UAE Corporate Tax Group: Pros, Cons, and Considerations
- February 20, 2024
In the UAE Corporate Tax Law, a tax group refers to a special arrangement where two or more resident companies can come together to operate as a single taxable entity, subject to the conditions of Article 40 of the Corporate Tax Law.
This means If the companies meet the requirements to form a Tax Group, and their application to form a Tax Group is approved by the Federal Tax Authority, they can file a single UAE CT return covering all the members of the Tax Group.
Who Can Form a UAE Corporate Tax Group?
A resident parent company, along with its one or more subsidiaries, resident in the UAE (taxable person), can form a tax group, functioning as a single taxable entity for corporate tax purposes.
What Conditions need to be fulfilled to form a UAE corporate tax group?
The following conditions need to be fulfilled to form a Tax Group under the UAE Corporate Tax Law:
Juridical persons
Each person forming part of the ‘Tax Group’ should be a juridical person. The natural persons (Individuals) cannot constitute a ‘Tax Group’.
Tax Residents
All members of the group must be resident companies in the UAE. Non-resident persons or foreign companies cannot be added to the tax group.
Parent Company | Subsidiary | Allowed? |
|---|---|---|
Resident | Resident | Yes |
Resident | Non- Resident
| No
|
Non- Resident | Non- Resident | No
|
Non- Resident | Resident | No |
A foreign juridical person effectively managed and controlled in the UAE would be treated as a resident person for the purpose of tax grouping subject to maintenance of the following documentation that such an entity is not a resident in any other country:
(a) A confirmation from the relevant tax authority of the other country; or
A confirmation from the relevant competent authorities for the purpose of the application of tax treaties in force supporting non-residency in another country.
1. The parent company should own at least 95% of the ownership interest
A Parent Company can form a tax group with its resident subsidiary if it meets the Ownership Requirement as stated in Article 40(1) of the Corporate Tax Law, accordingly –
the parent company must hold, directly or indirectly, at least 95% of the following in each subsidiary:
- Share capital
- Voting rights
- Entitlement to profits and net assets
2. None of the company is an Exempt Person:
Neither the parent nor any subsidiary can be an exempt person or a Qualifying Free Zone Person (QFZP).
- Exempt persons include public charities, government entities, and certain specialized activities.
- QFZPs are companies operating in designated free zones with their own tax regimes
3. Shared Financial Year and Standards:
To ‘Tax group’, the CT Law mandates that the financial year of each taxable person should end on the same date. The Parent Company and subsidiaries cannot follow two different financial years. Also, each tax group should have prepared their financial statements using the same accounting standards.
Pros of forming a Corporate Tax Group
Single filing required
- The tax group is required to file only one consolidated tax return under UAE Corporate Tax Law.
- This will significantly simplify the tax compliance compared to filing of individual returns for each member separately.
No applicability of Arm’s length principles and Transfer Pricing Documentation
Transactions between group members are exempt from arm’s length requirements and transfer pricing documentation. This significantly reduces the burden and complexity of proving fair market value for intra-group transactions
Losses of one company set off in the same year with another company leading to cash benefits
Losses incurred by one group member can be used to offset the profits of other members in the same tax year. This allows profitable companies to utilize the losses of loss-making companies within the group, potentially reducing the overall tax liability and generating immediate cash flow benefits
Lower compliance burden due to single Corporate Tax return
Under the UAE Corporate tax law, tax group to apply for only one corporate tax registration on behalf of all the companies of tax group and such tax group is required to file only one consolidated return instead of filing separate returns for every member company of the Tax Group. This will simplify the overall administration part for the tax group, and it also reduces the compliance cost as well.
Cons of Forming a Corporate Tax Group
Single exemption limit irrespective of tax group members
- Under the UAE Corporate Tax Laws, once the tax group is formed, the threshold of AED 375,000 applies collectively to the entire tax group rather than to each member individually.
- This can be disadvantageous as even companies with smaller amounts of profitability may lose their individual exemption limits by joining a group with larger taxable profits, as only one threshold limit is applicable to the entire tax group.
Mandatory to prepare consolidated financial statements
- The Formation of Tax groups mandatorily requires the preparation of consolidated financial statements in accordance with applicable accounting standards.
- This will make the overall accounting process complex and lead to higher compliance costs compared to the preparation of individual financial statements.
Triggers joint as well as several liabilities
- All members of a tax group share joint and several liabilities for the entire tax group's corporate tax liabilities. This implies that group members are collectively and individually responsible for meeting corporate tax obligations.
- So, in case any member denies making the payment of their individual share, other members can be held responsible for the payment of the entire corporate tax liability.
Potential complications on engaging in M&A activity
- Joining or leaving in the tax group may lead to complications during mergers and acquisitions (M&A) activities.
- Changes in the overall group composition can have implications on tax positions and restructuring among the group members might be required during the mergers and acquisitions.
Limited to parent-subsidiary relationships, resident, and taxable persons
- The formation of a Corporate Tax Group is limited to parent-subsidiary relationships, and it applies to only entities that are residents and taxable persons.
- Due to such restrictions, certain types of business entities cannot form a Tax group to enjoy the benefits of group taxation.
Conclusion
A Tax Group is a specialized arrangement wherein two or more resident companies consolidate their financials and operate as a single taxable entity. Key prerequisites include the following: each member should be a juridical person, each participant should be a UAE tax resident and not exempt under UAE CT Law, the parent company should own at least 95% of the ownership interest, and shared financial years and accounting standards are mandated among all the subsidiaries of the Tax Group.
As an entity, a Tax Group enjoys multiple benefits, including a simplified registration process, consolidated tax filing, exemption from transfer pricing documentation, and the flexibility to offset losses against profits within the group. However, Tax Groups face various challenges, including a collective exemption limit for the entire group, mandatory preparation of consolidated financial statements, joint and several liabilities for tax obligations, complexities during mergers and acquisitions, and limitations to parent-subsidiary relationships among resident and taxable entities.
Forming a Tax Group under the UAE Corporate Tax Law can offer several advantages, but careful analysis is crucial before deciding. An assessment of the potential benefits against the drawbacks, considering your specific group structure, financial situation, and future plans, is essential.
FAQs
Being owned by a foreign parent company does not preclude UAE subsidiaries from forming a Tax Group, but the UAE subsidiaries must be held by an intermediary UAE parent company that will be the “parent” of the Tax Group for UAE CT purposes.
Yes. The AED 375,000 threshold for Taxable Income subject to the 0% Corporate Tax rate will apply to the Tax Group as a single Taxable Person, irrespective of the number of entities in the Tax Group.
Pre-Grouping Tax Losses are Tax Losses that are accrued by a Taxable Person before joining or forming a Tax Group.
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