Welcome to the 13th instalment of our series offering comprehensive insights into UAE corporate tax. This blog post explores Tax Groups, a concept introduced by the UAE Corporate Tax regime. It explains the eligibility criteria, formation process, implications, and other essential details for companies considering this option.
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.
What are Tax Groups?
In the UAE, resident companies can join forces and be treated as a single taxable entity for Corporate Tax purposes. This structure is called a Tax Group. There are specific requirements that companies must meet to qualify for this setup.
Eligibility Criteria
- Ultimate Ownership: A UAE parent company must hold at least 95% of the share capital and voting rights. It also needs entitlement to profits and net assets of each subsidiary company.
- UAE Residency: All companies involved must be UAE resident persons under the UAE Corporate Tax Law. They should comply with any relevant double tax agreements.
- Tax Status: Neither the parent company nor any subsidiaries can be an Exempt Person or a Qualifying Free Zone Person.
- Financial Alignment: All companies must share the same financial year and prepare their financial statements using identical accounting standards.
Foreign Parentage and Tax Groups
A foreign parent company doesn’t necessarily prevent its UAE subsidiaries from forming a Tax Group. To comply with UAE Corporate Tax requirements, one must establish an intermediary parent company based in the UAE to serve as the official “parent.”
Foreign Subsidiaries and Tax Residency
Only UAE resident foreign subsidiaries can participate in a Tax Group. TThe UAE Corporate Tax Law and any relevant double tax treaties determine this residency.The foreign entity must maintain documentation proving its UAE residency for tax purposes, such as a tax residency certificate issued by the relevant foreign tax authority.
Tax Threshold for Tax Groups
The AED 375,000 threshold for Taxable Income subject to the 0% Corporate Tax rate applies to the entire Tax Group as a single Taxable Person, regardless of the number of companies within it.
Administration and Liability
Once formed, the parent company takes responsibility for managing the Tax Group, including filing tax returns and paying Corporate Tax on behalf of the entire group. During their membership, the parent company and each subsidiary are jointly and severally liable for the Tax Group’s UAE Corporate Tax obligations. Specific members can limit this liability upon applying for and receiving approval from the Federal Tax Authority (FTA).
Taxable Income Calculation
To determine the Taxable Income of the Tax Group, the parent company typically consolidates the financial accounts of each subsidiary for the relevant tax period. This consolidation involves aggregating the financial statements and eliminating transactions between parent and subsidiaries, as well as transactions between subsidiaries themselves. However, exceptions may exist for specific situations, such as pre-grouping tax losses of a member company.
Maintaining Ownership Requirements
The Tax Group must maintain ownership of 95% or more throughout each Tax Period. If a member falls below this threshold at any point, they leave the Tax Group from the beginning of that Tax Period.
Tax Residency Changes
A Tax Group can only consist of companies with UAE residency for Corporate Tax purposes and not considered tax residents elsewhere under applicable double tax treaties. If a member becomes tax resident in another jurisdiction, they are treated as leaving the Tax Group from the beginning of the relevant Tax Period. Companies with potential residency in multiple jurisdictions must maintain documentation supporting their UAE residency for UAE Corporate Tax purposes.
Application Timeline
Applications to form or join a Tax Group must be submitted before the end of the Tax Period specified in the application.
Joining a Tax Group Mid-Year
Generally, UAE resident companies meeting all conditions can join a Tax Group from the beginning of the Tax Period specified in the application. Exceptions exist for newly incorporated entities in the UAE, which can join from their incorporation date. Similarly, a newly established parent company replacing an existing one can also join (and become the parent) from its incorporation date.
Leaving a Tax Group or Cessation
If a member leaves a Tax Group, or the Tax Group ceases to exist due to unmet conditions, the group must notify the FTA within 20 business days. Departing subsidiaries need to prepare standalone financial statements using the same accounting basis as the Tax Group, with opening asset and liability values reflecting those recorded in the Tax Group. Similar procedures apply when a Tax Group ceases to exist.
Business Restructuring and Tax Groups
Members of a Tax Group can undertake business mergers and specific restructuring/reorganization transactions without incurring taxable gains or losses. If a two-member Tax Group has one member transfer its entire business to the other, the Tax Group dissolves on the transfer date. However, for Tax Groups with more than two members, the transferring member remains part of the group until the transfer is complete, and the Tax Group continues to exist afterward. No separate election for Business Restructuring Relief is required, as the restructuring transaction is eliminated when determining the Tax Group’s Taxable Income.
Pre-Grouping Tax Losses
Pre-Grouping Tax Losses are tax losses a company accumulates before joining or forming a Tax Group. These losses receive special treatment because they can only be used to offset the Taxable Income of the Tax Group attributable to that specific member.
There’s a limit to the amount of pre-Grouping Tax Losses that can be utilized. The lower of two figures applies:
- The amount of Taxable Income of the Tax Group attributable to the member with pre-Grouping Tax Losses.
- 75% of the Tax Group’s total Taxable Income.
For example, consider a Tax Group with members A and B. The group has a Taxable Income of AED 100,000, and member A has pre-Grouping Tax Losses of AED 40,000. In this case, the Tax Group’s Taxable Income can be offset by the lower amount, which is AED 40,000 (pre-Grouping Tax Losses of member A). Therefore, the Tax Group’s Taxable Income after the loss offset becomes AED 60,000 (AED 100,000 – AED 40,000).
Utilizing Pre-Grouping Tax Losses with Other Carried Forward Losses
Yes, pre-Grouping Tax Losses can be used first. They must be fully utilized to offset Taxable Income before any other carried forward tax losses can be applied in the same Tax Period.
Disclosure Requirements for Tax Groups
Generally, members of a Tax Group don’t need to disclose details of transactions and arrangements between themselves or with their Related Parties and Connected Persons. However, disclosure becomes necessary in two specific situations:
- Utilizing Pre-Grouping Tax Losses: When a member claims pre-Grouping Tax Losses to offset the Tax Group’s Taxable Income.
- Calculating Taxable Income of Individual Members: If the Tax Group needs to calculate the Taxable Income of a specific member (e.g., claiming Foreign Tax Credits).
Joining a Tax Group Mid-Year (Further Details)
The rule prohibiting companies from joining a Tax Group mid-year ensures they don’t need to file part-year tax returns. They would have already filed a return for a complete 12-month Tax Period before joining. The exceptions to this rule are:
- Newly Incorporated Companies: These entities can join an existing Tax Group from their incorporation date.
- Replacing a Parent Company: A newly established parent company replacing an existing one can join (and become the parent) from its incorporation date.
In both these exceptions, there’s no need for the joining entity to file a part-year return because:
- For a newly incorporated company, they haven’t operated outside the Tax Group.
- For a new parent company, they join at the beginning of a Tax Period and have already submitted a full-year return as the previous parent company.
What Happens When a Tax Group Ceases to Exist?
If a Tax Group dissolves, each former member company becomes a separate Taxable Person again for Corporate Tax purposes. Here’s what happens to their tax losses:
- Unutilized Pre-Grouping Tax Losses: These remain with the former member company that generated them.
- Tax Group Losses: If the Tax Group itself had generated tax losses, and the former parent company continues to exist, these losses remain with the former parent company.
- Losses and Ceased Parent Company: If the former parent company ceases to exist after the Tax Group dissolves, the Tax Group’s losses are lost entirely.
Tax Groups with Foreign Subsidiaries (Additional Considerations)
Let’s revisit the scenario of a Tax Group with a foreign subsidiary. To be eligible, the foreign subsidiary cannot be considered a tax resident in its country of incorporation under the applicable double tax treaty with the UAE. Additionally, the foreign company must provide relevant documentation proving its UAE tax residency. This documentation could be:
- A tax residency certificate issued by the relevant foreign tax authority.
- A confirmation issued by the relevant competent authorities for applying a double tax treaty in force in the UAE.
Eligibility and Formation Process
To establish a tax group, specific eligibility criteria must be met. The parent company or its major shareholder must hold at least 95% ownership in terms of share capital, voting rights, and entitlement to profits and net assets of each subsidiary. Continuous compliance with these conditions throughout the financial year is imperative. Additionally, businesses operating within qualifying free zones are ineligible for tax group formation.
Benefits and Considerations
Businesses with complex structures or multiple entities stand to benefit significantly from tax grouping. It eases the burden of tax return filing and facilitates compliance with transfer pricing requirements. However, the decision to form a tax group should be carefully considered, weighing the pros and cons based on each company’s unique circumstances.
Tax Treatment and Offsetting of Losses
One of the key advantages of tax grouping is the ability to offset losses against profits within the group. The guidelines specify the conditions and limitations for offsetting pre-grouping tax losses, ensuring fair treatment and compliance with tax regulations.
Operational Guidelines and Compliance Requirements
Maintaining tax group status requires adherence to operational guidelines and compliance requirements. This includes maintaining clear financial records, uniform accounting standards, and transfer pricing documentation. Continuous compliance is essential to avoid penalties and maintain the benefits of tax grouping.
Distinction from VAT Tax Groups
It’s important to distinguish between corporate tax grouping and VAT grouping, as each has its own set of criteria and implications. While VAT grouping requires a lower common shareholding threshold, corporate tax grouping necessitates stricter ownership requirements.
Tax Groups offer a valuable mechanism for UAE resident companies under common ownership to streamline their UAE Corporate Tax obligations. Understanding the eligibility criteria, formation process, implications, and specific considerations like pre-Grouping Tax Losses is crucial for companies evaluating this option. If you’re a UAE resident company considering forming or joining a Tax Group, consulting with a qualified tax advisor is recommended to ensure you meet all the requirements and maximize the benefits this structure can offer.
To stay updated with Corporate Tax Law and related implementing decisions you can visit this link.
