The UAE Ministry of Finance (MoF) recently issued two updated Ministerial Decisions under Federal Decree-Law No. 47 of 2022 (UAE Corporate Tax Law). Among these, Ministerial Decision No. 302 of 2024 on the Participation Exemption and Foreign Permanent Establishment Exemption (MD 302) replaces Ministerial Decision No. 116 of 2023 (MD 116).
MD 302 will apply for tax periods commencing on or after 1 January 2025. For tax periods starting before this date, MD 116 will continue to apply.
The key amendments made under MD302 are highlighted below:
Definitions
A definition of a Qualifying Foreign Permanent Establishment has been provided to mean a Foreign Permanent Establishment (PE) that is subject to Corporate Tax or a tax of a similar character under the applicable legislation of the relevant foreign jurisdiction at a rate not less than 9%. Otherwise, the Foreign PE shall be considered a Non-Qualifying Foreign PE. The Foreign PE exemption is available to a Qualifying Foreign PE.
Minimum acquisition cost
While MD 116 replaced the condition of meeting the 5% minimum capital ownership requirement with the AED 4 million threshold, it did not exempt investors from meeting the following additional tests:
- Rights to 5% of assets upon liquidation
- 5% of total dividend payouts
MD 302 has amended the provisions to state that the AED 4 million threshold will replace the 5% threshold across all three tests, thus eliminating inconsistencies and providing a welcome relief.
Application of the asset test
As per Article 23.2.d of the UAE Corporate Tax Law, one of the conditions to be fulfilled for Participation Exemption is that “not more than 50% of the direct and indirect assets of the Participation consist of ownership interests or entitlements that would not have qualified for an exemption from UAE Corporate Tax under Article 23 if held directly by the Taxable Person.”
MD 302 has provided a relief by stating that this condition is required to be tested only in cases where the Participation is a Related Party of the Taxable Person.
Transfer of ownership interest
MD 302 provides for the conditions where exchange of ownership interests shall be treated as continuous ownership interest for the purposes of Article 23 and elaborates on adjustments to be made while computing Taxable Income on account of interplay between Article 26 or Article 27 (for subsequent transfers within 2 years) and Article 23 of the UAE Corporate Tax Law.
Liquidation proceeds and losses
A loss realized by the Taxable Person on the liquidation of a Participation can be utilized only after reduction of the following items in the relevant Tax Period and preceding 7 Tax Periods:
a) Tax losses transferred by the Participation or its Participations to the Taxable Person or any of the Taxable Person’s Related Parties.
b) Exempt dividends or other profit distributions received by the Taxable Person from the Participation.
c) The difference between the market value and the amount of consideration paid for an asset or liability which was transferred between the Taxable Person or the Taxable Person’s Related Parties and the Participation or its Participations on fulfilment of certain conditions.
d) Any adjustments taken into account under the above-mentioned items (a) or (c) by the Participation (being liquidated) in determining the losses realized on the liquidation of its Participations, insofar as such adjustments have not already been taken into account by the Taxable Person as stated above.
Rules have also been specified for the determination of the amount of liquidation loss recognized in relation to a Participation that is a member of a Tax Group
A loss cannot be realized by a Tax Group on the liquidation of a Participation where the Participation leaves the Tax Group due to business restructuring as per Article 10 of Ministerial Decision No. 301 of 2024.
Foreign PE exemption
MD 302 provides for an amended utilization mechanism of tax losses incurred by the Taxable Person’s Qualifying Foreign PEs.
Further, it also provides for implications of the tax losses on income subject to Participation exemption where a Taxable Person transfers all the assets and liabilities of a Qualifying Foreign PE/Non-Qualifying Foreign PE to a Participation, resulting in the termination of the existence of that PE. In such cases, the participation exemption applies only to the income exceeding unutilized tax losses from the Foreign PEs.
Our comments
Since MD 116 of 2023 has been repealed and MD 302 can be applied only for tax periods commencing after 1 January 2025, this could lead to ambiguity regarding the course of action to be followed for tax periods commencing before 1 January 2025 where the amendments may be clarificatory in nature (for example in relation to minimum acquisition cost or asset test).
If you need assistance, please reach out to your advisors at KPMG or the contacts mentioned below.
