Business Restructuring Relief- UAE CT Update

Introduction 

UAE MOF has come up with an update helping in framing guidelines for Business Restructuring as per Article 27 of the UAE Corporate Tax Law. 

What is Transfer in Exchange for Shares and Other Forms of Consideration? 

A transfer takes place when the market value received in addition to the shares or interest does not exceed the lower of the:  

• Net value of the assets and liabilities transferred or 

• 10% of the nominal value of ownership interest  

What is an Ownership Interest? 

Ownership interest is any one of these or a combination of these: 

• Ordinary shares,  
• Preferred shares,  
• Redeemable shares,  
• Membership and partner interest and  
• Other types of securities or capital contribution etc.  

Equity Interest: An ownership interest in the above securities is treated as it is classified as equity interest in Accounting Standards on which taxable person holds the ownership interest. 

Holding an ownership interest: A Taxable Person holds the ownership interest for the purpose of the Article 27 where the: 

• Ownership interest is controlled by Taxable Person 
• Taxable person has economic rights produced by the ownership interest under Accounting Standards. 

Election to Apply Business Restructuring Relief 

Transferor must make an election which shall be in the form and manner prescribed by the FTA. The transferor and transferee must maintain the records and the adjustments made to the Taxable Income of the transferor and transferee must be as per the rules for determining the Taxable Income given in Ministerial Decision. 

Transfer of Unutilised Tax Losses 

Unutilized tax losses incurred by the transferor before Tax Period in which the transfer takes place is carried forward Tax Losses of the transferee and the transferee continues to conduct the same business which was conducted before the transfer by the transferor which include all used assets by the transferor before the transfer. 

What are the factors for determining same or similar business? 

To determine the conduct of the transferee with regard to same or similar business activity of the transferor, the transferor include:  

• Transferee uses some all or assets used by the transferor before transfer. 
• Transferee has not made any important changes to the core identity or business operations since the transfer.
• When any changes are made then these results from the development of assets, services, products, process or methods which is existed prior to the transfer. 

Parties to the Transfer 

       The shares or ownership interest must be: 

• Received by the person shall be at least 50% in the transferor and  
• Issued by the person shall be at least 50% in the transferee. 

Unincorporated Partnerships 

If an application is made for the Unincorporated Partnership to be treated as a Taxable Person, no gain or loss needs to be considered to determine the Taxable Income irrespective of whether: 

• Any share or ownership interest received by the partners in the Unincorporated Partnership 
• All partners in the Unincorporated Partnership are Taxable Persons 

Subsequent Transfer for Business Restructuring 

For the purpose of calculation of taxable income of the transferor, any gain or loss that arises in following circumstances: 

1. The shares or ownership interest of transferor or transferee are sold, transferred, disposed off to person who is not a member qualifying group. 
2. There is following transfer or disposal of business.  

Attribution of Gains or Losses: The transferor accrued any gain or loss shall be attributed to the transferee when any of the following is applies: 

1. The transferor is ceased to be taxable person or 

1. The transferor is natural person. 

Inclusion in Tax Return: The transferee shall include gain or loss in the Tax Return. The transferee can make any adjustment which is necessary for their Taxable income during the related Tax Period.  

Applicable Rules on such a transfer: Where the provision of the UAE Corporate Tax Law applies to the transfer, then following shall be apply: 

• Necessary Adjustments: The transferee shall make necessary adjustments to their Taxable Income and reverse any depreciation, amortisation, change in value of asset or liability which is adjusted previously by the transferee for this transfer subjected to ministerial decision on the general rules for deciding the Taxable Income. 
• Ministerial Decision: For the current or future Tax Periods in relation to this transfer, the Ministerial Decision on the General Rules for Deciding Taxable Income is not applicable. 

Record Keeping for Business Restructuring  

The transferor and transferee must maintain all the records of agreement to transfer the business and any adjustments given under the ministerial decision on the rules to decide the taxable income. 

Conclusion to Business Restructuring

The decision by the Ministry has brought much needed clarity on the issue of business restructuring as enumerated in the UAE Corporate Tax Law. 

Do you need help with Business Restructuring in the UAE as per the UAE Corporate Tax Law? Contact us today.

FAQs 

1. What is transfer in exchange of shares under Business Restructuring? 

The transfer is said to happen if the Market Value is lower of: 

• Net book value of the assets and liabilities transferred or 
•  10% of nominal value of the ownership interests issued 

2. When can a Taxable Person be said to hold Ownership Interest? 

This is when ownership interest is controlled by the Taxable Person and the Taxable Person has the right to the economic benefits produced by the ownership interest. 

3. If an application is made for treating Unincorporated Partnership as a Taxable Person, then how will the losses and gains be treated? 

No gain or loss needs to be taken into account in determining Taxable Income.