Are capital gains exempt from UAE Corporate Tax?

Under the Participation Exemption regime, capital gains earned from a Participating Interest in either foreign or domestic juridical persons are exempt from UAE Corporate Tax. Also, there is relief from Corporate Tax for capital gains that may arise on intra-group transfers and reorganisation and restructuring transactions.

Other capital gains would be treated as ordinary income and subject to Corporate Tax.

Participation Exemption regime means;

The background to the Participation Exemption regime is to prevent double taxation within a group where an underlying group company (that pays the dividend or whose shares are being sold) has already been taxed on its profits.

The Corporate Tax Law fully exempts dividends derived from UAE entities, as well as dividends from foreign subsidiaries that qualify as “Participation”. Participation is a juridical person in which the UAE shareholder company owns a 5% or greater ownership interest or has an acquisition value of at least AED 4,000,000 (a “Participating Interest”) for at least 12 months, and that meets the conditions of the Participation Exemption regime.

Similarly, capital gains on the sale of shares in domestic and foreign entities would also be exempt from Corporate Tax. This exemption is subject to the same minimum ownership threshold, duration and other conditions mentioned above.

Benefit from a UAE Corporate Tax exemption if own less than a 5% shareholding in a company

There can be instances where a UAE business makes a strategic investment in another company that does not result in a 5% or greater ownership interest, or where the percentage ownership in the Participation falls below the 5% ownership threshold because of events outside of the control of the UAE shareholder company.

To address such instances and reduce the administrative burden associated with monitoring the continued compliance with the minimum ownership requirement under the Participation Exemption regime, an ownership interest with an acquisition cost that equals to or exceeds AED 4 million will be deemed to meet the minimum ownership requirement. This means that the income derived in relation to such an ownership interest will be exempt under the Participation Exemption regime, provided that all other conditions are met.

Written By CA Adarsh Janardhanan ACA

Expandx Tax Consultants