the value of a Participating Interest (for example on sale of Participating Interest) will be “in relation to” the Participating Interest and hence excluded from Taxable Income under Article 23(5)(c) of the Corporate Tax Law. Example 21: Currency fluctuation between date of sale of Participating Interest and receipt of foreign currency (realised gain) Company A (a company incorporated and resident in the UAE) sold shares held in Company F (a company incorporated and managed outside the UAE) which qualified for the Participation Exemption. The sale price was fixed at GBP 10,000. At that time, the value of GBP 1 was equal to AED 4.5, so Company A recorded sale proceeds of AED 45,000 in its Financial Statements. The sale consideration was only received after 2 months. At the time of receipt, the value of GBP 1 was AED 5, meaning Company A received the equivalent of AED 50,000. The additional gain of AED 5,000 is attributable solely to foreign currency fluctuation and is, therefore, exempt from Corporate Tax under the Participation Exemption. Unrealised foreign exchange gains or losses may arise where a change in the value of an asset due to currency fluctuation is recorded in the Taxable Person’s Financial Statements, but no transaction to realise a gain or loss has yet taken place. Taxable Persons, who prepare their Financial Statements on an accrual basis, may elect to take into account gains and losses on a realisation basis.103 The election can either be made so that all unrealised accounting gains and losses are not taken into account,104 or only unrealised gains and losses in relation to those assets and liabilities held on the Taxable Person’s capital account.105 In either scenario, unrealised gains and losses may include unrealised foreign exchange gains and losses.106 103 Article 20(3) of the Corporate Tax Law. 104 Article 20(3)(a) of the Corporate Tax Law. 105 Article 20(3)(b) of the Corporate Tax Law. 106 Article 20(4)(d) of the Corporate Tax Law. Corporate Tax Guide | Exempt Income: Dividends and Participation Exemption | CTGEXI1 57