Facts
The holding company (Company) is registered in a qualified Free Zone in the UAE. The Company is considering the application of the 0% Corporate Tax rate, which is available for a Qualifying Free Zone Person (‘QFZP’) with respect to the income derived from the holding of shares and other securities for investment purposes.
In accordance with Article 2(1)(d) of the Ministerial Decision No. 265 dated 27.10.2023, holding shares and other securities for investment purposes is considered a Qualifying Activity that allows the application of a 0% Corporate Tax rate on income derived from such activities in accordance with the UAE Corporate Tax Law. Under Article 2(3)(d) of the same Decision, ‘shares and other securities are deemed to be held for investment purposes when held for an uninterrupted period of at least (12) twelve months’.
The Company initially purchased shares with the intention of holding them for more than 12 months. However, market data indicated an imminent decline in their value, prompting the Company to sell the shares to minimize losses.
Question
Does the activity of holding shares qualify under Article 2(1)(d) of Ministerial Decision No. 265 of 2023 when such securities are held for less than 12 months, provided the Company can demonstrate with sufficient evidence that the securities were acquired for the purpose of holding them for 12 months or more?
Summary
Based on the facts and analysis below, we opine that:
1) Last paragraph of Article 2(3)(d) of the Decision No. 265 should not be construed in a manner that disqualifies holdings where the intention to maintain the investment for more than 12 months can be substantiated, but valid economic reasons necessitated an earlier sale of the security.
This paragraph should be interpreted with flexibility to accommodate dynamic investment strategies, thereby encouraging rational decision-making and avoiding the imposition of economically inefficient holding requirements for shares or similar securities.
2) As with all scenarios where there is no clear-cut guidance in the law, regulations, public clarifications, or authorized guides, there is a risk of disagreement with the FTA. Moreover, it seems that few other consultants share this position, as our search of available media comments has not yielded similar views.
Therefore, it is advisable to seek verification of the above position through a private clarification with the FTA. When doing so, the taxpayer must present a favorable tax position, propose alternatives (where applicable), and provide a detailed analysis of these positions. A relevant tax opinion should also be submitted. The arguments outlined below can support a favorable interpretation, but additional arguments tailored to the specific facts of each case should be thoroughly developed and included in the technical position.
Analysis
In accordance with Article 2(1)(d) of the Ministry of Finance Decision No. 265 dated 27.10.2023, holding shares and other securities for investment purposes is considered a Qualifying activity that allows the application of a 0% Corporate Tax rate on income derived from such activities in accordance with the UAE Corporate Tax Law.
Under Article 2(3)(d) of the same Decision, holding shares and other securities for investment purposes includes ‘Holding of negotiable or non-negotiable financial instruments, including, derivative instruments, financial commodities, and other investment instruments that are or can be traded in a public or private market or that are convertible or exchangeable into a security or which confer a right to purchase a security, with the exception of the holding of financial or investment instruments that are issued pursuant to a securitization of receivables from a non-financial asset’.
At the same time, Article 2(3)(d) establishes that ‘shares and other securities are deemed to be held for investment purposes when held for an uninterrupted period of at least (12) twelve months’.
In the securities market, while an investor may initially intend to hold securities for a minimum of 12 months, unforeseen changes in market conditions or other circumstances can render such a holding period impractical and financially detrimental. In some cases, investors are compelled to sell securities prematurely to either mitigate existing losses or prevent further financial harm. Consequently, enforcing a mandatory 12-month holding period often conflicts with the realities of dynamic financial markets, placing investors in unfavorable and potentially disadvantageous positions.
Requiring such a fixed holding of 12 months period fails to account for rational investment decisions driven by market fluctuations. It discourages prudent risk management and forces investors to prioritize compliance over economic sensibility. Therefore, it is worth considering whether such an interpretation is correct, as it is unlikely that the legislator intended to impose unfavorable conditions on prudent business decisions.
Indeed, Article 2(3)(d) of the Decision requires for qualifying holding activity the fact of “investment purposes” rather than reaching initial target. It states that ‘securities are deemed to be held for investment purposes when held for an uninterrupted period of at least (12) … months’. The broad interpretation of this rule may imply that the purpose to hold for a period of at least 12 months should be treated as a decisive factor.
Furthermore, the phrase “are deemed to be held for investment purposes” indicates that holding securities for 12 months is considered as “deemed” investment holding. This means that once the 12-month threshold is met, the investment purpose is presumed, even in cases where the securities were initially acquired for trading, liquidation, asset sales, or purposes other than investing. The 12-month holding period serves as a uniform criterion to classify all types of holdings, regardless of whether they originate from investment considerations or not. Even if the securities were not acquired with investment purposes in mind, they are still “deemed” to qualify as such after this period. Interpreted in this way, the cited paragraph of Article 2(3)(d) does not exclude cases where securities are held for actual investment purposes, i.e. those that reflect true, factual investments.
The phrase “are deemed to be held for investment purposes” indicates that holding securities for 12 months is considered as “deemed” investment holding. This means that once the 12-month threshold is met, the investment purpose is presumed, even in cases where the securities were initially acquired for trading, liquidation, asset sales, or purposes other than investing. The 12-month holding period serves as a uniform criterion to classify all types of holdings, regardless of whether they originate from investment considerations or not.
Even if the securities were not acquired with investment purposes in mind, they are still “deemed” to qualify as such after this period.
Interpreted in this way, the cited paragraph of Article 2(3)(d) does not exclude cases where securities are held for actual investment purposes, i.e. those that reflect true, factual investments.
When the Company sells its investments in the form of securities before the expiration of the minimum holding period of 12 months, such a disposal is not driven by the purpose of active trading, but prematurely to either mitigate existing losses or prevent further financial harm. Certainly, in such scenarios the Company must demonstrate evidence to substantiate these facts. If the Company managed to cope with this burden of proof, enforcing a mandatory 12-month holding period will conflict with the realities of dynamic financial markets, placing the Company in unfavorable and potentially disadvantageous positions. Moreover, requiring such a fixed holding of 12 months period fails to account for rational investment decisions driven by a substantial change in a position of security in the market.
Therefore, we believe that where the investment was initially acquired for investment purposes and with an initial intention to hold for at least 12 months (if supported by the documentation), but was sold before the expiration of the holding period to minimize already incurred losses or to avoid a future financial loss due to market fluctuations or other circumstances, in such a case income derived from the sale of such an investment should qualify as income from holding of shares and other securities for investment purposes and eligible for the 0% Corporate Tax rate.
In Section 10.6. of the Free Zone Persons Corporate Tax Guide No. CTGFZP1, the FTA instructs that ‘the active trading of shares and other securities also would not constitute a Qualifying Activity for the purposes of the rules. Shares and other securities are deemed to be held for investment purposes when held (or there is an intention to hold and the QFZP can demonstrate its intention to hold) for an uninterrupted period of at least 12 months’.
Thus, the FTA clarifies that for the purposes of the 12-month holding period, the "intention to hold" the shares and other securities should be taken into account if the QFZP can demonstrate its intention to hold. Footnote 99 to this clarification refers to Article 2(3)(d) of Ministerial Decision No. 265 of 2023. This article, cited above, does not include “intention to hold” in the holding period test. Therefore, the FTA's interpretation implies that “holding for an uninterrupted period of at least (12) twelve months” encompasses an intention-based element.
The holding period test is also included in the Participation Exemption rules. In contrast to Article 2(3)(d) of Decision No. 265, clause 2(a) of Article 23 of the Corporate Tax Law explicitly includes “the intention to hold” in this test. Furthermore, clause 2 of Article 23 specifically addresses the scenario in question: “Where a Taxable Person fails to hold a 5% or greater ownership interest in the Participation for an uninterrupted period of at least (12) months, any income previously not taken into account under this Article shall be included in the calculation of the Taxable Income in the Tax Period in which the ownership interest in the Participation falls below 5%”.
There is no similar claw-back provision in Decision No. 265. This difference explains why thorough guidance on claw-back is provided in the Exempt Income Guide No. CTGEXI1, but is absent from Guide No. CTGFZP1. The FTA does not have Article 23(10) of the Corporate Tax Law or a similar legislative rule to require claw-back, and therefore, it does not mandate it in the Free Zone Persons Guide.
The FTA may reject the favorable interpretation outlined above, arguing that the earlier sale disqualifies the Company from treating the income generated by the relevant securities as qualifying income.
In our view, such treatment of the 12-month period holding condition discourages prudent risk management and forces investors to prioritize compliance over economic sensibility. Last paragraph of Article 2(3)(d) of the Decision No. 265 should not be construed in a manner that disqualifies holdings where the intention to maintain the investment for more than 12 months can be substantiated, but valid economic reasons necessitated an earlier sale of the security. This paragraph should be interpreted with flexibility to accommodate dynamic investment strategies, thereby encouraging rational decision-making and avoiding the imposition of economically inefficient holding requirements for shares or similar securities.
The disclaimer
Pursuant to the MoF’s press-release issued on 19 May 2023 “a number of posts circulating on social media and other platforms that are issued by private parties, contain inaccurate and unreliable interpretations and analyses of Corporate Tax”.
The Ministry issued a reminder that official sources of information on Federal Taxes in the UAE are the MoF and FTA only. Therefore, analyses that are not based on official publications by the MoF and FTA, or have not been commissioned by them, are unreliable and may contain misleading interpretations of the law. See the full press release here.
You should factor this in when dealing with this article as well. It is not commissioned by the MoF or FTA. The interpretation, conclusions, proposals, surmises, guesswork, etc., it comprises have the status of the author’s opinion only. Furthermore, it is not legal or tax advice. Like any human job, it may contain inaccuracies and mistakes that I have tried my best to avoid. If you find any inaccuracies or errors, please let me know so that I can make corrections.
