Tax Groups
[Based on the Public Consultation Document released by the Ministry of Finance, UAE on 28 April 2022.]
The new Corporate Tax regime allows taxpayers to form a Tax Group. However, the criteria to create the Tax Group under Corporate Tax are completely different compared to the formation of the Tax Group under VAT
Under the Corporate Tax regime, a taxpayer who is UAE Resident Group can elect to form a Tax Group and be treated as a single taxable entity if all the following conditions are satisfied:-
- Parent Company holds a minimum of 95% of the share capital and voting rights of its subsidiaries
- Subsidiaries are indirectly owned by the parent company and at least 95% of its shares are owned by other subsidiaries of the Parent Company.
- Group entity is the UAE branch of the parent or any of its subsidiaries
- The parent company or any of the subsidiaries is not an Exempt Person or Free Zone Person that benefits from 0% Corporate Tax.
Procedure to Form a Tax Group
To form a Tax Group, a notice signed by
- the parent company and
- all subsidiaries need to be submitted to the FTA.
Subsequent addition of a new entity to the Tax Group can be done by submission of a similar notice signed by the parent company and the new subsidiary.
Post Formation of Tax Group
Once the Tax Group is formed, it shall be considered a single taxable person for all compliance under the Corporate Tax.
The Parent Company will be responsible (on behalf of all the Group Entities) for:-
- Consolidation of financials of each subsidiary
- Eliminate transactions between parent Company and Group subsidiaries
- Determination of Taxable Income
- Administration and Payment of Corporate tax
Group’s Corporate Tax will be joint and several liabilities of the parent company and each subsidiary in the Group. However, the same can be limited to one or more members with the approval of FTA.
Benefits of Forming a Tax Group
- Tax compliance procedures will be reduced, hence it
- It will help optimize tax costs.
Taxability of Legal Persons
The UAE Corporate Tax regime shall allow certain transactions between group companies, even when it is impossible to form a Tax Group or when the group companies do not elect to form a Tax Group.
This includes the transfer of losses and transfer of assets and liabilities in a tax optimization manner, subject to fulfillment of certain conditions.
Transfer of Losses
UAE Corporate Tax regime can allow a transfer of tax losses from one company to another group company with profits, provided the following conditions are met:
- UAE Group companies are at least 75% commonly owned
- Loss transfers from companies that are exempt or that benefit from the 0% Free Zone Corporate Tax regime shall not be allowed
- Losses offset should not exceed 75% of the taxable income of the company receiving the transferred loss in the relevant period.
Intra-group transfer of assets and liabilities
Relevant assets and liabilities will be treated as being transferred at their tax net book value so that neither a gain nor a loss needs to be taken into account while calculating the taxable income of the transferor or the transferee.
However, this exemption will be allowed if the following conditions are fulfilled:
- The transfer is between the UAE resident companies
- The transferor and transferee are at least 75% commonly owned
- Assets or liabilities remain within the same group for a minimum of three years
In violation of any of the above conditions, the relief shall be withdrawn.
Any gain or loss that would have arisen upon initial transfer will need to be calculated and included in the transferor’s tax return in the tax period in which the conditions ceased to be met.
Restructuring Relief
In order to facilitate mergers, spin-offs, and other corporate restructuring transactions, the UAE Corporate Tax regime will exempt or allow for a deferral of taxation where a whole business, or independent parts of a business, are transferred in exchange for shares or other ownership interests.
Similar to intra-group transfer, relevant assets and liabilities will be treated as being transferred at their tax net book value, so neither a gain nor a loss needs to be taken into account while calculating the taxable income of the transferor or the transferee.
However, this exemption will be ‘clawed back’ if within 3 years of restructuring there is a subsequent transfer of the business to any third party.
Our comments:
Transfer of Losses
Losses incurred in one group company in one financial year will be allowed to transfer to another group company only for the same financial year. Such loss may not be carried forward and set off in the subsequent financial years with another group entity.
Restructuring and Reorganisation
It has been mentioned that the proposed Corporate Tax regime shall allow:-
- exemption or deferral of Corporate Tax in respect of transfer of assets and liabilities between members of a group
- certain corporate reorganization transactions within the group like mergers can be undertaken on tax neutral basis. Whether any further requirements would be there for such restructuring and reorganization, is to be looked out for.
