Holding company in the UAE: two routes to 0%

Article 23 of the Corporate Tax Law, Federal Decree-Law No. 47 of 2022, exempts dividends and capital gains from a participating interest, as detailed in Ministerial Decision No. 116 of 2023. The core conditions are that the holding owns at least 5% of the shares or capital of the subsidiary, or has invested at least a set acquisition cost, that it holds or intends to hold the interest for an uninterrupted period of at least twelve months, that the subsidiary is subject to corporate tax or a similar tax at a rate of at least 9% in its country of residence, and that the subsidiary's assets are not predominantly of a kind that would fail the asset test. A subsidiary that is itself a holding company is tested by looking through to the companies it holds, and a subsidiary that is a Qualifying Free Zone Person or an exempt person is deemed to meet the subject-to-tax condition.

Dividends from other UAE companies are exempt in any case, whatever the shareholding. For foreign subsidiaries, the 9% subject-to-tax condition is usually the one that decides: a subsidiary in Saudi Arabia or a European country with a normal corporate tax passes it easily, while one in a no-tax or very low-tax jurisdiction does not, and its dividends and gains are then taxable in the UAE at 9%. Losses on the disposal of participations that qualify are not deductible, which is the price of exempt gains.

The UAE does not withhold tax on dividends, interest or royalties paid to non-residents, so profits can be paid from a UAE holding to its shareholders abroad without UAE tax. The UAE also has one of the widest treaty networks in the region, which can reduce withholding on dividends paid into the UAE by subsidiaries in treaty countries, provided the holding can show that it is the beneficial owner and tax resident, which in turn requires a tax residence certificate from the Federal Tax Authority and, increasingly, real substance.

For groups with consolidated revenue of EUR 750 million or more, the domestic minimum top-up tax introduced by Cabinet Decision No. 142 of 2024 changes the picture. A UAE holding of such a group whose income is exempt under the participation exemption or the free zone regime still forms part of the UAE jurisdictional calculation, and where the group's effective rate in the UAE falls below 15%, a top-up applies. The global minimum tax rules themselves exclude many dividends and gains from the calculation, so a pure holding often generates little top-up, but large groups should test it rather than assume it.

An Indian technology group sets up a UAE holding to own a Saudi subsidiary, a Bahraini subsidiary and a German subsidiary. Formed as a mainland LLC in Dubai, the holding receives a dividend from the German company, which pays corporate tax at well above 9%: the holding owns 100% and has held it for over a year, so the dividend is exempt under the participation exemption. A dividend from the Saudi company also qualifies, Saudi Arabia's 20% income tax and zakat regime satisfying the subject-to-tax condition for the relevant profits, after Saudi withholding at source, which a treaty may reduce. The Bahraini subsidiary is the difficult one: Bahrain has no general corporate tax today, so the 9% condition is not met, and its dividends would be taxable in the UAE at 9% unless another route applies.

The group considers two fixes. One is to hold the Bahraini company through a free zone holding that qualifies as a Qualifying Free Zone Person, where holding shares is a qualifying activity and the dividend can be taxed at 0%, accepting the conditions and audit that come with it. The other is to wait: if Bahrain's draft corporate tax takes effect in 2027 at 10%, a Bahraini subsidiary within its scope may pass the 9% test for future profits. The group chooses the free zone holding for the Bahraini investment now and keeps the mainland holding for the rest, so that the mainland group can still form a tax group with its UAE operating companies.