The introduction of Corporate Tax in the UAE has reshaped how groups structure investments, manage dividends, and plan exits. To preserve the UAE’s position as a regional and international holding company hub, the Corporate Tax Law provides a robust Participation Exemption framework, designed to prevent economic double taxation on qualifying investments.

This article provides a comprehensive and practical deep dive into the UAE Participation Exemption regime, aligned with:

• Ministerial Decision No. 116 of 2023 on Participation Exemption
• FTA Corporate Tax Guide: Exempt Income – Dividends and Participation Exemption (CTGEXI1)
• Ministerial Decision No. 302 of 2024, effective for Tax Periods commencing on or after 1 January 2025

Overview: What Is Participation Exemption?

Participation Exemption allows UAE Corporate Tax taxpayers to exclude qualifying income derived from ownership interests in other entities from their taxable base, provided specific conditions are met.

In practice, this exemption applies to:

• Dividends and profit distributions
• Capital gains or losses on disposal of shares
• Foreign exchange differences that are directly attributable to the participation and treated consistently with the accounting and tax treatment of the exempt income
• Impairment movements connected to the participation, where such treatment aligns with the principles set out in CTGEXI1 and symmetry rules apply

The objective is clear:

Avoid taxing the same profits multiple times within a group or across borders.

This exemption is particularly relevant for:

• UAE holding companies
• Groups with foreign subsidiaries
• Investment and private equity structures
• Businesses planning reorganisations, exits, or dividend repatriation

Dividend Exemption vs Participation Exemption

Although closely linked, the UAE Corporate Tax law distinguishes between the domestic dividend exemption and the broader Participation Exemption.

Domestic Dividends (UAE-to-UAE)

Dividends or profit distributions received from a UAE resident juridical person are generally fully exempt, subject to the recipient not being a taxable person excluded from the exemption under the Corporate Tax Law, without the need to satisfy participation conditions.

Foreign Dividends & Capital Gains

Dividends from foreign entities, and income such as capital gains, rely on satisfying the Participation Exemption conditions under Article 23 of the Corporate Tax Law and the relevant Ministerial Decisions.

What Qualifies as a “Participating Interest”?

A Participation Exemption applies only if the UAE taxpayer holds a Participating Interest.

A. Minimum Ownership Threshold

A Participating Interest typically exists where the taxpayer holds at least 5% ownership in the entity.

B. Alternative Acquisition Cost Test

Even where ownership is below 5%, a Participating Interest may still exist if the aggregate acquisition cost of the ownership interest is AED 4 million or more.

This provides flexibility for:

• Minority strategic investments
• High-value financial or investment holdings

What Counts as Acquisition Cost?

Acquisition cost may include:

• Purchase consideration (cash or in-kind)
• Capital contributions
• Share premium and additional equity injections
• Capitalised transaction-related costs (where applicable)

Aggregation of Ownership Within a Group

One of the most valuable—and frequently overlooked—features of the Participation Exemption is ownership aggregation.

Ownership interests may be aggregated where:

• Multiple instruments are held in the same entity
• Ownership is spread across entities within a Qualifying Group

Such aggregation is only permitted where the entities meet the Qualifying Group conditions under Article 26 of the Corporate Tax Law, including the minimum common ownership threshold and absence of disqualifying exempt persons

This means a UAE group may still meet the participation threshold even if no single entity holds 5% individually, provided the Qualifying Group conditions are satisfied.

Strategic importance: This provision enables tax-efficient group structuring within the boundaries of the Qualifying Group framework,  without artificial consolidation of shareholdings.

Core Conditions for Applying Participation Exemption

Meeting the ownership threshold alone is not sufficient. The Participation Exemption includes substance-based conditions to prevent abuse.

“Subject to Tax” Condition (Foreign Participations)

For foreign participations, the entity must be subject to a tax that:

• Is imposed on a similar basis to UAE Corporate Tax, and
• Has a statutory rate of at least 9%

The law recognises that:

• Temporary incentives
• Progressive tax rates
• Alternative minimum taxes

do not automatically disqualify a participation, provided the overall tax framework of the foreign jurisdiction is comparable in nature and intent to the UAE Corporate Tax system.

This assessment must be carefully documented, particularly when dealing with low-tax or incentive-driven jurisdictions as the analysis is jurisdictional and qualitative, not purely rate-based.

Exempt Income vs Non-Deductible Expenses

Exempt Income

Where Participation Exemption applies, the following may be exempt:

• Dividends and profit distributions
• Capital gains and losses on disposal
• Foreign exchange movements that are integral to exempt participation income
• Income or reversals connected to participation impairments, where symmetry principles apply

Expense Deductibility

As a general rule:

• Expenses directly linked to exempt income are non-deductible

However:

• Interest expenses may still be deductible, subject to Interest Deduction Limitation Rules (IDLR) and proper structuring.

This creates a critical planning intersection between:

• Group financing
• Investment structuring
• Exempt income tracking

Special and Complex Scenarios

A. Restructuring and Continuity of Ownership

Certain qualifying exchanges or reorganisations may allow the ownership interest to be treated as continuous, preventing the reset of holding periods or eligibility thresholds, provided the restructuring meets the conditions set out in the Corporate Tax Law and relevant Ministerial Decisions.

B. Equity-Classified Debt Instruments

Income from a debt instrument issued by a participation may be treated as participation income if classified as equity under applicable accounting standards.

This is particularly relevant for:

• Islamic finance structures
• Convertible instruments
• Profit-participating loans

Accounting treatment plays a decisive role in tax outcomes, provided such classification is technically defensible and consistent with substance over form principles.

Ministerial Decision No. 302 of 2024 – What Changed?

Ministerial Decision 302 of 2024:

• Repeals MD 116 of 2023 prospectively
• Applies to Tax Periods commencing on or after 1 January 2025
• Confirms MD 116 continues to apply to earlier Tax Periods

MD 302 primarily consolidates and clarifies the interaction between Participation Exemption and Foreign Permanent Establishment (PE) Exemption, rather than materially expanding the scope of participation relief.

Key Enhancement: Foreign Permanent Establishment (PE) Interaction

MD 302 introduces clarity on how:

• Foreign PE tax losses
• Foreign PE exemption elections

Interact with participation income, particularly in restructuring scenarios.

This is critical for UAE businesses converting:

• Foreign branches into subsidiaries
• Overseas operations into holding structures

Failure to plan the sequencing correctly can restrict exemption benefits.

Practical Implementation Checklist for UAE Businesses

Before declaring dividends, planning exits, or finalising restructuring, UAE businesses should:

1. Confirm Participating Interest eligibility (ownership % or AED 4 million test)
2. Review Qualifying Group aggregation opportunities
3. Assess foreign subsidiary tax residency and statutory rate
4. Validate accounting classification of equity and debt instruments
5. Track exempt income separately for compliance purposes
6. Review expense deductibility and financing alignment
7. Apply the correct Ministerial Decision based on the Tax Period
8. Maintain robust documentation for audit readiness

How German Fintax Consultancy Can Help

Participation Exemption is a powerful relief – but one that requires technical precision, documentation, and forward planning.

German Fintax Consultancy supports UAE businesses with:

• Participation Exemption eligibility assessments
• Group ownership and aggregation reviews
• Foreign subsidiary “subject-to-tax” evaluations
• Structuring and restructuring advisory
• Dividend and exit tax planning
• Corporate Tax compliance and audit defence

Our approach: Practical, regulation-aligned, and commercially focused – ensuring exemptions are applied correctly and defended confidently.

Frequently Asked Questions (FAQs)

1. Are dividends from UAE companies always exempt?

Yes, dividends from UAE resident juridical persons are generally exempt, subject to the recipient not falling within an exclusion under the Corporate Tax Law.

2. Can minority shareholdings qualify?

Yes, if the acquisition cost meets the AED 4 million threshold.

3. Can group companies combine ownership interests?

Yes, where the entities form a Qualifying Group under Article 26 of the Corporate Tax Law.

4. Does a low-tax foreign subsidiary automatically disqualify the exemption?

Not necessarily. A detailed “subject to tax” assessment is required.

5. Which decision applies after 2025?

Ministerial Decision No. 302 of 2024 applies to Tax Periods starting on or after 1 January 2025.