Tax Group Under UAE Corporate tax

The introduction of Corporate Tax (CT) in the United Arab Emirates (UAE) on June 1, 2023, marked a significant shift in the country's tax landscape. While the CT regime offers most businesses a competitive 9% tax rate, certain provisions allow for optimised tax structures. One such provision is the concept of Tax Groups, which enables eligible companies to be treated as a single taxpayer for CT purposes. This article delves into the intricacies of Tax Groups under UAE Corporate Tax registration, providing a comprehensive guide for businesses seeking to leverage this framework.

Filings.ae helps you to form a tax group with UAE Corporate tax registration!!

What is the Corporate tax group in UAE?

The UAE's Corporate Tax (CT) framework introduced in 2023 allows certain businesses to form a special structure called a Tax Group. This essentially treats a group of companies as a single taxpayer for CT purposes. To qualify, companies must be UAE-based legal entities with a parent company holding significant control (over 95%) of subsidiaries. Tax Groups offer advantages like consolidated tax filing, offsetting losses within the group, and potentially improved cash flow. However, there are also considerations like joint tax liability and limitations on membership. Consulting with tax professionals is crucial to determine if a Tax Group is the right fit for your UAE business structure.

Who is eligible to form a Corporate tax group in UAE?

Companies in the UAE can form a Corporate Tax Group if they meet the following criteria:

• Parent company: A resident UAE legal entity (not an exempt person or a free zone entity) applies to the Federal Tax Authority.
• Subsidiaries: One or more resident UAE legal entities (not exempt persons or free zone entities) with at least 95% ownership, voting rights, and profit/asset entitlement by the parent company (either directly or indirectly).
• Financial alignment: Both parent and subsidiaries share the same financial year and prepare financial statements using identical accounting standards.

Also read: Who should get corporate tax registration in UAE?

When can a Corporate tax group be formed and ceased?

Below, we have given the information on when corporate tax group can be formed and ceased under Article 40 of the UAE Corporate tax law,

Formation:

• A Corporate Tax Group can be formed on the starting date of the tax period specified in the application submitted to the Federal Tax Authority (FTA).
• Alternatively, the FTA may determine a different starting date for the tax group.

Adding a Subsidiary:

• New subsidiaries can join an existing Tax Group at the beginning of the tax period specified in the application submitted to the FTA.
• Again, the FTA may determine a different starting date for the new subsidiary's inclusion.

Dissolution:

• A subsidiary can leave a Tax Group by applying with the FTA to cease its membership. The exit date will be the beginning of the tax period specified in the application or another date determined by the FTA.
• A subsidiary will automatically cease to be part of the Tax Group if it no longer meets the eligibility criteria outlined in Article 40 of the UAE Corporate Tax Law.

Tax Group Dissolution:

• The entire Tax Group will cease to exist from the date it fails to meet the conditions set out in Article 40 of the UAE Corporate Tax Law. This could be due to a subsidiary no longer qualifying or other regulation breaches.

How to Calculate a taxable income of a Corporate tax group in UAE?

Calculating taxable income for a Corporate Tax Group in the UAE differs from individual companies. Here's a breakdown:

Consolidation:

• The parent company consolidates each subsidiary's financial results (income, expenses, assets, and liabilities) for the tax period.
• Importantly, all transactions between the parent company and subsidiaries within the group are eliminated. This prevents double taxation on internal transactions.

Tax Law Application:

• The entire Tax Group is subject to the UAE Corporate Tax Law.
• The taxable income threshold (currently AED 375,000) applies to the combined income of the Tax Group, not individual members.

Unutilized Tax Losses:

• When a subsidiary joins the group with previous tax losses (pre-grouping losses), they become part of the Tax Group's carried-forward losses.
• However, these losses can only be used to offset the taxable income generated by the specific subsidiary that brought them, not the entire group's income.

Limitations on Using Tax Losses:

• When a new subsidiary joins, the existing Tax Group's unused losses cannot be applied to income generated by the new member.
• Additionally, Articles 37 (Tax Loss Relief Provisions) and 39 (Limitation on Carry Forward of Tax Losses) of the UAE Corporate Tax Law must be considered for utilizing tax losses.

Exiting Subsidiaries & Tax Losses:

• If a subsidiary leaves the Tax Group, the group retains its accumulated losses except for any pre-grouping losses the departing subsidiary hadn't used.

Termination & Distribution of Tax Losses:

• Upon termination of the Tax Group:
• If the parent company remains a taxable entity, it retains all tax losses.
• If the parent company ceases to be taxable, individual subsidiaries cannot use the group's losses, except for any unused pre-grouping losses of those subsidiaries.
• Exception: If a new parent company takes over and the Tax Group continues, the group's tax losses remain usable.

Learn more: How to calculate corporate tax in UAE?

Consequences of entity leaving the Corporate tax group

There are a few key consequences to consider when an entity (either the transferring or receiving entity) departs from a Corporate Tax Group in the UAE within two years of an asset or liability transfer:

• Loss of Consolidated Financial Statements: The Tax Group will no longer be eligible to prepare consolidated financial statements under Clause 1 of Article 40 [of the UAE Corporate Tax Law]. This eliminates the tax benefits associated with internal group transfers.

Exceptions:

• This rule doesn't apply if the income generated from the transferred asset/liability would have been exempt from Corporate Tax anyway, or if it wouldn't have factored into calculations under other provisions of the UAE CT Law.
• Corresponding Adjustments: On the departure date of the entity, the UAE tax authorities require "corresponding adjustments" to be made. This involves recognizing any previously untaxed income associated with the transferred asset/liability within the Tax Group. Additionally, adjustments must be made to the cost base of the relevant asset/liability to ensure accurate calculation of future Corporate Tax payable.

Overall Impact:

Leaving a Tax Group within two years of an asset/liability transfer can lead to additional tax burdens due to the loss of consolidated filing benefits and the requirement for income recognition and cost-base adjustments.

Conclusion

In summary, the UAE's Corporate Tax registration framework allows certain businesses to form a Tax Group, acting as a single taxpayer for Corporate Tax purposes. Benefits include consolidated tax filing and offsetting losses within the group, but eligibility requirements and limitations like joint tax liability exist. Consulting Filings.ae tax professionals is recommended to determine if a Tax Group is the right fit for your UAE business structure.

Get expert help from Filings.ae to form a tax group in UAE Corporate tax registration!!