Summary: The UAE Corporate Tax system does not tax every item of accounting income. Chapter Seven of Federal Decree-Law No. 47 of 2022 provides for specified categories of Exempt Income, including dividends and profit distributions from UAE Resident Persons, income from qualifying Participating Interests, income of eligible Foreign Permanent Establishments and qualifying international transportation income of Non-Resident Persons. Exempt Income must be distinguished from an Exempt Person under Article 4. While an Exempt Person may be outside the Corporate Tax regime altogether, Articles 22 to 25 deal with specified income streams of a Taxable Person that are excluded while determining Taxable Income. Article 23 provides the Participation Exemption, subject to conditions relating to ownership or acquisition cost, holding period, minimum taxation, economic entitlement and asset composition. Article 24 provides an election-based exemption for qualifying Foreign Permanent Establishments, subject to a minimum foreign tax condition and restrictions relating to previously utilised losses and foreign tax credits. Article 25 provides a reciprocity-based exemption for qualifying income earned by Non-Resident Persons from international transportation activities involving aircraft or ships. These provisions must be read together with Ministerial Decision No. 116 of 2023 and the related conditions prescribed under the UAE Corporate Tax law.
UAE Corporate Tax – Exempt Income
Articles 22 to 25 of Federal Decree-Law No. 47 of 2022
- 1. Introduction
- ARTICLE 22 – EXEMPT INCOME
- 2. What does Article 22 provide?
- A. Dividends and profit distributions from a UAE Resident Person
- 3. Foreign dividends – Article 22(2)
- 4. Other income from a Participating Interest – Article 22(3)
- 5. Foreign Permanent Establishment income – Article 22(4)
- 6. International transportation income – Article 22(5)
- ARTICLE 23 – PARTICIPATION EXEMPTION
- 7. Concept of Participation Exemption
- 8. What is a Participating Interest?
- 9. The five principal Article 23 conditions
- Condition 1 – Minimum 5% ownership
- 10. Alternative AED 4 million acquisition-cost test
- 11. Condition 2 – 12-month holding requirement
- 12. What happens if the 5% threshold is later breached?
- 13. Condition 3 – Subject-to-tax requirement
- 14. Special rule for low-tax/no-tax jurisdictions
- 15. Condition 4 – Economic entitlement
- 16. Condition 5 – Asset composition test
- 17. Holding company rule
- 18. What income is covered by Participation Exemption?
- 19. Important restriction – deductible impairment
- 20. Liquidation loss
- 21. Two-year restriction
- 22. Expenses relating to Participating Interest
- 23. Example – Complete Participation Exemption
- ARTICLE 24 – FOREIGN PERMANENT ESTABLISHMENT EXEMPTION
- 24. Basic concept
- 25. Election is important
- 26. What is excluded?
- 27. 9% minimum tax condition for Foreign PE
- 28. Foreign PE must be calculated separately
- 29. Example – Foreign PE exemption
- 30. Foreign PE loss – important planning point
- ARTICLE 25 – NON-RESIDENT PERSON OPERATING AIRCRAFT OR SHIPS IN INTERNATIONAL TRANSPORTATION
- 31. Purpose of Article 25
- 32. Activities covered
- 33. Reciprocity condition
- 34. Article 25 practical example
- 35. Important distinction – Articles 22 to 25
- 36. Article 22 vs Article 23 – very important
- 37. Participation Exemption – practical checklist
1. Introduction
The UAE Corporate Tax system does not tax every item of accounting income.
Chapter Seven of Federal Decree-Law No. 47 of 2022 specifically provides for certain categories of Exempt Income.
Article 22 identifies five broad categories:
- Dividends and profit distributions from a UAE Resident Person;
- Dividends and other income from a qualifying Participating Interest;
- Income of an eligible Foreign Permanent Establishment;
- Income of a Non-Resident Person from qualifying international transportation activities.
The important point is that “exempt income” and “exempt person” are different concepts.
An Exempt Person under Article 4 may be outside the Corporate Tax regime altogether, whereas Articles 22–25 deal with particular income streams of a Taxable Person that are excluded when calculating Taxable Income.
ARTICLE 22 – EXEMPT INCOME
2. What does Article 22 provide?
Article 22 provides that specified income and the related expenditure are not taken into account in determining Taxable Income.
The five categories are:
A. Dividends and profit distributions from a UAE Resident Person
Dividends and other profit distributions received by a UAE Taxable Person from a juridical person that is a Resident Person are excluded from Taxable Income.
Example
UAE Company A owns shares in UAE Company B.
Company B distributes:
- Dividend: AED 2,000,000
Company A records:
Dividend Income Dr. AED 2,000,000
To Dividend Income / Investment Income AED 2,000,000
For Corporate Tax purposes:
AED 2,000,000 → Exempt Income
It is therefore excluded while arriving at Taxable Income.
Important practical point
This exemption under Article 22(1) is different from the Participation Exemption under Article 23.
For a dividend received from another UAE Resident Person, Article 22(1) itself provides the exemption.
For a dividend from a foreign company, Article 23 and its conditions become relevant.
3. Foreign dividends – Article 22(2)
Article 22 also covers dividends and profit distributions received from a Participating Interest in a foreign juridical person, provided the conditions of Article 23 are satisfied.
Therefore:
Foreign dividend ≠ automatically exempt.
You must perform an Article 23 test.
4. Other income from a Participating Interest – Article 22(3)
Article 22 also excludes other income from a qualifying Participating Interest as specified under Article 23.
This can include, subject to the Article 23 conditions:
- Dividends;
- Profit distributions;
- Gains on disposal;
- Foreign exchange gains/losses relating to the participation;
- Impairment gains/losses relating to the participation.
Thus, Article 22 should be read together with Article 23.
5. Foreign Permanent Establishment income – Article 22(4)
Income of a Foreign Permanent Establishment can be excluded where the requirements of Article 24 are satisfied.
However, Article 24 is an election-based exemption.
A UAE Resident Person can elect not to take into account the income and associated expenditure of its qualifying Foreign Permanent Establishments.
6. International transportation income – Article 22(5)
Income derived by a Non-Resident Person from operating aircraft or ships in international transportation can be outside UAE Corporate Tax where the conditions of Article 25 are satisfied.
This is essentially based on the principle of reciprocity.
ARTICLE 23 – PARTICIPATION EXEMPTION
7. Concept of Participation Exemption
Article 23 is one of the most important provisions for UAE holding companies.
The basic principle is:
“Income from a qualifying Participating Interest is exempt from UAE Corporate Tax, subject to specified conditions.”
The provision is designed to prevent the same underlying corporate profits from effectively being taxed again when distributed to an investor or when the investment is disposed of.
8. What is a Participating Interest?
The basic statutory threshold is:
Minimum ownership = 5%
A Participating Interest means an ownership interest of 5% or more in the shares or capital of a juridical person, subject to the other conditions of Article 23.
There is also an alternative minimum acquisition-cost test prescribed by the Minister.
Under Ministerial Decision No. 116 of 2023:
Minimum acquisition cost = AED 4 million
Therefore, a taxpayer can potentially qualify where the aggregated acquisition cost of the ownership interests is at least AED 4 million, subject to the detailed conditions.
9. The five principal Article 23 conditions
A practical way to remember Article 23 is:
5% + 12 months + 9% tax + 5% economic entitlement + 50% asset test
Let us examine each.
Condition 1 – Minimum 5% ownership
The Taxable Person must have at least:
5% ownership interest
in the Participation.
Different types of qualifying ownership interests can be considered.
Ministerial Decision No. 116 includes:
- Ordinary shares;
- Preferred shares;
- Redeemable shares;
- Membership interests;
- Partner interests;
- Other securities, capital contributions or rights that entitle the owner to profits and liquidation proceeds, subject to the accounting classification requirements.
Different ownership interests in the same juridical person can be aggregated.
Example
Company A owns:
- 3% ordinary shares; and
- 2.5% preferred shares.
Total: 5.5%
The interests may be aggregated for determining whether the 5% threshold is satisfied.
10. Alternative AED 4 million acquisition-cost test
Ministerial Decision No. 116 provides that an ownership interest can qualify as a Participating Interest where the aggregated acquisition cost is at least AED 4 million.
This is important because the 5% percentage test is not the only route.
Example
UAE Company A acquires:
- 2% of Foreign Company B
Acquisition cost: AED 5 million
Subject to all other requirements, the AED 4 million threshold can allow the investment to qualify as a Participating Interest.
Important
Do not read this as:
“Any investment above AED 4 million is automatically exempt.”
The other Article 23 conditions still need to be satisfied.
11. Condition 2 – 12-month holding requirement
The Taxable Person must have:
- held the Participating Interest; or
- intended to hold the Participating Interest
for an uninterrupted period of at least:
12 months.
The law therefore allows the intention to hold for 12 months to be considered.
Example
Company A purchases 10% of Company B on 1 January.
It receives a dividend in June.
The investment has not yet been held for 12 months.
The taxpayer should examine the Article 23 conditions, including whether the required intention to hold for at least 12 months existed.
12. What happens if the 5% threshold is later breached?
Suppose:
Company A initially owns:
10%
and claims the participation exemption.
Later, it sells shares and ownership falls to:
4%
before completing the required uninterrupted 12-month period.
Article 23 provides a claw-back mechanism.
Income previously not taken into account under the participation exemption can become taxable in the Tax Period in which the ownership interest falls below 5%.
Practical lesson
Maintain an ownership-period tracker.
Do not simply test the percentage on the year-end balance sheet.
13. Condition 3 – Subject-to-tax requirement
The Participation must generally be subject to Corporate Tax or a similar tax in its jurisdiction at a rate of at least:
9%
This does not necessarily mean that the foreign company must actually pay 9% tax on every dirham of accounting profit.
Ministerial Decision No. 116 provides detailed rules.
A participation may satisfy the condition where:
- It is subject to a similar tax at a rate of at least 9%; or
- It has an effective tax rate of at least 9%; or
- Under specified circumstances, recalculation under UAE Corporate Tax principles results in an effective rate of at least 9%; or
- Certain alternative tax regimes result in an effective rate of at least 9%.
14. Special rule for low-tax/no-tax jurisdictions
A foreign jurisdiction does not necessarily fail automatically merely because its headline Corporate Tax rate is below 9% or because its tax system is different.
Ministerial Decision No. 116 contains an alternative effective-tax-rate test.
If the Participation is subject to tax on income, equity, net worth, or a combination of these, it may satisfy the condition where the resulting effective tax rate is at least:
9%
on accounting profits calculated under the applicable Accounting Standards.
15. Condition 4 – Economic entitlement
The ownership interest must entitle the UAE taxpayer to at least:
5% of distributable profits
and
5% of liquidation proceeds
of the Participation.
Therefore, merely owning an instrument described as “5% ownership” is not enough if the rights attached to that interest do not provide the required economic entitlement.
16. Condition 5 – Asset composition test
Not more than:
50%
of the direct and indirect assets of the Participation may consist of ownership interests or entitlements that would not themselves qualify for exemption if held directly by the UAE Taxable Person.
This is commonly referred to as the 50% asset test.
Why is this important?
The participation exemption is intended primarily for genuine equity investments.
The rule prevents a company from obtaining exemption merely by inserting an intermediary holding company whose assets are largely investments that would not themselves qualify.
17. Holding company rule
Special rules apply where the Participation is principally a holding company.
Ministerial Decision No. 116 provides conditions including:
- The company should be directed and managed in the relevant foreign jurisdiction;
- It should comply with local filing/document requirements;
- It should have adequate personnel and premises, considering the level of activity;
- Its activities should generally be limited to acquisition and holding of shares/equity interests and activities incidental or ancillary thereto.
There is also a test concerning the nature of its income.
A Participation can satisfy the relevant condition where, on average, at least:
50% of its income
for the relevant Tax Period and preceding Tax Period consists of dividends, capital gains and other income from Participating Interests.
18. What income is covered by Participation Exemption?
Where the Article 23 conditions are satisfied, the exemption can cover:
1. Dividends
Example:
Foreign subsidiary pays UAE parent:
AED 3 million dividend
→ Exempt, if Article 23 applies.
2. Capital gain on sale
UAE Company purchases shares for:
AED 10 million
and sells them for:
AED 18 million.
Gain: AED 8 million
→ Potentially exempt under Article 23.
3. Foreign exchange gains/losses
Foreign exchange movements relating to the Participating Interest can fall within the exemption.
4. Impairment gains/losses
The law also provides specific treatment for impairment gains/losses relating to the Participating Interest.
19. Important restriction – deductible impairment
Article 23 contains anti-double-benefit provisions.
For example, if the taxpayer has already obtained a deduction for an impairment loss relating to the Participating Interest before the participation conditions were satisfied, the exemption does not simply allow the taxpayer to obtain a second benefit on the same economic amount.
Similarly, specific rules apply where a taxpayer or its Related Party has recognised a deductible impairment loss on a loan receivable from the Participation.
20. Liquidation loss
This is an important examination/practical point.
Gain on disposal
Generally potentially exempt if the participation conditions are satisfied.
Loss on liquidation
Article 23 specifically provides that the participation exemption does not apply to a loss realised on liquidation of a Participation.
Therefore:
Capital gain → potentially exempt
but
Liquidation loss → generally not deductible under the participation exemption regime.
Ministerial Decision No. 116 provides detailed rules for calculating and adjusting a liquidation loss.
21. Two-year restriction
Article 23 contains a special two-year restriction where a Participation was acquired in exchange for an ownership interest that did not meet the Article 23 conditions, or through a transfer that was exempt under Article 26 or Article 27.
In such circumstances, the exemption does not apply for the specified two-year period.
This is an important anti-avoidance/continuity rule.
22. Expenses relating to Participating Interest
Ministerial Decision No. 116 specifically deals with expenditure connected with acquiring, selling, transferring or disposing of a Participating Interest.
Examples include:
- Professional fees;
- Due diligence costs;
- Litigation costs;
- Commission/brokerage;
- Stamp duty;
- Registration duties;
- Irrecoverable taxes;
- Valuation/appraisal costs;
- Refinancing costs.
Such expenditure is generally not deductible under Article 22/Article 28 and is instead capitalised as part of the acquisition cost, subject to the detailed rules.
Interest is different
Interest expenditure relating to acquisition and holding of a Participating Interest can remain deductible, subject to the normal Corporate Tax interest limitation provisions.
23. Example – Complete Participation Exemption
UAE HoldCo owns:
- 10% of Foreign SubCo
Acquisition cost: AED 20 million
Holding period: 3 years
Foreign SubCo is subject to a qualifying tax regime.
During the year:
- Dividend: AED 4 million
- Capital gain on sale of shares: AED 6 million
Assuming all Article 23 conditions are satisfied:
| Income | Amount | UAE CT treatment |
|---|---|---|
| Dividend | AED 4 million | Exempt |
| Capital gain | AED 6 million | Exempt |
| Total potentially exempt | AED 10 million | Excluded |
The AED 10 million is not included in Taxable Income.
ARTICLE 24 – FOREIGN PERMANENT ESTABLISHMENT EXEMPTION
24. Basic concept
A UAE Resident Person may have a Foreign Permanent Establishment, such as:
- Foreign branch;
- Foreign fixed place of business;
- Other qualifying foreign presence.
Article 24 allows the UAE Resident Person to make an election to exclude the income and associated expenditure of qualifying Foreign Permanent Establishments.
25. Election is important
Unlike the UAE dividend exemption under Article 22, the Foreign PE exemption is not simply automatic.
The Resident Person:
may elect
to apply the exemption.
Once the election applies, specific consequences follow.
26. What is excluded?
Where the election applies, the following are excluded from the UAE Corporate Tax calculation:
A. Foreign PE losses
Losses of qualifying Foreign PEs are not taken into account.
B. Foreign PE positive income
Positive income and associated expenditure are excluded.
C. Foreign Tax Credit
The UAE taxpayer cannot claim a Foreign Tax Credit for foreign tax relating to income that has been excluded under the Foreign PE exemption.
This is logical:
“You cannot both exempt the foreign income and claim a UAE foreign tax credit for the same income.”
27. 9% minimum tax condition for Foreign PE
The exemption applies only to a Foreign PE that is subject to:
Corporate Tax or a similar tax at a rate of at least 9%.
Therefore, the practitioner must examine the tax regime of the foreign jurisdiction.
28. Foreign PE must be calculated separately
For purposes of determining the PE’s income and expenditure, the UAE Resident Person and its Foreign PE are treated as:
separate and independent persons.
This is important for attribution of profits and expenses.
Transactions between the UAE head office and foreign PE are treated appropriately under the law, including Market Value treatment where required.
29. Example – Foreign PE exemption
UAE Company A has a branch in Country X.
Branch results:
- Revenue: AED 10 million
- Expenses: AED 6 million
- Net income: AED 4 million
Country X imposes a qualifying corporate tax at:
10%
UAE Company A elects for the Article 24 exemption.
Result:
AED 4 million foreign PE income → excluded from UAE Taxable Income
But:
Foreign tax paid → no Foreign Tax Credit in UAE
30. Foreign PE loss – important planning point
Suppose the foreign branch has:
- Year 1 loss: AED 2 million
and the UAE taxpayer uses that loss in determining UAE Taxable Income.
Later, the taxpayer wants to elect for the Foreign PE exemption.
Ministerial Decision No. 116 contains a specific rule requiring the previously utilised Foreign PE loss to be fully offset by subsequent Foreign PE income before the exemption can apply in the relevant circumstances.
Therefore:
Do not make the Article 24 election without reviewing historical Foreign PE losses.
ARTICLE 25 – NON-RESIDENT PERSON OPERATING AIRCRAFT OR SHIPS IN INTERNATIONAL TRANSPORTATION
31. Purpose of Article 25
Article 25 provides an exemption from UAE Corporate Tax for specified income earned by a Non-Resident Person from international transportation activities.
The provision is based on:
Reciprocity
The UAE does not impose Corporate Tax on qualifying foreign international transport operators where the relevant foreign jurisdiction provides equivalent treatment to UAE operators.
32. Activities covered
The Non-Resident Person must conduct one of the following businesses.
A. International transportation
Transport of:
- Passengers;
- Livestock;
- Mail;
- Parcels;
- Merchandise;
- Goods.
by:
- Air; or
- Sea.
B. Leasing or chartering aircraft or ships
The exemption can also cover leasing or chartering of aircraft or ships used in international transportation.
C. Leasing integral equipment
The exemption extends to leasing equipment integral to:
- The seaworthiness of ships; or
- The airworthiness of aircraft
used in international transportation.
33. Reciprocity condition
This is the most important condition.
A UAE Resident Person carrying on the same activities must be:
- Exempt from tax; or
- Not subject to a tax of a similar character to Corporate Tax
under the law of the foreign jurisdiction where the Non-Resident Person is resident.
Example
A foreign airline earns qualifying international transportation income in the UAE.
Country X provides an equivalent exemption to UAE airlines.
Therefore, subject to all other requirements:
UAE Corporate Tax exemption can apply.
34. Article 25 practical example
Foreign Shipping Co. is resident in Country X.
It operates ships carrying goods internationally.
It earns UAE-source income from qualifying international transportation.
Country X gives UAE shipping companies an equivalent exemption from its corporate income tax.
Therefore:
Article 25 conditions → satisfied
UAE Corporate Tax → not imposed on the qualifying income
35. Important distinction – Articles 22 to 25
| Article | Subject | Key concept |
|---|---|---|
| Article 22 | Exempt Income | Identifies exempt income categories |
| Article 23 | Participation Exemption | Qualifying shareholding/investment |
| Article 24 | Foreign PE | Election + 9% foreign tax condition |
| Article 25 | International Transportation | Reciprocity |
36. Article 22 vs Article 23 – very important
UAE dividend
UAE Company receives dividend from UAE Resident Company.
→ Article 22(1)
Foreign dividend
UAE Company receives dividend from foreign subsidiary.
→ Examine Article 23.
Therefore:
Domestic dividend → Article 22
Foreign participation dividend → Article 23
37. Participation Exemption – practical checklist
Before treating foreign dividend/capital gain as exempt, prepare this checklist:
Ownership
- ☐ At least 5% ownership?
- ☐ Acquisition cost at least AED 4 million?
Holdin
