What are the conditions for the participation exemption on dividends?

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.

Article 22 – Exempt Income The following income and related expenditure shall not be taken into account in determining the Taxable Income: 1. Dividends and other profit distributions received from a juridical person that is a Resident Person. 2. Dividends and other profit distributions received from a Participating Interest in a foreign juridical person as specified in Article 23 of this Decree-Law. 3. Any other income from a Participating Interest as specified in Article 23 of this Decree-Law. 4. Income of a Foreign Permanent Establishment that meets the condition of Article 24 of this Decree-Law. 5. Income derived by a Non-Resident Person from operating aircraft or ships in international transportation that meets the conditions of Article 25 of this DecreeLaw.

6. Participation Exemption: Exempt Income and loss Certain income and losses from, or in relation to, a Participating Interest are excluded from Taxable Income. These are: Dividends from a foreign Participation, gains or losses on the transfer, sale or other disposition of a Participating Interest, foreign exchange gains or losses and impairment gains or losses in relation to Participating Interest.91 Dividends and other profit distribution Article 23(5)(a) of the Corporate Tax Law provides an exemption for Dividends and other profit distributions received from a foreign Participation. In this respect note that: • • • For the scope of the term “Dividend and other profit distribution” and determination of Dividend income, see Section 3. The use of the term “received” indicates that the exemption is available only on actual receipt. In the case of the Accrual Basis of Accounting, this is when the income is recorded, rather than when the cash payment is received. This principle applies to the types of Dividends discussed in Section 3. Article 23(5)(a) of the Corporate Tax Law covers only Dividends and other profit distributions from a foreign Participation. A Dividend or other profit distribution received from a juridical person that is a Resident Person is excluded from Taxable Income under Article 22(1) of the Corporate Tax Law with no further conditions (see Section 3.2.2). Example 18: Back-to-back Dividends Company A (a company incorporated and resident in the UAE) holds 100% of the shares in Company B (a company incorporated and resident in the UAE). Company B holds 100% of the shares in Company C (a company incorporated, resident and managed outside the UAE). Company C and Company B both declare Dividends. The Dividend received by Company B from Company C is exempt under the Participation Exemption, provided all conditions of the Participation Exemption are satisfied. The Dividend received by Company A from Company B, being a Dividend from a juridical person that is a Resident Person, is exempt with no further conditions. 91 Article 23(5) of the Corporate Tax Law. Corporate Tax Guide | Exempt Income: Dividends and Participation Exemption | CTGEXI1 50

4.4.1. Domestic Dividends Dividends, and other profit distributions, received from a juridical person that is a Resident Person are exempt from Corporate Tax.19 There are no additional conditions that a Taxable Person has to meet in order to benefit from this exemption. 4.4.2. Participation Exemption 4.4.2.1. Dividends and other profit distributions from foreign juridical persons Dividends and other profit distributions received from foreign juridical persons are exempt from Corporate Tax if the recipient has a Participating Interest in a foreign juridical person.20 A Participating Interest is a 5% or more ownership interest in the shares or capital of a juridical person (the “Participation”) subject to the conditions below. A Participating Interest exists where all of the following conditions are met:21 • The Taxable Person has an ownership interest of 5% or more in the shares or capital of the Participation. As an alternative to the requirement to have a 5% or more ownership interest, a Taxable Person will be treated as having a Participating Interest in a Participation where the aggregate acquisition cost of ownership in that juridical person is AED 4 million or more. • The Participation has been held, or is intended to be held, for an uninterrupted period of at least 12 months. • The Taxable Person is entitled to at least 5% of profits available for distribution by the Participation and at least 5% of the liquidation proceeds of the Participation. • Not more than 50% of the Participation’s direct and indirect assets consist of ownership interests that would not have qualified for the Participation Exemption if they were held directly by the Taxable Person. • The Participation is resident for tax purposes throughout a given Tax Period in another country that levies a tax that is applied on a similar basis to Corporate Tax and at a headline statutory tax rate of at least 9% (i.e. the “subject to tax” requirement). The subject to tax requirement is also considered to have been met if it can be demonstrated that the Participation is subject to a tax on income, equity or net worth at an effective rate of at least 9% on profits. 19 Article 22(1) of the Corporate Tax Law. 20 Article 22(2) and (3) of the Corporate Tax Law. 21 Article 23(2) of the Corporate Tax Law. Corporate Tax Guide | Determination of Taxable Income | CTGDTI1 23