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Group and Restructuring Reliefs in the UAE Corporate Tax

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From June 1, 2023, the UAE is going to introduce corporate tax. Under the current guidelines, businesses that earn taxable profits of over AED 375,000 will pay 9% corporate tax. However, businesses with annual taxable income of less than AED 375,000 will have 0% corporate tax. In order to become an attractive business hub, there are several tax reliefs available to businesses in the UAE. For instance, group relief, restructuring relief, and small business relief (SBR) This blog discusses group and restructuring reliefs in the UAE corporate tax laws.

What is tax relief?

Tax relief is a part of government policies or programs that enable businesses to decrease their tax liabilities. This can be in the form of tax deductions, credits, exemptions, or exclusions. The reliefs aim to benefit the wider economy by supporting sectors that create jobs or invest in innovation. The UAE is offering several tax reliefs to businesses, including group relief and restructuring relief, that will result in a lower tax liability. However, it is important to understand and keep yourself updated with the available CT tax reliefs and their conditions to ensure compliance with UAE laws.

Creative Zone Tax Accounting is the best source to get assistance.

Group and Restructuring Reliefs in the UAE Corporate Tax Laws:

In corporate tax, there are several reliefs available to group companies or companies that undergo reorganization in the UAE. The group and restructuring reliefs discussed below are as per Federal Decree-Law No. 47 of 2022.

Transfers of assets and liabilities within a qualifying group:

According to Article 26 of the corporate tax law, there will be no impact on taxable income when there is a transfer of assets and liabilities between companies (taxable persons) of the same qualifying group.

In order to qualify as a member of a qualifying group, taxable persons must satisfy all of the following conditions:

a) The taxable person should have a permanent establishment in the state.

b) There should be at least 75% ownership (direct or indirect) of one taxable person in another taxable person. If by a third person, there should be at least 75% ownership in each of the taxable persons.

c) None of the taxable persons are exempt persons or qualifying free zone persons.

d) The financial year-end date should be the same for all tax persons.

e) All taxable persons should use uniform accounting standards in their financial statements.

It is important to note that the transfer of assets and liabilities should be done at net book value (NBV) so that no profit or loss arises at the transfer. Furthermore, the consideration paid or received should be equal to the NBV of the asset or liability.

If, within 2 years of the initial transfer, the asset or liability is transferred outside the qualifying group or if a taxable person ceases to be part of the qualifying group, then there will be no relief. Then the transfer will be considered done at market value at the date of transfer for tax purposes.

Tax Group:

According to Article 40 of the CT law, a resident person (parent company) can apply to the authority for the formation of a tax group with other resident persons (subsidiaries).

The following are the conditions of a tax group:

a) The parent company owns at least 95% of the share capital or voting rights of the subsidiary.

b) The parent company is entitled to at least 95% of the profits and net assets of the subsidiary.

c) Parent and subsidiary are not exempt persons.

d) Parent and subsidiary are not Qualifying Free Zone Persons (QFZP).

e) The parent and subsidiary have a similar financial year.

f) Both the parent and subsidiary prepare their financial statements in accordance with the same accounting standards.

The tax group is a single taxable person, the parent company, for tax purposes. The parent company, on behalf of the tax group, should comply with all the obligations mentioned in the CT law.

The parent and subsidiary are jointly and severally liable for the tax liability when part of the tax group. The state or authority can approve the reduction of joint and several liabilities for certain members.

A subsidiary shall leave a tax group if it ceases to fulfill the conditions mentioned above. On the other hand, a tax group ceases to exist if the parent company does not fulfill the above conditions. Note that a parent and a relevant subsidiary can also request the authority to cease the group.

Taxable Income of the Tax Group:

According to Article 42, the parent company should prepare consolidated financial statements, including all the subsidiaries of the tax group. However, one should eliminate transactions between the parent company and subsidiaries of the tax group.

Tax losses that are unutilized by a subsidiary that joins a tax group can be offset against the taxable income of the group; however, they can only be offset against the income of the relevant subsidiary. On the other hand, when a new subsidiary becomes part of an already existing tax group, any unused tax losses of the existing group cannot be used to reduce the taxable income of the tax group if this income is related to the new subsidiary.

If a subsidiary that is a part of the tax group leaves the group, any tax losses of the group will still belong to the group, except for any tax losses that were incurred by the leaving company before it joined the group, also called pre-grouping tax losses. When a tax group is dissolved, any unutilized tax losses remain with the parent; however, if the parent company ceases to be a taxable person, then unutilized tax losses are not attributed to the individual subsidiaries. Note that the pre-grouping tax losses remain with the relevant subsidiaries if there are any.

Business Restructuring Relief:

Business restructuring relief is a relief for companies that undergo corporate restructuring or reorganization. Companies can transfer assets and liabilities between entities without incurring any tax liability. However, they need to meet certain conditions.

According to Article 27 of the corporate tax law, no gain or loss is taken into account for the purpose of determining taxable income when a taxable person transfers its entire business or an independent part of its business to another taxable person (or a prospective taxable person) in exchange for shares or other ownership interests. Furthermore, no gain or loss is taken into account for the purpose of taxable income when one or more taxable persons transfer their entire business or an independent part of their business to another taxable person (or a prospective taxable person) in exchange for shares or other ownership interests, and the transferors cease to exist after the transfer, i.e., the transferor(s) no longer exists as a separate entity after the transfer.

Business restructuring relief requires the following conditions:

a) The applicable laws of the state should govern the transfer.

b) The taxable persons have a permanent establishment in the state.

c) None of the taxable persons are exempt persons or qualifying free zone persons.

d) The financial year-end date should be the same for all tax persons.

e) All taxable persons should use uniform accounting standards in their financial statements.

f) The reason for transfer should depict economic reality.

The assets and liabilities transferred should be treated as being transferred at their NBV so no gain or loss arises. The value of the shares received in a transfer shall not exceed the NBV of the assets and liabilities transferred, minus the value of any other consideration received. Similarly, the value of shares received in exchange for surrendered shares shall not exceed the NBV of surrendered shares minus the value of other consideration received. Any unutilized tax losses of the transferor prior to the transfer may become carried forward tax losses of the transferee; however, this is subject to conditions prescribed by the Minister.

However, the relief does not apply if the shares or ownership interests are sold or transferred to a taxable person who is not a member of the qualifying group within two years of the transfer or if the business is sold or transferred within two years. In this case, the transfer will be subject to tax as if it had taken place at market value at the date of transfer.

Conclusion:

Both group and restructuring reliefs encourage companies to undertake business restructurings or to form groups of companies to improve their business operations. However, it is important to note that there are conditions that companies must meet to be eligible for these reliefs. Companies should seek professional advice and guidance to ensure that they comply with the relevant regulations and guidelines. These reliefs incentivize companies to invest, innovate, and create jobs.

CZTA at your service:

The complexities of relief might not take you away from your business’s ultimate goal. Our team assists in every complex matter in an easy and understandable way. We will let you know all the reliefs, including group and restructuring reliefs, that you can take advantage of.  Contact us any day for a quick chat.