Participation Exemption and Foreign Permanent Establishment Exemption in UAE Corporate Tax
Businesses that operate internationally or invest in other companies often face the risk of being taxed twice, once in the country where they earn income, and again at home. The UAE’s corporate tax system offers two important exemptions to help avoid that. These are the participation exemption and the foreign permanent establishment (PE) exemption.
Each works differently, but both are designed to ease the tax load for companies that are involved in cross-border activity. Let's walk through each one, who qualifies, how to apply them, and what to avoid.
What is the Participation Exemption?
The participation exemption lets UAE businesses ignore certain types of income when calculating taxable profits. If you own part of another company, either in the UAE or abroad, you may be able to exclude the earnings you receive from that investment. This could include dividends, gains from selling shares, and even currency exchange profits, if conditions are met.
The goal here is to keep businesses from paying tax twice on the same money. As long as the company you invested in pays enough tax where it’s based, the UAE won’t tax you again on that income.
Who Can Use It?
This exemption is available to companies that own a meaningful stake in another business. You must show that your investment isn’t a short-term trade or a passive holding. It needs to be a serious ownership interest.
There are a few clear requirements:
- You must own at least five percent of the company’s shares.
- You either need to hold those shares for at least one year or show that you plan to.
- The company you’ve invested in must be taxed at a rate of at least nine percent where it is based.
- No more than half of that company’s assets can be things like bonds, shares, or other passive financial investments.
- The investment can’t be considered a portfolio investment something bought just to trade quickly.
A Simple Example
Suppose your UAE company owns ten percent of a firm in Germany. You’ve held that ownership for more than a year, and the German company pays local corporate tax at fifteen percent. One day, you receive dividends worth half a million dirhams.
Because you meet the conditions, ownership, duration, tax rate, and asset test, you don’t have to include that income in your UAE taxable profits. You keep the full amount without any local tax.
Records You Need to Keep
Using this exemption means you need to be ready with evidence. If the tax authority asks, you’ll need to show:
- Your shareholding percentage and the date you acquired it
- Confirmation of how long you held the shares
- Proof that the investee company paid at least nine percent tax
- Financial statements showing that passive assets are below the fifty percent limit
Clear, organized records will save you time and stress.
What Is a Foreign Permanent Establishment?
Let’s move to the second relief option. A foreign permanent establishment, or PE for short, is a business location outside the UAE where you do regular commercial activity. This might be a branch office, a warehouse, a factory, or even a project site that lasts long enough to count.
If your UAE company has one of these PEs abroad and pays tax there, you may be able to exclude that income from your UAE Corporate Tax. The exemption prevents your foreign profits from being taxed twice.
What You Need to Do
To benefit from this exemption, you must:
- Actively choose the exemption. It doesn’t happen automatically.
- Show that the PE is taxed abroad.
- Keep a separate set of accounts for the PE’s activity.
Once you choose this path, you won’t pay tax in the UAE on the PE’s income. But keep in mind that you also won’t be allowed to deduct any expenses or losses from that PE when calculating your UAE tax.
Example: UAE Company with a Foreign Branch
Imagine a Dubai-based business with a registered branch in India. That branch handles manufacturing and pays Indian tax on its profits. You keep all its accounting separate.
By making the election for the PE exemption, you stop those profits from being added to your UAE tax return. There’s no double taxation, but you also give up the chance to deduct any Indian losses in the UAE.
Can You Use Both Exemptions?
Yes, if your company qualifies. Some firms have both equity investments and overseas branches. Each exemption has its own set of conditions. As long as you follow the rules for each, you can use both.
Just make sure your documents are clean and separate. You don’t want to mix records or apply an exemption incorrectly.
Final Thoughts
Both the participation exemption and the foreign permanent establishment exemption offer clear benefits, but you need to do your homework. The rules are strict, and the Federal Tax Authority expects clear, accurate records.
If your company earns income from outside the UAE, whether from shares or from running a business abroad, take a careful look at whether you qualify. Keep your records sharp, track all elections, and get advice when needed.
Want help reviewing your documents or checking if you qualify? Reach to us now and we will be more than happy to assist you. The right preparation can save you thousands and make your Corporate Tax filing far easier.
Frequently Asked Questions
Can I apply the participation exemption to income from a UAE company?
Yes, if the company meets the tax rate and asset tests, and you meet the ownership conditions.
What if I sell the shares before holding them for a full year?
You won’t qualify unless you can prove you intended to hold them that long.
Do I need to submit a form to apply the participation exemption?
There’s no formal application, but you need to document everything in case of audit.
What if the tax rate in the other country is below nine percent?
The income may not qualify. That’s one of the key thresholds in the law.
Can I claim losses from a PE if I apply the exemption?
No. Once you exclude the income, you can’t deduct the losses either.
Is there a deadline for electing the PE exemption?
Yes. You need to make the election in time for it to apply to the current tax period.
Can I switch back and forth with the PE exemption?
Once made, the election applies continuously unless revoked. There may be rules about when and how you can change it.
What if the PE doesn’t pay tax overseas?
You can’t use the exemption. The foreign income must actually be taxed to qualify.
Do I need audited financials to prove compliance?
You need full documentation. If you’re a large company, audited financials are a safer choice.
How can I track all this easily?
Many companies use tools like Tax Star to monitor ownership, document holding periods, and manage elections for foreign tax rules.
