Not all income is taxed under UAE Corporate Tax. Certain income is exempt, and one of the most valuable exemptions is the participation exemption, which can keep dividends and gains from qualifying shareholdings out of the tax base entirely. For businesses that hold shares in other companies, understanding what is exempt is as important as understanding what is deductible. Here is how exempt income and the participation exemption work, in plain terms.
Some income is simply outside the tax
Article 22 of Federal Decree-Law No. 47 of 2022 lists income that is exempt from Corporate Tax. It includes, in defined conditions, dividends and other profit distributions from UAE companies, and income that qualifies under the participation exemption. Exempt income is not taxed and, correspondingly, expenses linked only to earning it are generally not deductible. The point is that this income sits outside the tax base rather than being taxed and then relieved.
The participation exemption
Article 23 sets out the participation exemption, which applies to income from a qualifying shareholding, called a participating interest. Where the conditions are met, dividends from the holding and gains on disposing of it can be exempt. The conditions are specific and include a minimum ownership level and a minimum holding period, among others.
| Condition | Broad requirement |
|---|---|
| Minimum ownership | At least a 5% ownership interest in the other company |
| Holding period | Held, or intended to be held, for at least 12 months |
| Subject-to-tax test | The other company meets a minimum tax condition |
| Result | Qualifying dividends and gains can be exempt |
Why it matters
The participation exemption prevents the same profits being taxed twice as they move up a group: once in the company that earned them and again in the shareholder that receives them. For a UAE holding company or any business with significant shareholdings, it can be the difference between a large tax charge on dividends and gains and none at all. That makes it one of the most consequential features of the regime to get right.
Exempt income is not taxed and then relieved; it sits outside the tax base. For shareholdings that qualify, the participation exemption can keep dividends and gains entirely out of Corporate Tax.
The conditions are the whole point
Because the exemption is valuable, its conditions matter. A shareholding that falls short, too small an interest, held too briefly, or failing the other tests, does not qualify, and assuming exemption where it does not apply understates the tax. Equally, a business that meets the conditions but taxes the income anyway is overpaying. The exemption rewards businesses that check their shareholdings against the actual conditions rather than assuming an outcome.
What to do about it
If your business holds shares in other companies, identify which holdings might qualify as participating interests and test them against the ownership, holding period, and other conditions in Article 23. Keep the evidence, since the exemption rests on the conditions being met. And treat exempt income consistently, neither taxing what is exempt nor exempting what does not qualify. For groups and holding companies especially, the participation exemption is worth getting precisely right.
This article is general information and is not tax advice. The exemption and its conditions are set out in Federal Decree-Law No. 47 of 2022 and depend on your circumstances. We would be glad to assess whether your shareholdings qualify.