Understanding Participation Exemption Under UAE Corporate Tax: A Simple Guide for Businesses

The introduction of UAE Corporate Tax (CT) in 2023 marked a major shift for businesses in the UAE. With this new regime, companies now need to follow strict tax rules—but they also have access to several exemptions and deductions. One of the most useful among them is the Participation Exemption.

If your company earns foreign income from dividends or capital gains, this exemption can help you avoid double taxation and reduce your overall corporate tax burden. But to benefit from it, you need to meet specific conditions. Let’s break it down in simple terms.

What Is the Participation Exemption?

The Participation Exemption is a tax relief offered under the UAE Corporate Tax law. Its main goal is to prevent double taxation on income that comes from foreign investments or holdings.

In short:
If your UAE-based company earns income—like dividends or capital gains—from qualifying foreign investments, that income may be exempt from UAE Corporate Tax.

The exemption can apply to:

• Foreign dividends
• Capital gains and losses
• Foreign exchange gains or losses
• Impairment gains or losses

But these benefits don’t come automatically. You’ll need to meet a set of participation interest conditions to qualify.

Conditions for Participation Exemption: What Your Business Must Meet

To be eligible, your company’s foreign investment or holding must meet six key conditions:

1. Minimum Ownership Test

Your company must own at least 5% of the shares in the foreign company.
📌 Alternatively, if the cost of acquiring that ownership is AED 4 million or more, you can still qualify (this is called the Minimum Acquisition Cost Test).

2. Holding Period Test

You must hold the ownership interest for at least 12 months.
Or, you should have a clear intention to hold it for that long.

3. Subject to Tax Test

The foreign company in which you hold the investment should be subject to a corporate tax of at least 9%, either in its own country or within the UAE.

4. Entitlement to Profits and Liquidation Proceeds

Your company should be entitled to receive at least 5% of the profits and any liquidation proceeds from the foreign company.

5. Asset Test

No more than 50% of the foreign company’s assets should be made up of non-qualifying ownership interests.
This ensures the company isn’t just holding passive investments that don’t support tax exemption.

6. Alternative Option for Less Than 5% Ownership

If your shareholding is below 5%, but the acquisition cost is AED 4 million or more, you might still qualify under the minimum acquisition cost rule.

These rules help the authorities determine whether your foreign investment is significant and strategic enough to justify a tax exemption.

Why Participation Exemption Matters for Your Business

If your business regularly invests in foreign companies, meeting these conditions can significantly lower your taxable income under UAE law. The participation exemption is especially useful for:

• Holding companies
• Investment groups
• Multinational businesses
• UAE companies with international subsidiaries

Getting this exemption right means paying less tax, avoiding double taxation, and making your cross-border business operations more profitable.

How Philip McMillanWoods Can Help You Stay Compliant and Tax-Efficient

Understanding UAE Corporate Tax and qualifying for exemptions like Participation Exemption can get complicated—especially with multiple tests and conditions involved. That’s where we come in.

At Philip McMillanWoods, our expert tax advisory team ensures your business:

• Meets all eligibility conditions for participation exemption
• Files accurate tax returns
• Maximizes allowable deductions and exemptions
• Stays 100% compliant with the UAE Federal Tax Authority

Whether you’re a growing SME or an established enterprise, we help you simplify your tax strategy while staying compliant and confident in your operations.

Final Thoughts

The Participation Exemption under UAE Corporate Tax is a golden opportunity for businesses earning foreign income to reduce tax burdens—but only if used correctly. Make sure your team understands the six main eligibility conditions, or better yet, work with a tax expert who does.

Need help assessing if your company qualifies?
Reach out to our team at Philip McMillanWoods today—we’re here to support you every step of the way.