Yes, it can. When a Dubai holding company, for example one registered in IFZA, sells shares in its subsidiary, the gain can be tax exempt under UAE corporate tax. The gain is only reported in the tax return, with no tax payable, if four conditions are met. If any condition is not met, the gain is taxable at the level of the holding company, at 9% or 0% depending on the tax regime of the holding company.
This guide looks at a common case. An IFZA holding company owns 100% of a subsidiary (possibly less in future, but more than 5%) and plans to sell the shares in future, most likely after more than 1 year. We cover three scenarios: a US subsidiary taxed at more than 9%, a US subsidiary taxed at less than 9%, and a UAE subsidiary.
What are the 4 conditions for a tax free gain?
The gain on selling the shares is tax exempt only if all four conditions are met:
- The holding company holds 5% or more of the shares in the subsidiary.
- These shares give the right to receive not less than 5% of the profits available for distribution by the subsidiary, and not less than 5% of the liquidation proceeds when the subsidiary closes.
- The subsidiary is subject to tax at 9% or more in its own country.
- The holding company holds or intends to hold 5% or more of the shares for more than 12 months, without interruption.
If any of these is not met, the gain is taxable at the level of the holding company, at 9% or 0% depending on its tax regime.
Scenario 1: US subsidiary taxed at more than 9%
The US subsidiary pays corporate income tax in the US at a rate of more than 9%, so the subject to tax condition is met.
Conclusion: the gain can be tax free if all four conditions are met. If any of them is not met, the gain is taxable at the level of the IFZA holding company, at 9% or 0% depending on its tax regime.
Scenario 2: US subsidiary taxed at less than 9%
The US subsidiary pays corporate income tax in the US at a rate of less than 9%, so the subject to tax condition is not met. As a result, the gain is taxable at the level of the IFZA holding company, at 9% or 0% depending on its tax regime.
Conclusion: the gain cannot be tax free, because the subsidiary’s tax rate is lower than the UAE rate.
Scenario 3: UAE subsidiary taxed at any UAE rate
The subsidiary is a UAE company that pays tax at any UAE rate. Under UAE law, the subject to tax condition is considered to be met.
Conclusion: the gain can be tax free if all four conditions are met. If any of them is not met, the gain is taxable at the level of the IFZA holding company, at 9% or 0% depending on its tax regime.
The 3 scenarios at a glance
| Subsidiary | Subject to tax condition | Can the gain be tax free? |
|---|---|---|
| US company, taxed at more than 9% | Met | Yes, if all 4 conditions are met |
| US company, taxed at less than 9% | Not met | No |
| UAE company, taxed at any UAE rate | Considered met under UAE law | Yes, if all 4 conditions are met |
What to check before you sell
- The tax rate the subsidiary pays in its own country.
- That the holding company keeps 5% or more of the shares, with matching rights to profits and liquidation proceeds.
- That the shares have been held or intended to be held for more than 12 months without interruption on the date of sale.
Even when the gain is tax exempt, it still has to be reported in the corporate tax return of the holding company.
FAQ
Can a Dubai holding company sell its subsidiary tax free?
Yes. The gain on selling shares in a subsidiary is tax exempt under UAE corporate tax if four conditions are met: 5% or more shareholding, rights to at least 5% of distributable profits and liquidation proceeds, the subsidiary is subject to tax at 9% or more, and the shares are held or intended to be held for more than 12 months without interruption.
What shareholding does the holding company need?
The holding company must hold 5% or more of the shares in the subsidiary. These shares must give the right to receive not less than 5% of the profits available for distribution and not less than 5% of the liquidation proceeds when the subsidiary closes.
How long must the shares be held before selling?
The holding company must hold or intend to hold 5% or more of the shares for more than 12 months, without interruption.
What if the foreign subsidiary pays tax at less than 9%?
Then the subject to tax condition is not met, and the gain cannot be tax free. It is taxable at the level of the holding company, at 9% or 0% depending on its tax regime.
Is the gain on selling a UAE subsidiary tax free?
It can be. Under UAE law, the subject to tax condition is considered met for a UAE subsidiary taxed at any UAE rate. The gain is tax free if all the other conditions are also met.
Does a tax free gain still need to be reported?
Yes. A tax exempt gain is still reported in the corporate tax return of the holding company, with no tax payable.
What tax applies if the conditions are not met?
The gain is taxable at the level of the holding company, at 9% or 0% depending on the tax regime of the holding company.
About InBusiness
InBusiness is a Dubai-based accounting, tax, and corporate services firm, founded in 2021, that acts as the UAE finance and compliance arm for international businesses. The team provides outsourced accounting, tax advisory, company formation, admin services, and immigration across all Free Zones and Mainland. The team speaks English and Russian.
