The United Arab Emirates has aligned with international tax standards by introducing a federal corporate tax effective June 1, 2023. Among the noteworthy aspects of this tax legislation are the provisions regarding forming tax group structures. The UAE corporate tax (CT) framework distinguishes between two types of groups: Qualifying Groups, which permit limited consolidation, and Tax Groups, which enable complete consolidation, treating the group as a single taxable entity.
Qualifying Groups can be formed by two or more entities when an individual possesses at least 75% direct or indirect ownership in each. Establishing such a group does not require approval by the Federal Tax Authority (FTA). This arrangement’s primary benefits include the facility to transfer tax losses and assets among group members at their book value, avoiding the realization of gains or losses. However, each entity within a Qualifying Group must file tax returns based on its financial outcomes, limiting the potential for complete consolidation.
In contrast, Tax Groups offer the advantage of complete horizontal consolidation, allowing companies to be treated as a single taxable entity. However, forming a Tax Group demands stricter criteria, including the requirement that a company holds at least 95% of voting rights in the group’s other entities.
Forming a Tax Group in the UAE: Eligibility and Restrictions
The UAE’s Corporate Tax (CT) Law outlines strict criteria for establishing a Tax Group. Here’s a breakdown of the key points:
Control and Ownership:
- Threshold: A company must directly or indirectly hold at least 95% of the voting rights and share capital of entities seeking to join the Tax Group.
- Consistency: This 95% threshold must be met at the beginning and end of the tax period.
- Control Mechanisms: Voting rights can be held directly through ownership of shares or indirectly through controlled entities.
Restrictions on Group Formation:
- Individual Ownership: Entities solely owned by individuals cannot form a Tax Group, even within the same business sector. Group ownership is a requirement.
- Ineligible Companies:
- Real estate investment trusts
- Qualifying free zone persons
- Exempt persons
Additional Considerations:
Even if companies meet the basic requirements, they might still be ineligible for a Tax Group due to:
- Illegal Activities: Involvement in any illegal activity disqualifies a company.
- Financial Difficulties: Companies experiencing financial strain may be excluded.
- Tax Compliance Issues: A history of non-compliance with UAE tax laws can lead to ineligibility.
To qualify for group status, entities must meet specific conditions: they should be UAE residents or have a permanent establishment within the UAE; maintain at least 75% of voting rights and share capital within the group; use consistent accounting standards and share a financial year; and not be exempt from CT or be a qualifying free zone person. When these conditions are met, the entire group’s profits, rather than those of individual companies, determine the CT liability. This can lead to substantial tax savings, especially if some group members incur losses.
For asset or liability transfers within a Qualifying Group, the legislation stipulates that such transactions are executed at net book value, ensuring no gains or losses are recognized. This is crucial for maintaining the financial integrity of group transactions.
Forming a Tax Group under the UAE CT law requires rigorous adherence to ownership and control criteria. A minimum of 95% ownership in voting rights and share capital of the entities to be consolidated is needed at the beginning and end of the tax period. It’s important to note that individuals cannot form a Tax Group, regardless of business similarity; corporate ownership is essential.
However, not all companies can form a Qualifying Group under the UAE CT Law. Specifically, real estate investment trusts, qualifying free zone persons, and exempt persons are precluded. Additionally, entities involved in illegal activities, those facing financial distress, or those with a history of tax non-compliance may not meet the criteria for group formation.
Approval from the FTA is mandatory for establishing a Tax Group. The approval process involves submitting a detailed application demonstrating genuine business purposes and a logical commercial rationale for consolidation. It’s critical to understand that arrangements designed purely for tax advantages are unlikely to gain approval.
The UAE’s corporate tax law presents business opportunities to reduce tax burdens, streamline compliance processes, and enhance financial reporting by forming qualifying groups. For companies contemplating this strategic move, it is advisable to seek guidance from knowledgeable professionals to ensure the correct structural alignment for maximizing the benefits of group formation.