Is a loan waiver by a shareholder taxable income?

If a lender recognises income on a reversal of a previous impairment on a loan between members of the same Tax Group, this would not generally result in a corresponding deduction for the borrower, except where a deductible loss was recognised by a member of the Tax Group in relation to that loan prior to forming or joining the Tax Group. 226 Unless this exception applies, the reversal of such impairment is not taken into account for the purposes of the attribution of Taxable Income. If a lender releases or waives a loan between members of the same Tax Group, this release or waiver would generally result in income for the borrower due to cancellation of its liability. This income would be taken into account for the attribution of Taxable Income up to an arm’s length standard and up to the loss that the lender reports in the same Tax Period in relation to the loan. Example 17: Attribution of income between members of a Tax Group Company A and Company B are in a Tax Group as of 1 January 2025. Company A and Company B both use the Gregorian calendar year as their Tax Period. Company A and Company B have unutilised pre-Grouping Tax Losses and hence, the Tax Group is required to determine Taxable Income attributable to Company A and Company B on a standalone basis.227 Company A holds a loan receivable of AED 1 million with Company B as the borrower with an Interest rate of 5%. Interest is payable annually. • In 2026, Company A impairs the loan receivable from Company B to zero. In 2026, Company B continues to recognise the liability for the full nominal amount of AED 1 million. • In 2027, Company A releases the loan, creating AED 1 million of income for Company B, which is assumed to be consistent with the arm’s length principle. If Company A were a separate Taxable Person, it would recognise a deduction against Taxable Income of AED 1 million in 2026 as a result of the impairment. If Company B were a separate Taxable Person, it would not recognise Taxable Income in 2026 as a result of the impairment. Thus, on a standalone basis, there is no income in Company B corresponding to the deduction in Company A. However, for the purposes of calculating the Taxable Income of the Tax Group for the 2026 Tax Period, the transaction is eliminated on consolidation. Therefore, in the Tax Period 2026, the impairment loss is not taken into account for the attribution of Taxable Income attributable to Company A and Company B. 226 Article 4 of Ministerial Decision No. 125 of 2023. 227 Article 8(1)(a) of Ministerial Decision No. 125 of 2023. Corporate Tax Guide | Tax Groups | CTGTGR1 76

However, Interest on a loan may qualify as a Dividend insofar as the lender effectively shares the risks run by the company, i.e. when repayment depends largely on the success or otherwise of the company’s Business and the loan is therefore classified as equity under the Accounting Standards applied by the Taxable Person. The question as to whether the lender shares the risks run by the company and whether this means that the Interest on the loan is in substance a Dividend must be determined in each individual case in light of all the relevant facts and circumstances. 3.1.4. Dividend in kind 3.1.4.1. General A Dividend will usually take the form of a cash amount. However, as defined, it can also take a different form, such as securities or other properties, or some other asset of the entity making the distribution. This is referred to as a Dividend in kind. In the case where a Dividend in kind is received, the value of the Dividend in the hands of the Taxable Person is the value recorded in its Financial Statements prepared as per the applicable Accounting Standards, as long as the value is recorded at Market Value. 3.1.4.2. Issuance of bonus shares Bonus shares usually refer to additional shares that a company allocates to its existing shareholders out of its profits or reserves, without receiving new consideration from the shareholders. Since bonus shares are in effect a payment out of a company’s profit and reserves, they meet the definition of a Dividend. 3.1.5. Other distributions 3.1.5.1. In substance distributions As per the definition of Dividend, a payment or benefit made in connection with the following would be considered a Dividend to the extent it constitutes, in substance, a distribution of profit: • • • • The acquisition by a company of its own shares (buy-back of shares); The redemption of shares; The cancellation of shares (capital reduction); or The termination of other ownership interests or rights. Corporate Tax Guide | Exempt Income: Dividends and Participation Exemption | CTGEXI1 15