Federal Decree Law No. 47 of 2022 related to taxation of Corporations and Businesses (CT law) defines a Tax Group as two or more Taxable Persons treated as a single Taxable Person according to the conditions of Article 40 of the CT law.
There are multiple advantages of forming a Tax Group, such as the ability for the Parent Company to file a single tax return on behalf of all members of the Tax Group, allows for the income and losses of the members of the Tax Group to be offset against each other, transfer of assets and liabilities and other transactions and arrangements between members of the Tax Group are to be disregarded when determining the Taxable Income of the Tax Group.
Prerequisites for forming a corporate tax group:
- Only resident persons can form part of the tax group.
- Only juridical persons can become a member of the group.
- The Parent Company must own at least 95% of the share capital of the subsidiary, either directly or indirectly, through one or more subsidiaries.
- The Parent Company must hold at least 95% of the voting rights in the subsidiary, either directly or indirectly, through one or more subsidiaries.
- The Parent Company must be entitled to at least 95% of the subsidiary’s profits and net assets, either directly or indirectly, through one or more subsidiaries.
- Neither the Parent Company nor the subsidiary is an Exempt Person
- Neither the Parent Company nor the subsidiary is a Qualifying Free Zone Person.
- The Parent Company and the subsidiary must have the same financial year.
- Both the Parent Company and the subsidiary must prepare their financial statements using the same accounting standards.
Forming a Corporate Tax In UAE can offer several advantages. While there are pros and cons to forming a tax group, the decision needs to be taken based on facts and careful evaluation of the members of the group.
Pros of forming a corporate tax group:
- Easy compliance: Under the corporate tax law, multiple entities are allowed to be grouped under a single CT registration and file single tax return on behalf of the group. This makes compliance simpler and more efficient.
- Arm’s length / Transfer Pricing : Transactions between members of the tax group are not subject to arm’s length principle and transfer pricing requirements. This significantly reduces the burden and complexity of proving fair market value for intra-group transactions. This exemption reduces the compliance burden on the tax group members as they don’t have to maintain detailed transfer pricing records.
- Cash flow benefits: By forming a tax group, losses of one entity can be offset with another entity in the group during the same tax period, leading to cash benefits. Profitable companies can offset the losses of loss-making entities within the group thereby reducing tax liability and generating immediate cash flow benefits during the same tax period.
- Lower compliance cost: The corporate tax law requires each taxable person to register for CT and file tax returns annually. Separate registration and filing would greatly increase the compliance cost. A tax group allows multiple entities satisfying the prescribed conditions to be registered as single group and file a single return. This would greatly lower the compliance cost.
- Simplified Administration: A tax group is required to file only one consolidated tax return under UAE corporate tax law, hence bringing all the eligible entities under a single tax group would significantly simplify the overall compliance/administration efforts of the group compared to filing of individual returns.
Cons of forming a corporate tax group:
Corporate tax group carries certain disadvantages too. The following are some of the cons of forming a UAE corporate tax group:
- Eligibility: Meeting the corporate tax grouping conditions is very crucial. Tax group can be formed only by resident juridical persons in parent-subsidiary relationships subject to meeting all the conditions. Due to such restrictions, certain types of business entities cannot form part of a tax group.
- Exemption limit: The corporate tax law allows a taxable person a basic exemption limit of AED 375,000/-up to which there will be no tax. By forming a tax group, the threshold limit of AED 375,000/- becomes applicable to the whole group collectively rather than to each entity individually. By forming a group, companies lose their individual exemption limit.
- Consolidated Financial Statements: Tax groups require the preparation of consolidated financial statements in accordance with applicable accounting standards. This may make the overall accounting process complex and lead to higher compliance costs when compared to the preparation of individual financial statements.
- Jointly and severally liable: The Parent Company and each Subsidiary shall be jointly and severally liable for Corporate Tax Payable by the Tax Group for those Tax Periods when they are members of the Tax Group. Group members are collectively and individually responsible for meeting corporate tax obligations.
- Mergers & Acquisitions: Entities joining the tax group or leaving the group may lead to complications during mergers and acquisitions.
Businesses need to evaluate based on the pros and cons to arrive at a calculated decision on whether to form a corporate tax group or not.
Conclusion:
A tax group allows two or more resident companies consolidate their financials and operate as a single taxable entity. Forming a Tax Group under the UAE Corporate Tax Law can offer several advantages, but careful analysis is crucial before taking a call. An assessment of the potential benefits against the drawbacks, considering one’s specific group structure, financial situation, and future plans, is essential. These evaluations can be complex for business owners as they lack the necessary knowledge of UAE Corporate Tax Law and allied regulations.
Consulting with tax professionals and advisors familiar with UAE corporate tax regulations is highly recommended to navigate through the complexities of tax grouping.
Disclaimer:
This blog is not a legally binding document but is intended to provide assistance in understanding the tax implications of forming a tax group under the UAE CT regime. While we have made every effort to ensure the accuracy and reliability of the information presented, tax laws and regulations are subject to change and interpretation. This blog is written in general terms and does not constitute any form of advice or recommendation by M&M and therefore cannot be relied upon to cover specific situations. We recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. We do not assume any liability for actions taken /not taken based on the information provided in this update. Our update is not binding on any regulators and there can be no assurance that the regulators will not take a position contrary to our comments. We do not take any responsibility with regard to any different view/approach taken by the UAE Federal Tax Authority.