UAE Tax Office Issues Guide with 28 Examples on Strategic Participation Exemption Rules (CTGEXI1)

The UAE Tax Service has released a comprehensive guide along with 28 examples aimed at illustrating the application of strategic participation exemption rules concerning dividends and capital gains (CTGEXI1).

These clarifications come as a much-awaited resource, given my observation that not everyone has had sufficient time to delve into the conditions and requirements outlined in Article 23(2) of the Corporate Tax Law (CTL) and Decision No. 116.

I highly recommend both the guide and its examples for review by all taxpayers (both legal entities and individuals whose income doesn’t stem from personal investments) receiving dividends from a resident legal entity, as well as income or capital gains from shares or participation interests.

The guide comprises two schemes: one for general rule application and a detailed one for determining whether shares fall under the definition of ‘Participating Interest’ (including Example No. 8, when the participation interest is acquired in exchange for a stake not falling under the definition of ‘Participating Interest’).

Among common scenarios covered: Example No. 19, where shares are transferred in exchange for shares of another organization (share-for-share) at a valuation differing from the book value at the time of disposal, including clarification for transactions between related parties not based on the ‘outstretched hand’ principle.

Section 3.1.6 also clarifies the concept of ‘constructive dividends’: any payments not adhering to the ‘outstretched hand’ principle from subsidiary companies to parent companies may now be classified as dividends, regardless of formal distribution.

Moreover, Example No. 25 is of particular interest, illustrating Article 23(6)(c) of the CTL, stipulating that the exemption does not apply if the taxpayer or its associated entity recognizes a deductible loss regarding a loan granted to a legal entity in which the taxpayer or associated entity holds an interest.

Full text of this Guide via this link.