UAE Ministerial Decision No. 302 of 2024: Participation Exemption and Foreign Permanent Establishment Exemption for Corporate Tax Law
Issued on 10 December 2024 | Effective from 11 December 2024
In a significant development, the UAE Ministry of Finance has issued Ministerial Decision No. 302 of 2024, providing comprehensive guidelines on the Participation Exemption and Foreign Permanent Establishment (FPE) Exemption under the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (UAE Corporate Tax Law). This Ministerial Decision replaces Ministerial Decision No. 116 of 2023, and will apply to Tax Periods starting on or after 1 January 2025.
Key Highlights of Ministerial Decision No. 302 of 2024:
1. Clarification of Key Terms and Definitions
- Definitions relevant to Participation Exemption, including Participating Interest, Participation, Ordinary Shares, Preferred Shares, Redeemable Shares, Dividend, Membership and Partner Interests, and Islamic Financial Instruments.
- Clarifies Qualifying and Non-Qualifying Foreign Permanent Establishments (FPEs).
2. Scope of Ownership Interests under Participation Exemption
- Ownership interests include various instruments such as Ordinary Shares, Preferred Shares, Redeemable Shares, Partner Interests, and others.
- Ownership interests must be classified as equity under applicable Accounting Standards.
- Islamic Financial Instruments are recognized as ownership interests if classified as equity under AAOIFI standards.
3. Aggregation of Ownership Interests
- Multiple ownership interests held directly or through Qualifying Groups are aggregated to determine if a Participating Interest exists.
4. Transfer and Continuity of Ownership Interests
- Ownership interests exchanged in no gain or loss transfers under Article 27 of Corporate Tax Law are treated as continuous ownership interests for Participation Exemption.
- Two-year holding period requirement begins from the date of the first exempt transfer.
5. Minimum Acquisition Cost Threshold
- A minimum aggregated acquisition cost of AED 4 million is required for the ownership interest to qualify for the exemption.
- Specific guidance is provided for calculating acquisition costs, including subsequent contributions and capital repayments.
6. Subject to Tax Requirement
- To qualify for exemption, Participations must be in jurisdictions levying at least 9% tax on a similar basis to UAE Corporate Tax.
- Alternative taxes meeting certain criteria may also be recognized.
- Comprehensive criteria are provided for jurisdictions without corporate tax but levying other forms of income or equity tax.
7. Conditions for Holding Companies
- Specific substance requirements for foreign holding companies, including:
- Being directed and managed in the jurisdiction.
- Adequate personnel and premises.
- Limitation of activities to shareholding and incidental activities.
8. Treatment of Debt Instruments
- Income from debt instruments issued by Participations may qualify as exempt if classified as equity under accounting standards.
9. Expenditure Related to Participating Interests
- Expenditure for acquiring or disposing of Participating Interests is not deductible but should be capitalized.
10. Foreign Permanent Establishment (FPE) Exemption
- Tax Losses from FPEs must be fully offset before applying for FPE Exemption.
- Clarifications on treatment when assets and liabilities of FPEs are transferred to a Participation.
11. Liquidation Proceeds and Losses
- Conditions and adjustments are outlined for losses recognized on liquidation of Participations, including reductions for previously exempt dividends or profit distributions.
12. Repeal and Applicability
- Ministerial Decision No. 116 of 2023 is repealed but remains applicable for tax periods commencing before 1 January 2025.
- Ministerial Decision No. 302 of 2024 applies for tax periods starting on or after 1 January 2025.
Conclusion:
Ministerial Decision No. 302 of 2024 provides critical clarifications and comprehensive conditions for applying Participation Exemption and Foreign Permanent Establishment Exemption under UAE Corporate Tax Law. These provisions will be instrumental for multinational groups, investment holding companies, and businesses with foreign operations to assess their tax exposure and compliance obligations.
Businesses should proactively review their corporate structures, Participations, and foreign operations to ensure alignment with the new provisions and to benefit from available exemptions.
KGRN Chartered Accountants is well-positioned to assist companies in evaluating the impact of these changes and implementing strategic solutions. Contact us for personalized advisory services on UAE Corporate Tax planning and compliance.
