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Commencing from June 1, 2023, the United Arab Emirates (UAE) is preparing to introduce a significant shift in its corporate tax policy. As per the most recent guidelines, companies that generate taxable profits surpassing AED 375,000 will be subject to a 9% corporate tax rate. Conversely, companies with an annual taxable income less than AED 375,000 will enjoy a 0% corporate tax rate. The UAE is striving to establish itself as an attractive business hub by offering a range of tax incentives, including group relief, restructuring relief, and small business relief (SBR). This article will provide an in-depth exploration of the specific provisions of group and restructuring reliefs within the framework of UAE corporate tax laws.
Understanding Tax Relief
Tax relief constitutes a fundamental element of government initiatives or programs aimed at assisting companies in reducing their tax liabilities. These relief measures can take the form of tax deductions, credits, exemptions, or exclusions. The ultimate goal is to strengthen the overall economy by supporting sectors that contribute to job creation and innovation. The UAE is extending multiple tax relief options to companies, including group relief and restructuring relief, with the aim of reducing their tax obligations. Nonetheless, it is essential for businesses to remain well-informed about available corporate tax reliefs and their associated requirements to ensure full compliance with UAE regulations.
For expert guidance on matters related to tax accounting, Abacus Tax & Accounting is your trusted resource.
Exploring Group and Restructuring Reliefs in UAE Corporate Tax Laws
Within the realm of corporate tax, several relief options are accessible to group entities or companies undergoing restructuring in the UAE. The subsequent discussion delves into group and restructuring reliefs as outlined in Federal Decree-Law No. 47 of 2022.
Transfers of Assets and Liabilities within a Qualified Group
According to Article 26 of corporate tax legislation, no impact on taxable income occurs when assets and liabilities are transferred between companies (taxable entities) belonging to the same qualifying group.
To qualify as a member of a qualifying group, taxable entities must meet the following criteria:
a) Each taxable entity should maintain a permanent presence within the state.
b) There should be at least 75% ownership (direct or indirect) of one taxable entity in another. If a third party is involved, each taxable entity should maintain at least 75% ownership.
c) None of the taxable entities should be exempt or categorized as qualifying free zone entities.
d) The financial year-end date should be uniform for all taxable entities.
e) All taxable entities should adhere to uniform accounting standards in their financial reporting.
Crucially, the transfer of assets and liabilities must be carried out at the net book value (NBV) to avoid any profit or loss implications during the transfer. Moreover, the consideration exchanged should equal the NBV of the asset or liability.
If, within two years of the initial transfer, an asset or liability is moved outside the qualifying group, or a taxable entity ceases to be part of the qualifying group, no relief applies. In such cases, the transfer is considered to have occurred at market value on the date of transfer for tax purposes.
Formation of a Tax Group
Per Article 40 of the CT law, a resident entity (the parent company) has the option to apply for the establishment of a tax group in conjunction with other resident entities (subsidiaries).
The conditions for forming a tax group include:
a) The parent company should possess a minimum ownership stake of 95% in terms of share capital or voting rights in the subsidiary.
b) The parent company should be entitled to a minimum of 95% of the subsidiary’s profits and net assets.
c) Neither the parent nor subsidiary entities should qualify as exempt entities.
d) Both parent and subsidiary entities should not be considered Qualifying Free Zone Persons (QFZP).
e) The parent and subsidiary should maintain congruent financial year-end dates.
f) Both parent and subsidiary entities should adhere to the same accounting standards in their financial statements.
For tax purposes, the tax group functions as a single taxable entity, namely the parent company. The parent company is responsible for fulfilling all obligations stipulated in the CT law on behalf of the tax group.
When part of the tax group, the parent and subsidiary entities share joint and several liability for tax liabilities, though the state or authority may grant exemptions from joint and several liability for select members.
A subsidiary will exit a tax group if it no longer meets the aforementioned conditions. Conversely, a tax group ceases to exist if the parent entity fails to meet the prescribed criteria. Notably, a parent and relevant subsidiary can jointly request the authority to dissolve the group.
Taxable Income within the Tax Group
According to Article 42, the parent entity must prepare consolidated financial statements encompassing all subsidiaries of the tax group, while eliminating transactions between the parent entity and subsidiaries within the group.
Unused tax losses of a subsidiary joining a tax group can be offset against the group’s taxable income, but this can only be applied against the income of the respective subsidiary. On the other hand, when a new subsidiary becomes part of an existing tax group, any unused tax losses of the existing group cannot be used to offset the taxable income of the tax group if it is related to the new subsidiary.
If a subsidiary within the tax group departs, the group retains ownership of any tax losses, except for pre-grouping tax losses incurred by the departing company prior to joining the group. In case of a tax group dissolution, unused tax losses remain with the parent entity, although if the parent entity ceases to be a taxable entity, unutilized tax losses are not attributed to individual subsidiaries. Pre-grouping tax losses, if any, remain with the relevant subsidiaries.
Business Restructuring Relief
Business restructuring relief provides a framework for companies undergoing corporate restructuring or reorganization. It allows these companies to transfer assets and liabilities between entities without incurring tax liability, subject to certain conditions.
As per Article 27 of the corporate tax law, no gain or loss is considered for determining taxable income when a taxable entity transfers its entire business or a distinct portion of it to another taxable entity (or a prospective taxable entity) in exchange for shares or other ownership interests. Similarly, no gain or loss is factored into the taxable income when one or more taxable entities transfer their entire business or a distinct portion of it to another taxable entity (or a prospective taxable entity) in exchange for shares or other ownership interests, and the transferors cease to exist as separate entities following the transfer.
The eligibility criteria for business restructuring relief encompass the following:
a) The transfer must be governed by the laws of the state.
b) All taxable entities involved should maintain a permanent presence within the state.
c) None of the taxable entities should be classified as exempt entities or qualifying free zone entities.
d) The financial year-end date should be uniform for all taxable entities.
e) Uniform accounting standards should be followed by all taxable entities in their financial statements.
f) The rationale behind the transfer should align with economic reality.
Assets and liabilities transferred must be treated as if they were exchanged at their net book value to avoid any gain or loss. The value of shares received in a transfer should not exceed the net book value of the assets and liabilities transferred, minus the value of any other considerations received. Similarly, the value of shares received in exchange for surrendered shares should not exceed (The net book value of the surrendered shares – The value of other considerations received). Any unused tax losses incurred by the transferor before the transfer may be carried forward as tax losses for the transferee, subject to conditions stipulated by the Minister.
However, the relief does not apply if the shares or ownership interests are sold or transferred to a taxable entity. And not affiliated with the qualifying group within two years of the transfer or if the business is sold or transferred within the same timeframe. In such instances, the transfer is subject to taxation as though it had transpired at market value on the date of transfer.
In Conclusion
Both group and restructuring reliefs serve as incentives for companies to engage in business restructurings. And establish company groups to enhance their operational efficiency. It’s imperative for companies to be cognizant of the conditions required for eligibility in these relief programs. Seeking professional advice and guidance is advisable to ensure full compliance with relevant regulations and guidelines. These reliefs, in turn, promote investment, innovation, and job creation.
For comprehensive assistance, Abacus TA is at your service.
Navigating the intricacies of tax relief should not deter you from your business’s core objectives. Our team specializes in simplifying complex matters, offering clear and understandable guidance. We can provide you with insights into all available reliefs, including group and restructuring reliefs. Don’t hesitate to reach out to us for a quick consultation anytime.