Proposed Group Reliefs under the UAE Corporate Tax regime

Suhail Kolakkadan, Tax Analyst

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    The UAE has made considerable tax reforms recently to streamline its tax structure, put it into compliance with global standards, and broaden revenue. The proposed corporate tax (CT) in UAE will be applicable on the taxable profits earned businesses, including persons involved in business, commercial, or any other economic activity, with specific exclusions and restrictions.

    The UAE corporate tax regime allows UAE groups to seek group relief in respect of losses, intragroup transactions, and restructurings. In order to learn more about the planned group reliefs under UAE corporation tax, let’s keep on reading.

    Tax Groups

    Businesses are able to create tax groups under the UAE corporate tax framework, which will go into force in June 2023. The operations of large corporates are frequently carried out by a cluster of businesses, each of which will have a parent company and a number of subsidiaries. Companies create tax groups to restrict or fence responsibilities, which optimizes the expense of your total tax compliance.

    Criteria for tax group formation

    Businesses that are liable to UAE corporate tax must determine if they are properly qualified to form a tax group. You must meet specific conditions set out by the UAE Ministry of Finance (MoF) in order to establish a corporate tax group.

    • The tax group’s members should all follow the same fiscal year.
    • The parent organization must own at least 95% of the voting rights and share capital of its subsidiaries.
    • Especially when all of the group members are UAE residents, companies can create a tax group.
    • A free zone business that enjoys the 0% corporate tax rate or an exempt person can be a part of tax group.
    • If a subsidiary is indirectly held by the parent firm and other subsidiaries possess at least 95% of its shares, the subsidiary could join a tax group or if it is a UAE branch of the parent firm or one of its subsidiaries

    Parent entity’s obligations:

    1. Each tax group subsidiary’s financial accounts must be combined by the parent firm.
    2. Exclude all transactions between each tax group subsidiary and the parent.
    3. Tax collection and administration

    Accountability of Tax Group Members

    Each subsidiary and the parent business will have joint as well as several liabilities for the CT of the group. However, with FTA permission, the responsibility can be restricted to one or more members.

    Transfer of losses

    If certain conditions are met, the UAE CT framework may allow the transfer of tax losses from one group company to another group company with revenues for combinations of businesses that do not meet the required 95 percent common ownership threshold or do not wish to form a tax group.

    Requirements

    • At least 75% of UAE group enterprises are held collectively.
    • No loss transfers from businesses that are immune or gain access to the 0% Free Zone CT system are permitted.

    The overall tax loss offset may not exceed 75% of the applicable period’s taxable income of the entity obtaining the transferred losses. Balance tax losses can be carried forward indefinitely, provided certain conditions are met.

    Intra-group transfer of assets and liabilities

    Transfers of assets and liabilities between UAE-based group entities with a common ownership stake of at least 75% are exempt from the CT requirement as long as they are retained for a minimum of three years from the date of transfer.

    When intra-group relief is requested, the applicable assets and liabilities are recognized as having been transferred at their tax net book value, preventing the transferor and the transferee firm from having to take responsibility for the gain or a loss when determining their respective taxable income.

    Any gain or loss that would have occurred upon the first transfer must be computed and included in the transferor’s tax return in the tax period in which the circumstances officially ended, if the applicable criteria for intra-group relief are no longer met.

    Restructuring Relief

    1. The UAE CT scheme would exclude or provide a deferral of taxes if a full firm, or separate sections of a business, are conveyed in exchange for shares or other ownership interests in order to assist mergers, spin-offs, and other corporate activities.
    2. The purchasing firm will be able to use the transferor’s current tax basis in the transferred assets and liabilities, and the natural person will receive immunity from CT in relation of any benefit from the transfer.
    3. In order to avoid reporting for a gain or loss for determining taxable income, assets and liabilities being transferred as part of a qualified reorganization will be considered to be transferred at their tax net book value.
    4. If the firm is subsequently transferred to a third party inside three years of the restructuring, any restructuring relief will be “clawed back.”

    In Summary

    The month of June 2023 would arrive in an instant! And right now is the ideal time to prepare for corporate taxes. For any organization to be able to attain UAE CT compliance there is a lot of work to be done. It is high time to pass the baton over to expert UAE tax consultants in corporate tax, like HLB HAMT, and relax.

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