Welcome to the 14th instalment of our series offering comprehensive insights into UAE corporate tax. The UAE Corporate Tax regime allows for legal mergers, business mergers, spin-offs, and other transfers. Restructuring transactions that meet Article 27 of the Corporate Tax Law can be carried out without triggering a gain or loss for Corporate Tax purposes.
If you’re just joining us, we recommend starting from the beginning of our series to get a full grasp of the insights we’ve shared so far. You can find the first blog post here.
Business Restructuring Relief: An Overview
Business Restructuring Relief permits mergers and certain corporate restructuring and reorganization transactions. These transactions can take place without triggering a gain or loss for Corporate Tax purposes. This relief is optional, and the Transferor must elect this in their Corporate Tax Return for the relevant Tax Period.
Conditions for Business Restructuring Relief
Receiving Considerations
Business Restructuring Relief can apply even if cash or other considerations are received. However, the Market Value of cash or other forms of consideration should not exceed the lower of:
- The net book value of the transferred assets and liabilities.
- 10% of the nominal value of the shares received.
If the Market Value exceeds these limits, Business Restructuring Relief will not be available.
Natural Persons and Business Incorporation
Natural persons converting their sole proprietorship into a company can benefit from Business Restructuring Relief. This is applicable when transferring their Business to a company, provided all relevant conditions are met.
Eligibility Criteria
To be eligible, the transferor and transferee must be resident juridical persons or UAE-based permanent establishments of a foreign company. They should not be an exempt person or a qualifying free zone person and must follow the same financial year and accounting standards. The business transfer must be for valid commercial or other non-fiscal reasons reflecting economic reality.
Scope of Business Restructuring Relief
Business Restructuring Relief covers the transfer of business for consideration primarily in the form of shares or other ownership interests. Cash consideration should not exceed the lower of the net book value of the assets and liabilities transferred or 10% of the nominal value of shares/ownership interest issued.
This relief covers conversions of sole proprietorships into LLCs, business transfers, mergers, demergers, and hive-downs in exchange for shares. It also allows transfers between non-resident persons with a permanent establishment in the UAE. However, certain transfers, like those without share transfers or within group companies, may not be eligible.
Share Issuance and Ownership
The transferor entity usually receives shares/ownership interest from the transferee entity. However, shares/ownership interest could be issued by a person with a direct or indirect ownership interest of at least 50% in the transferee entity. This provision allows overseas-based parent companies to exchange shares relating to the transfer of businesses among their UAE subsidiaries. UAE subsidiaries must monitor the status of shares/ownership interest to avoid clawback provisions.
Clawback of Business Restructuring Relief
A sale of the transferred Business or disposal of the received shares within two years triggers a clawback of the relief claimed. In this scenario, the Transferor must calculate the taxable gain or loss based on the Market Value at the original transfer date. The gain or loss should be reflected in the Tax Return for the period in which the clawback is triggered.
If the Transferor is a natural person or no longer exists or is subject to UAE Corporate Tax when the clawback event happens, the clawback must be reported by the Person that acquired the Business.
Clawback can be triggered if the shares received by the Transferor are sold/transferred/disposed to a non-qualifying Group member. The sale of even a single share can trigger a clawback. It can also be triggered by subsequent transfers/disposals of the originally transferred business.
Clawback may occur in other specified scenarios, requiring redetermination of tax liability based on the Market Value of the assets and liabilities at the original transfer date. This can involve penalties for late payment of additional tax liability. If the Transferor ceases to exist (e.g., via a merger), the Transferee would be liable for additional tax and penalties.
Unutilized Tax Losses
Unutilized Tax Losses of the Transferor can become the carried forward Tax Losses of the Transferee. This is possible if the Transferee continues to conduct the same or a similar Business or Business Activity as the Transferor prior to the transfer.
Asset and Liability Treatment
Under Business Restructuring Relief, the Person that acquires the Business must treat the received assets and liabilities at the net book value recorded by the Transferor.
Expanded Scope of Business Restructuring Relief
Business Restructuring Relief comes with an expanded scope, allowing exemptions from corporate tax if terms are met. Individual business owners are converting sole establishments into companies. Multinational groups are converting UAE branches into limited liability companies. The UAE corporate tax aims for tax neutrality in transfers of existing businesses or parts of them.
The Federal Tax Authority recently issued guidance on Business Restructuring Relief. It covers conditions to claim this relief, procedural requirements, and clawback consequences of non-compliance.
Multiple Parties
The guide clarifies that shares/ownership interest could be issued by someone with at least a 50% stake in the transferee entity. The payee could also be someone with a similar stake in the transferor entity. This helps overseas-based parent companies exchange shares among UAE subsidiaries. UAE subsidiaries must monitor the status of shares/ownership interest to avoid clawback provisions.
Record Keeping and Agreement
To benefit from Business Restructuring Relief, the Transferor must elect to do so. Both the Transferor and the Transferee must maintain a record of the agreement to transfer the Business at the value prescribed under the relief and relevant decisions. Thus, both parties must be aware of and consent to the application of Business Restructuring Relief.
Business Restructuring Relief under the UAE Corporate Tax regime provides flexibility for various restructuring transactions. By meeting specific conditions, businesses can reorganize without triggering significant tax liabilities. Understanding and applying these provisions can facilitate smoother transitions and strategic growth within the regulatory framework.
Business Restructuring Relief is a strategic tool within the UAE Corporate Tax framework. Proper utilization can significantly benefit businesses undergoing restructuring or reorganization. Always ensure compliance with Article 27 of the Corporate Tax Law and relevant conditions to maximize these benefits. Businesses should consider their future plans and maintain proper compliance and documentation to avoid potential clawbacks and penalties.
To stay updated with Corporate Tax Law and related implementing decisions you can visit this link.
