The United Arab Emirates (UAE) introduced a federal Corporate Tax regime through Federal Decree-Law No. 47 of 2022 (the “Corporate Tax Law”), effective for financial years starting on or after 1 June 2023. A common question for businesses and investors is how dividend income will be taxed under this new law. Fortunately, the UAE Corporate Tax system provides generous exemptions for dividend income in many cases, reflecting international norms like the participation exemption and ensuring that profits are not taxed twice. This article breaks down the treatment of dividend income – for local UAE dividends, foreign dividends under the participation exemption, and dividends received by individual (non-business) investors – with references to the law, cabinet decisions, and official guidance.
Dividend Income from UAE Companies (Local Dividends)
Dividends received by a UAE company from another UAE resident company are generally exempt from corporate tax. The Corporate Tax Law explicitly provides that dividend income (and other profit distributions) received by a UAE taxable person from a UAE resident person is not counted towards taxable income. In other words, if your UAE company holds shares in another UAE company and earns dividends, those dividends are automatically exempt from UAE corporate tax – no conditions or minimum ownership requirements needed. This prevents double taxation of the same profits at the UAE level, since the distributing company’s profits are (in principle) already subject to corporate tax before being paid out as dividends.
It’s worth noting that this exemption for domestic dividends applies regardless of the ownership percentage or holding period. Even a small minority shareholding in a UAE company can enjoy tax-free dividends under the Corporate Tax Law. However, other types of income from holding a stake in another UAE company – for example, a capital gain from selling the shares – may not be exempt unless additional conditions are met (as discussed under the participation exemption). The key takeaway is that local UAE dividends are fully tax-exempt for the recipient, reflecting the UAE’s position as a business-friendly, holding-company hub.
Foreign Dividends and the Participation Exemption
Dividends from foreign companies (non-UAE companies) can also be exempt from UAE corporate tax, but not automatically. They fall under the “Participation Exemption” provisions (Article 23 of the Corporate Tax Law) which set certain conditions to qualify for tax-free treatment. The participation exemption is designed to encourage UAE businesses to invest in subsidiaries or shareholdings abroad without incurring additional UAE tax on repatriated profits, provided the investment is substantial and genuine. Here are the key conditions for a foreign dividend to be exempt under the participation exemption:
- Minimum Ownership Interest: The UAE company must own a significant stake in the foreign company. The law sets a threshold of at least 5% ownership (a “Participating Interest”) in the shares or capital of the foreign entity. Even if the ownership is below 5%, this test can be met if the UAE investor’s acquisition cost for the shares was at least AED 4 million (this alternative monetary threshold ensures that substantial investments qualify even if they represent a small percentage of a large company’s equity).
- Holding Period: The shareholding must be held for an uninterrupted period of at least 12 months, or there must be an intention to hold it for at least 12 months. This requirement ensures the participation is a long-term investment and not just a short-term trade made to extract tax-free dividends.
- Subject-to-Tax Test: The foreign participation (the company paying the dividend) must be subject to corporate tax or an equivalent tax in its home jurisdiction at a rate of 9% or higher. In essence, the foreign company should be in a country that taxes its profits at a rate not lower than the UAE’s 9% rate. This test prevents abuse of the exemption for dividends coming from companies in zero-tax havens. (Notably, UAE free zone companies and other UAE exempt persons can still qualify as meeting this test under certain conditions, even though they may pay tax at 0%, as clarified by the law and Cabinet decisions.)
- Entitlement to Profits: The UAE shareholder must be entitled to at least 5% of the foreign company’s profits and liquidation proceeds. This typically goes hand-in-hand with owning 5% of the shares, but it ensures that the shares held are ordinary equity that gives rights to a proportional share of distributions. It excludes, for example, certain preferred shares or arrangements where an investor’s returns are fixed or capped and do not truly represent a share in the company’s ongoing profits.
- Asset Composition Test: No more than 50% of the assets of the foreign participation should consist (directly or indirectly) of assets that would not themselves qualify for participation exemption if held by the UAE company directly. This is an anti-abuse rule – it prevents a scenario where a UAE company invests into an intermediary entity that mainly holds passive investments or other non-qualifying interests just to take advantage of the exemption. In simpler terms, the foreign subsidiary shouldn’t be just a shell holding other investments that wouldn’t meet the exemption criteria on their own.
If all these conditions are satisfied, the dividend income (and even capital gains on the shares) from such a qualifying foreign participation is exempt from UAE Corporate Tax. This set of criteria is often referred to as the Participation Exemption regime. The Corporate Tax Law’s Article 23 and Ministerial Decision No. 116 of 2023 (which, for example, specifies the AED 4 million alternative threshold) detail these requirements.
What if the conditions are not met? If a UAE company receives a dividend from abroad but doesn’t meet the participation exemption tests (for instance, the ownership is too small or the holding period too short), then that dividend would be included in taxable income. In such cases, the dividend is subject to the normal corporate tax rate (9%) unless other reliefs apply. However, note that even then, a UAE company might get foreign tax credits if that dividend was taxed abroad, to avoid double taxation – but that’s a separate topic (foreign tax credits) beyond the scope of this discussion.
It’s also important to mention that the participation exemption is applied automatically – there is no need to formally elect for it. If the conditions are met at the time the dividend is derived, the income is simply not included in taxable profits. The UAE’s Federal Tax Authority (FTA), in its guide “Exempt Income – Dividends and Participation Exemption” (16 October 2023), emphasizes that no application is required; the exemption is built into the law and available as of right when qualifying criteria are fulfilled.
Practical example
Suppose a UAE holding company owns 10% of a foreign subsidiary for over a year, and the subsidiary is taxed at 15% in its home country. Any dividends that the UAE company receives from this subsidiary would be tax-free in the UAE under the participation exemption. If, however, the ownership was only 2% and cost AED 1 million, then those dividends would not qualify for exemption (since 2% is below 5% and AED 1 million is below the AED 4m threshold), and the UAE company would need to include that dividend in its taxable income calculation.
Lastly, note that the law also ensures that if a dividend was effectively tax-deductible for the payer (the foreign company) – which can happen in certain hybrid financial instruments – then the participation exemption would not apply to the recipient. This rule prevents companies from abusing the system by getting a deduction in one country and an exemption in another. Such anti-avoidance nuances aside, the main message is that substantial investments abroad can distribute profits to UAE businesses without incurring UAE corporate tax, thanks to the participation exemption framework.
Treatment of Dividend Income for Individuals (Non-Business)
The UAE Corporate Tax is primarily focused on businesses. Individuals earning personal investment income – including dividends from shares – are generally outside the scope of UAE Corporate Tax, as long as these investments are not part of a commercial business activity. In the UAE, there is no personal income tax on dividends, and the Corporate Tax Law does not seek to change that for typical individual investors.
In fact, Cabinet Decision No. 49 of 2023 clarifies which activities of natural persons are considered “business” and thus potentially subject to corporate tax. It explicitly states that income from personal investments (i.e. investing one’s own money, not under a commercial license) is not treated as business income for corporate tax purposes. This means if you are an individual shareholder investing on your own account (for example, holding stocks or earning dividends in your personal portfolio), those dividends are not subject to UAE Corporate Tax. The FTA’s guide on Taxation of Natural Persons reinforces that employment income, personal investment income, and real estate investment income of individuals are out of scope of Corporate Tax. Such income is not even counted when assessing if an individual exceeds the taxability threshold.
When would an individual ever pay corporate tax on dividends? Only in atypical cases where the individual is effectively running a business involving those investments. Under the Corporate Tax Law, a natural person is only taxed if they are conducting a business or business activity in the UAE (as defined by the law and above-mentioned Cabinet Decision).
Most personal investment activities do not qualify as a business activity – for example, investing in stocks and funds on your own behalf doesn’t require a business license and is generally considered a personal investment. However, if an individual were, say, trading frequently or managing investments in a way that requires a commercial license (e.g. operating as a sole-proprietor financial broker or running an investment fund business), then those activities could be seen as a taxable business. Even in those cases, the Cabinet Decision provides a safe harbor: an individual’s business income is not taxed if their total business turnover is below AED 1 million in a year. Above that threshold, the individual would need to register and pay corporate tax on the business profits.
For a regular individual shareholder, though, this is not a concern – dividends and other investment returns earned in a personal capacity remain tax-free in the UAE. This approach preserves the UAE’s appeal to investors and its longstanding policy of no personal income tax.
Conclusion
In summary, the UAE Corporate Tax Law exempts most dividend income from taxation, aligning with international practices and the UAE’s pro-investment stance. Domestic dividends (UAE-to-UAE) are fully exempt for the receiving company, avoiding double taxation on locally generated profits. Foreign dividends can also be exempt under the participation exemption, provided the UAE shareholder has a meaningful stake and meets conditions like the 5% ownership/AED 4 million investment, 12-month holding period, and the foreign entity being subject to adequate tax. These rules ensure that UAE companies can compete globally and repatriate overseas earnings without extra tax frictions. Meanwhile, individual investors continue to enjoy tax-free personal dividend income, since personal investment income is not treated as business profit under the corporate tax regime.
For businesses and investors, it is important to understand these criteria and plan accordingly. UAE holding companies should assess their shareholdings to ensure they meet the participation exemption conditions where possible, and individuals should distinguish clearly between business income and personal investment income. By leveraging the dividend exemptions in the UAE Corporate Tax Law, taxpayers can minimize their tax liability while remaining compliant with the legislation. As always, for complex investment structures or uncertainty about meeting the exemption tests, consulting with a UAE tax advisor or referencing official FTA guides (such as the “Exempt Income – Dividends and Participation Exemption” guide) can provide additional clarity.
Overall, the UAE’s approach to dividend income under corporate tax is highly favorable – reinforcing the UAE’s attractiveness as a destination for investors and a holding company jurisdiction, and ensuring that “dividend income tax” in UAE remains effectively nil in qualifying circumstances.
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