UAE Corporate Tax: Participative Interest, and its Taxability

The taxable person may have investment in the share capital of resident juridical persons and nonresident juridical persons. If this investment is at least five percent or four million dirhams in the share or capital of juridical person this is called participation.

The return from participation can be in the form of dividend, profit distribution, gain/loss on disposal of investment, impairment gain or loss and foreign exchange gain or loss.?The income from participation can be exempt from UAE corporate tax law (“CT law”, or “the Law”); or it can be taxable; like?dividend and profit distribution received from the resident juridical persons is exempt from the CT as given in the article 22(1) of the law while the exemption of other related income derived from juridical persons (resident and nonresident) depends upon certain criteria?as given in the article 23(2) of the law.

Upon fulfillment of the following conditions, the income from participation shall be exempt from CT, and where these conditions are not satisfied, the CT will be applicable on the related income.

• The article 23(2)(a) requires that the taxable person has at least 5% ownership interest or invested four million dirhams for an uninterrupted period of twelve months in the capital or equity of the juridical person. This investment can be in ordinary shares, preference shares, redeemable debentures or any other instrument which entitles the taxable person to receive profit and liquidation proceeds and it has been classified as an equity interest in the books of the taxable person. To calculate the above threshold, different types of ownership interests by the taxable person in the same juridical person; or ownership interests in the same juridical person held by members of a qualifying group shall be consolidated.
• Where the taxable person has made investment in the shares or capital of the foreign juridical person, article 23(2)(b) requires that foreign juridical person in which the taxable person has made investment, is subject to at least nine percent corporate or similar tax as applicable in the respective jurisdiction and it is resident for tax purposes throughout the same tax period in another country or foreign territory. If the foreign juridical person has demonstrated to the FTA that they have paid effective rate of nine percent in the relevant tax period, or if the tax is applied on the recalculated profits of foreign juridical persons, and it results effective rate of at least nine percent, then it shall be assumed that minimum tax requirement has met. If the tax is not imposed in the foreign jurisdiction, still requirement of atleast 9% tax as defined under 23(2)(b) shall be considered satisfied, if tax is applicable on income, equity or net worth, or a combination of any or all of these, and the levied tax results in an effective tax rate of not less than nine percent on the accounting profits calculated in accordance with the applicable accounting standards. Where in the foreign jurisdiction the tax is applicable only to selected activities; or the paid tax is refunded at the time of distribution of the relevant profits or income; or the tax is only due in the event of a distribution of profits or income, then it shall be assumed that tax is not applicable in the respective jurisdiction.
• The article 23(2)(c) requires that the taxable person has right to receive at least five per cent of the profits available for distribution of the company, and if the company is being liquidated, the taxable person has right to receive five per cent or more of the liquidation proceeds.?
• The article 23(2)(d) requires that maximum fifty per cent of the assets of the participation consists of the ownership or entitlements, and these would not have qualified for an exemption if held directly by the taxable person.?

If the company in which taxable person is holding the ownership interest, is claiming the deductions for the dividend and other distribution; or the taxable person is recognizing the impairment losses prior to meeting the conditions for the exemptions; or the taxable person or its related taxable party under the law, has recognized a deductible impairment loss in respect of a loan receivable from the company, then exemption under this article shall not be available.

There are certain limitations where the income received from the participation shall not be exempt from CT; like the exemption under this article does not apply to a loss realized on the liquidation of a participation. The exemption under this article shall not be available to the taxable person for a period of two years, if conditions of exemption as given above are not met, or the participation was acquired in exchange for the transfer within the qualifying group, or the participation was acquired in exchange for the transfer as business restructuring relief.

Where the taxable Person does not maintain an ownership interest of at least five percent or four million dirhams for a continuous period of at least twelve months, then any income that was previously not considered for tax purposes under this article will be included in the calculation of the taxable income in the tax period when the ownership interest in the participation drops below the above-mentioned threshold.

Expenditure incurred in relation to the acquisition, sale, transfer, or disposal participating Interest shall not be deductible as income is not taxable. Expenditure shall include, but not be limited professional fees, due diligence costs, litigation costs, commissions and brokerage fees, Stamp duty, registration duties and other irrecoverable taxes, appraisal and valuation costs, fefinancing costs. Interest expenditure incurred in relation to the acquisition and subsequent holding of a participating Interest shall be deductible subject to interest limitations rules.

The taxable person should assess the status of investment in the share or capital of juridical person to adopt the proper tax position, and tax the related income accordingly.

Mahar Afzal is a managing partner at Kress Cooper Management Consultants. The above is not an official opinion of the Khaleej Times but an opinion of the writer. For any queries/clarifications, please write to the writer at?[email protected].