The United Arab Emirates (UAE) is known for its enormous tax regime, which has attracted many companies to set up their business operations in the country. With a minimum corporate tax rate, the UAE has set an example to be one of the most ideal countries for businesses across the world. However, similar to other nations, the UAE has established regulations and frameworks pertaining to corporate tax, mandating every business to adhere to these guidelines to avoid penalties. One effective approach to ensuring tax compliance is the formation of a tax group under the UAE’s corporate tax regime.
Two or more Taxable Persons, satisfying specified conditions (outlined below), are eligible to submit an application for the establishment of a “Tax Group” and subsequently be regarded as a unified Taxable Person for the purposes of Corporate Tax.
The objective of introducing tax groups in the UAE is to promote ease of practicing businesses and provide a positive corporate environment. The rules and regulations that we will be discussing are an extract from the detailed book of Decree-Law No 47 of 2022 on Taxation and Business regulations.
Background of Tax Groups in UAE
The UAE is taking a significant step toward modernizing its economy with the implementation of the Federal Corporate Tax, effective from June 1, 2023. This legislation provides an avenue for businesses with multiple companies to establish a tax group, enabling them to function collectively as a single taxpayer. The concept of a tax group has its roots in international tax legislation, which permits similar groupings (also known as tax consolidation and fiscal unity).
Within the purview of Corporate Tax law, the notion of tax groups is contemplated. Business entities, however, are obligated to meticulously evaluate and substantiate the business rationale for establishing a tax group, given that such consolidation entails inherent advantages and disadvantages.
The principal advantage associated with the establishment of a tax group pertains to the streamlined reporting process and the amalgamation of income statements. This amalgamation encompasses both profitable and loss-making operations, thereby diminishing compliance costs.
Eligibility of forming Corporate Tax Group in UAE
Subsidiaries eligibility requirement for Tax Group
Subsidiaries are eligible to be included in the Tax Group according to Corporate Tax law, provided they meet specific conditions:
· If the parent company has indirect ownership of the entity, and other subsidiaries collectively hold a minimum of 95% of the entity’s shares.
· If the business or one of its subsidiaries operates a branch in the UAE of the parent company.
Liability of group and representative members
A Tax Group established under Corporate Tax Law will be treated as a unified taxable entity, with the parent company designated as the representative member. The parent company bears responsibility for adherence to all regulations. Subject to approval from the authority, liability may be curtailed or restricted to specific members.
Subsidiaries are eligible to request an exit from the tax group under the following circumstances:
- If the Parent Company no longer satisfies the criteria for forming a Tax Group as outlined in Article 40(1) (refer to Eligibility Criteria above).
- Upon approval by the Authority of an application submitted by the Parent Company.
If a subsidiary cease to meet the criteria for inclusion in the Tax Group, as defined in Article 40(1), the parent company and the relevant subsidiary can jointly petition the Authority to allow the subsidiary’s exit from the Tax Group, while the Tax Group as a whole continues to exist.
Determining Taxable Income of a Tax Group
For tax assessment purposes concerning the taxable income of a tax group, the parent company is required to aggregate the financial performance, assets, and liabilities of all subsidiaries within the Tax Group and eliminate any transactions between them.
When a subsidiary joins a Tax Group, any unused tax losses are carried forward to the group and may be utilized to reduce the taxable income attributed to that subsidiary. However, if a subsidiary becomes a member of an existing Tax Group, the current tax losses of that group cannot be offset against the new member’s income.
Furthermore, if assets or liabilities are transferred among members of a Tax Group, and one of these members exits the group within two years, any profit or loss that would have resulted from the transfer must be included in the Tax Group’s taxable income.
The Treatment of Tax Groups under the Corporate Tax Regime
In the UAE corporate tax system, a tax group is treated as a unified taxable entity. Consequently, the basic exemption limit is no longer determined by individual companies within the group. Instead, the responsibility for managing and paying corporate tax on behalf of the group falls upon the parent company. For further clarification, our team of corporate tax consultants is available to provide assistance with corporate tax administration and payment.
Understanding transferring losses under Corporate Tax
Certain companies may not satisfy the minimum 95% ownership criterion, and some may choose not to establish a group. In such circumstances, companies are authorised to transfer their tax losses from one group to another, alongside the profits, subject to specific conditions. To understand these conditions better, refer the points below:
- The UAE group companies must have at least 75% of ownership
- The companies must not be classified as exempt entities or be subject to a zero percent corporate tax rate in a free zone.
- The total tax loss compensation amount should not exceed 75% of the company’s taxable income for the period during which the transferred losses occurred.
Exploring Intra-Group Dynamics: Assets and Liabilities Transfers
Intra-group transfer relief is accessible for the transfer of assets and liabilities among UAE resident companies sharing a common market share of at least 75%. However, this relief is contingent upon the stipulation that the transferred assets/liabilities remain within the group for a minimum of three years. Businesses can proactively navigate intra-group relief with the guidance of our corporate consultants.
It’s important to note that restructuring relief may revoke any previously granted relief if, within three years after the restructuring, the business is transferred to a third party. Consequently, any gain or loss that would have arisen from the initial transfer must be accounted for in the tax return for the tax period following the transfer to the third party.
Tax Group Relief
In the anticipated corporate tax framework, companies stand to gain from a corporate tax exemption or deferral when transferring assets or liabilities among group members. This facilitates business restructuring without incurring extra tax liabilities. Furthermore, specific corporate reorganization activities, including mergers, will be executed on a tax-neutral basis to eliminate taxable gains or losses.
Entities seeking to establish a corporate tax group may enlist the services of a corporate tax consultant to evaluate their eligibility criteria, encompassing aspects of ownership, tax residency status, and alignment of tax years. When challenges arise during the evaluation of eligibility or the alignment of tax years, it is recommended to seek professional guidance from distinguished tax advisors in Dubai, represented by entities like N R Doshi & Partners, contact us here at +971 4 352 8001 or firstname.lastname@example.org.