Which companies can form part of Tax Group?
To form a tax group in the UAE, both the Parent company and the subsidiary must be tax residents of the UAE.
If either the Parent Company or any of the subsidiaries is not a tax resident in the UAE, they are ineligible to participate in the Tax Group.
Apart from tax residency, there may be other conditions that apply to form a Tax Group, and compliance with these conditions is essential.
In cases where an entity is considered a resident of the UAE under the UAE Corporate Tax Law but is also considered a tax resident of another foreign country due to a tax treaty, the treaty-based foreign tax residency takes precedence.
If an entity is a tax resident of another country under a tax treaty, it cannot participate in the Tax Group or must exit the Tax Group if it was already a member, in accordance with the UAE Corporate Tax Law.
The intersection of local tax law and international tax treaties can result in dual residency, and in such cases, the tax treaty provisions typically prevail in determining tax residency status.
Practical Case Study
XYZ Holdings is a conglomerate with several subsidiaries operating across various industries in the United Arab Emirates (UAE). As they consider forming a tax group for the purpose of corporate tax benefits, they encounter a unique challenge related to the tax residency status of one of their entities, XYZ Ventures.
Company Status:
XYZ Holdings: The parent company, a UAE-based multinational conglomerate with diversified business interests.
XYZ Ltd.: A subsidiary of XYZ Holdings, involved in international investments and trade. XYZ Ltd. has a unique tax residency status due to a tax treaty between the UAE and the United Kingdom (UK).
Key Questions:
- Are both XYZ Holdings and XYZ Ltd. tax residents in the UAE as required for tax group formation?
- How does the tax treaty between the UAE and the UK impact XYZ Ltd.’s tax residency status?
Resolution:
Tax Residency Status: XYZ Holdings is a UAE tax resident as per the UAE Corporate Tax Law. However, XYZ Ltd., while a UAE tax resident under local law, has a unique situation. Due to a tax treaty between the UAE and the UK, XYZ Ltd. is also considered a tax resident of the UK for treaty purposes.
Impact of Tax Treaty: The tax treaty between the UAE and the UK results in XYZ Ltd. having dual tax residency status—UAE resident under local law and UK resident under the treaty. This dual residency status creates a challenge for tax group formation.
Conclusion: In this case, XYZ Ltd. may not be able to participate in the tax group formation process as per UAE Corporate Tax Law.
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