UAE Ministerial Decision amends and clarifies aspects for the Participation Exemption

Introduction

The Ministry of Finance (MOF) of the United Arab Emirates (UAE) has recently released Ministerial Decision No. 302 of 2024 on the Participation Exemption and Foreign Permanent Establishment Exemption for the purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (CIT Law). This Decision repeals Ministerial Decision No. 116 of 2023 (released in May 2023) with effect for tax periods commencing on or after 1 January 2025. For tax periods prior to such date, Ministerial Decision No. 116 of 2023 remains in force.

The new Ministerial Decision introduces certain modifications with the Corporate Income Tax (CIT) regime which we have summarized below.

 

Main modifications

General

Introduction of additional definitions

Within Article 1, Ministerial Decision No. 301 of 2024 introduces certain definitions which were not relevant under the previous text but have become relevant under the new provisions.

New definitions include "Accounting and Auditing Organization for Islamic Financial Institutions", "Qualifying Foreign Permanent Establishment", "Non-Qualifying Permanent Establishment" and "Parent Company".

Participation Exemption

Introduction of rules regarding ownership transfers under the Qualifying Group Relief or the Business Restructuring Relief to avoid double taxation

The regulations regarding the Participation Exemption include a clause (Article 23.9 of the CIT Law) which disallows its applicability for a period of two (2) years if the participation was acquired in exchange for the transfer of a participation that did not meet the requirements to apply the participation exemption or if the transfer was exempted under the Qualifying Group Relief (Article 26 of the CIT Law) or the Business Restructuring Relief (Article 27 of the CIT Law).

In the second scenario, if the claw-back clauses of the Qualifying Group Relief or the Business Restructuring Relief regulations are triggered, income which was initially treated as exempt would need to be reversed through the relevant adjustment (i.e., taxed for CIT purposes).

However, if under Article 23.9 of the CIT Law, the potential capital gains are excluded from the application of the Participation Exemption (i.e., taxed for CIT purposes), the subsequent application of the claw-back clauses might entail double taxation of the same income. To cover this situation, the Ministerial Decision has added certain paragraphs to Article 4, with the aim of ensuring that income derived from ownership transfers under the Qualifying Group Relief, or the Business Restructuring Relief are not taxed twice.

Modification to the subject to tax rule

One of the key requirements to apply the Participation Exemption is that the entity in which the participation is held is subject to CIT or any other tax imposed under a foreign legislation which is of a similar character to the UAE CIT at a rate not less than 9% (Article 23.2 sub b of the CIT Law). Article 6.1 of the repealed Ministerial Decision established that the above requirement would be met if (i) the tax is applied on a similar basis to CIT and (ii) the tax is levied at a rate not less than 9%.

This second requirement has been modified under the new text, and now refers to tax being levied at a statutory rate not less than 9%. On that basis, the applicable regulations of the relevant jurisdiction should foresee a statutory rate exceeding 9% for this requirement to be met.

Additional guidance regarding liquidation proceeds and losses

As per Article 23.8 of the CIT Law, the Participation Exemption shall not be applicable to losses which are realized upon liquidation of the entity in which the participation is held (i.e., such losses would in effect be tax deductible for the parent company). Article 13 of the Ministerial Decision has now provided further clarity on the treatment of losses derived from a liquidation both on standalone basis and within the framework of a Tax Group. In particular, among others the following modifications have been introduced:

• Under the previous Ministerial Decision, the loss suffered upon the liquidation of a participation required adjustment for certain items in the relevant period and the previous one. This has now been modified to include not only the relevant period, but also the seven (7) previous periods (i.e., eight (8) in total as opposed to two (2) under the previous text).
• A new paragraph has been included to regulate the situation where a participation is held, which formed part of a Tax Group, and a liquidation loss was recognized within the Tax Group.

Foreign Permanent Establishment Exemption

With regards to the Foreign Permanent Establishment Exemption, the new Ministerial Decision has added a paragraph to Article 14, to cover situations in which a taxable person transfers all the assets and liabilities of a Permanent Establishment, which meets the exemption's requirements, to an entity which complies with the requirements to apply the Participation Exemption, when such a transaction results in the termination of the Permanent Establishment. Under such a scenario, the application of the exemption is limited to the income which exceeds the aggregate tax losses incurred by the Permanent Establishment which have not been fully offset against the aggregate taxable income of the Permanent Establishment.

 

Conclusion

The modifications included in the Ministerial Decision No. 302 of 2024 further clarify certain aspects regarding the practical application of the Participation Exemption and the Foreign Permanent Establishment Exemption, while adding a certain level of complexity to the overall interpretation of the rules.,/p>

We recommend taxpayers to carefully monitor the release of new regulations, as this are legally binding and any additional Guidance released by the FTA needs to be read in conjunction with the legislation.

Reference

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