What Foreign Income is Exempt for Companies under UAE corporate tax law?

Introduction

If your UAE-based company owns stakes in foreign businesses, you might be paying more tax than required—or worse, missing out on valuable exemptions.

Under UAE Corporate Tax Law, businesses can benefit from the Participation Exemption, which allows dividends and capital gains from foreign subsidiaries to be tax-free—if certain conditions are met.

But what are these conditions? And how can businesses ensure maximum tax efficiency while staying compliant?

Let’s break it down.

Understanding Participation Exemption on Foreign Income

Participation Exemption applies to foreign dividends and capital gains, allowing UAE businesses to avoid double taxation on profits earned outside the country. However, not all foreign income qualifies.


Key Conditions to Qualify for the Participation Exemption

✅ Minimum Ownership: Your UAE company must own at least 5% of the foreign subsidiary OR meet the minimum acquisition cost test.
✅ Foreign Tax Rate: The foreign subsidiary must be subject to at least 9% corporate tax in its home country.
✅ Holding Period: No strict requirement exists, but a stable ownership structure strengthens the exemption.
✅ Free Zone Status: The exemption applies to both mainland UAE and Free Zone entities.


What Foreign Income is Exempt for Companies under UAE corporate tax law?
✅ If you passed all 3 conditions (5% ownership, 9% foreign tax, 12-month holding), your dividends & capital gains (from selling shares) are tax-free.
❌ If you missed any condition, your foreign income is taxed at 9%.

Now, let’s explore real-world scenarios to understand how this works.

Scenario 1: The Cost of a Low Foreign Tax Rate

Company X (UAE) owns 12% of a foreign subsidiary that is subject to a 15% corporate tax. The subsidiary sells an asset, making AED 2 million in capital gains, and then distributes AED 1 million in dividends.


Tax Treatment in UAE:

✅ Dividend is fully exempt – because the foreign subsidiary meets the 9% tax threshold and ownership is above 5%.
❌ Capital gain is taxable – because the Participation Exemption does not cover capital gains unless the UAE company sells its shares in the subsidiary.

Lesson Learned: Not all foreign income qualifies for tax exemption. Dividends are exempt, but capital gains depend on how they are realized.


Scenario 2: Holding Period Matters!

Company Y (UAE) owns 20% of a foreign subsidiary for just 6 months. The subsidiary is taxed at 12% and pays AED 2 million in dividends.

Tax Treatment in UAE:

❌Dividend is fully taxable – because the UAE company has not held the shares for at least 12 months.

Lesson Learned: Even if the foreign tax rate is above 9% and ownership is above 5%, the holding period is crucial. To benefit from the exemption, you must own the shares for at least 12 months.


Scenario 3: When Capital Gains Are Exempt

Company Z (UAE) sells its 7% stake in a foreign subsidiary after 3 years. The foreign subsidiary is taxed at 18%, and the UAE company makes AED 4 million in capital gains.

Tax Treatment in UAE:

✅Fully exempt under Participation Exemption – because:

·        The ownership exceeds 5%.

·        The foreign tax rate is above 9%.

·        The shares were held for more than 12 months.

Lesson Learned: If you sell shares in a qualifying foreign subsidiary, the capital gain is also exempt under the Participation Exemption.


Scenario 4: The Danger of Low-Tax Jurisdictions

Company A (UAE) owns 60% of a foreign subsidiary that pays only 5% corporate tax. The subsidiary distributes AED 3 million in dividends.

Tax Treatment in UAE:

❌Dividends are fully taxable at 9% – because the foreign tax rate is below 9%.

Lesson Learned: Simply owning more than 5% of a subsidiary does not guarantee exemption. The foreign corporate tax rate must be 9% or higher.


Key Takeaways

✔️ Foreign dividends can be fully exempt, but only if the foreign subsidiary pays at least 9% corporate tax.
✔️ Capital gains are exempt only when the UAE company sells its shares—not when the foreign subsidiary sells its assets.
✔️ Holding period of 12 months is critical to claim the exemption.
✔️ Subsidiaries in low-tax jurisdictions (less than 9%) do not qualify for exemption, and their dividends are taxed at 9%.

-        Losses from a qualifying participation interest cannot be deducted under UAE Corporate Tax.
✔️ If a subsidiary delays dividends, the exemption is assessed at the time of distribution, based on compliance with exemption conditions.


How Fastlane Can Help

Navigating UAE corporate tax laws and optimizing foreign income taxation can be complex. Fastlane’s tax experts can help you:
✅ Structure foreign investments for maximum tax efficiency.
✅ Ensure compliance with Participation Exemption rules.
✅ Avoid unnecessary taxation on foreign dividends and capital gains.

🔹 Want to minimize your corporate tax liability while staying 100% compliant? Get a free consultation with our experts today! 🚀

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