UAE Corporate Tax: Key Considerations Relating to Participation Exemption

UAE Corporate Tax: Key Considerations Relating to Participation Exemption

by | Apr 8, 2026

Under the UAE Corporate Tax (CT) Law, income derived from a participating interest is exempt from CT. Consequently, both the income from such participating interest and any related expenses are excluded when calculating taxable income for CT purposes.

Outlined below is a concise overview of the conditions required for an investment to qualify as a participating interest, together with the key considerations for businesses when assessing these conditions.

1. Overview of Participation Exemption

An ownership interest in the shares or capital of a juridical person (‘Participation’) will qualify as a participating interest, provided if it fulfills all of the following conditions:

Conditions Requirements
Minimum ownership interest The participating interest represents at least 5% ownership interest in the Participation (or acquisition cost of at least AED 4 million)
Minimum holding period Ownership interest held or intended to be held for at least 12 months
Subject to tax test The Participation must be subject to CT or equivalent foreign CT at a rate of 9% or more
Entitlement to Profits test Entitlement to receive at least 5% of the distributable profits available and liquidation proceeds
Non-qualifying asset test Not more than 50% of the direct and indirect assets of the Participation consist of ownership interests which would not qualify for the Participation Exemption if held directly by the taxable person

2. Key Considerations

In practice, the businesses may encounter certain issues in claiming Participation Exemption, which are briefly discussed below:

Test Key Considerations
Ownership test and Profits entitlement test
  • Ownership interest in a Participation may be less than 5% even if the acquisition cost is ≥ AED 4 million
  • In such cases, entitlement to profits and liquidation proceeds may not be satisfied despite meeting the ownership threshold
  • As a result, the interest may not qualify as a Participating Interest for tax purposes
Asset Test Condition
  • Ensure no more than 50% of total (direct and indirect) assets are non-qualifying for the Participation Exemption
  • Perform a review of all direct and indirect assets to assess eligibility under the Participation Exemption rules
  • For holding companies, assess the threshold using the Consolidated Balance Sheet (CBS) of the investee entity
  • In multi-tier structures, evaluate assets at each level, as failure at any level may impact overall compliance
  • Where a CBS is unavailable, a market valuation approach may be applied, though it can be time and cost intensive
  • The Asset Test is a continuous requirement, to be met throughout the relevant tax period
Subject to tax condition
  • UAE Resident Participation: Automatically satisfies this condition; includes Qualifying Free Zone Persons, Exempt Persons, and holding companies (subject to conditions)
  • Foreign Resident Participation: Review whether the foreign country levies a tax similar to CT at ≥ 9%
  • If statutory rate effective tax rate (ETR) ≥ 9%, computed using one of three prescribed methods
  • ETR computation: May require recalculation under IFRS or adjustments for taxation on income, equity, or net worth; careful evaluation is necessary

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