Transfer within the same Qualifying Group – UAE CT Update

Introduction 

The Ministerial Decision provides direction for the application of transfer within the same Qualifying Group under the UAE Corporate Tax Law. In this regard, the policies and processes for transfers within a Qualifying Group are described.  

What is an Ownership Interest for Transfer within the same Qualifying Group? 

Taxable Person holding any one or a combination of the following instruments is sufficient to constitute ownership interest for the purposes of Article 26 of the Corporate Tax Law. 

• Ordinary Shares 

• Preferred Shares  
• Redeemable Shares  
• Interests in Membership and Partnership. 
• Additional securities, financial contributions, and ownership rights that entitle the holder to earnings and liquidation proceeds. 

Equity Interest: According to the provision, an ownership interest must be categorised as an equity interest under the accounting standards used by the tax-exempt entity that owns the interest for it to be considered as such. 

Holding Ownership Interest: A Taxable Person will be regarded as holding an ownership interest under the Corporate Tax Law, if they have control over the ownership interest and the right to the economic benefits it produces. Based on the Taxable Person standards, this decision has been made. 

Islamic Financial Instrument: Additionally, for the purposes of Article (26) of the Corporate Tax Law, an Islamic Financial Instrument or a combination of arrangements relating to it will be recognized as an ownership interest if the accounting standards used by the Taxable Person classify it as an equity interest. 

Percentage of Ownership: Last but not least, depending on which is appropriate in the particular circumstance, the percentage of ownership held through ownership interests, as mentioned in Clause (1) of the article, is computed by using either the total paid-up capital of the Taxable Person or the total equity interest contributions made to the Taxable Person 

Election for Transfer within the same Qualifying Group 

The decision brings the idea of a transfer inside a qualifying group to the rules of Article (26) of the Corporate Tax Law. Unless the Authority determines otherwise, the Transferor must make this election, which is final and valid for the Tax Period in which it is made and all succeeding Tax Period. Election requires keeping accurate records and adhering to the format and submission requirements. Following the election, all transfers of assets and liabilities held on the capital account will be subject to the provisions of Article (26), Corporate Tax Law, subject to compliance with the legal requirements. 

Exchange of Assets and Liabilities for Transfer within the same Qualifying Group 

For the purposes of applying Article (26) of the Corporate Tax Law, the decision treats a transfer where the consideration is in the form of another asset or obligation as two independent transfers. This strategy makes sure that each transfer is assessed separately and that the pertinent tax laws are correctly applied. 

1. Separate Treatment of Transfers: When the consideration for the transfer of an asset or liability is in the form of another asset or liability, the transfer is treated as two separate transfers. This provision ensures that each transfer receives appropriate tax treatment. 
2. Application of Tax Laws: In cases where the transfer involves at least one Taxable Person who has been elected, the relevant provisions of the law and the Ministerial Decision on general rules for determining taxable income apply to each transfer. 

Subsequent Transfer 

Any resulting gain or loss must be taken into account when determining the Transferor’s Taxable Income if a future transfer takes place outside the Qualifying Group or if the Transferor and Transferee stop being members of the same Qualifying Group.  

The gain or loss is also ascribed to the Transferee if the Transferor no longer qualifies as a Taxable Person.  

Taxable Income and Gain/Loss Calculation: Any gain or loss should be taken into account when determining the transferor’s Taxable Income. For the Tax Period in which one of the following events takes place, the transferor’s Tax Return should reflect this gain or loss: 

1. The asset or liability is subsequently transferred outside of the Qualifying Group.
2.  Neither the transferor nor the transferee continues to be members of the same Qualifying Group

In extraordinary circumstances, any gain or loss that would have accrued to the transferor should be attributed to the transferee instead if the transferor ceases to be a Taxable Person. 

Taxable Income of the Transferee: The transferee should take any gain or loss into account when determining taxable income when Clause (2) of this Article applies (due to the transferor ceasing to be a Taxable Person). For the Tax Period in which one of the following events takes place, the transferee’s tax return should reflect this gain or loss: 

1. The asset or liability is subsequently transferred outside of the Qualifying Group.
2. Neither the transferor nor the transferee is a member of the same qualifying group anymore.

Application in Proportion: The transferee must make the required adjustments to their Taxable Income. Any depreciation, amortization, or other changes in the value of an asset or liability that have been previously adjusted for this transfer by the transferee are intended to be reversed by these adjustments. 

Record-keeping 

The decision requires both the Transferor and the Transferee to keep records pertaining to the transfer, including the agreement, the value specified under Article (26) of the Corporate Tax Law, and any necessary adjustments required under the Ministerial Decision on the general rules for determining taxable income. This is done to ensure compliance and to make auditing processes easier. 

Publication and Application 

The Decision is published, and the day after its publication, it takes effect. This ensures transparency and makes it possible for taxpayers to quickly become familiar with the new rules. 

Conclusion 

The Decision offers much-needed clarification and guidance on how to apply Article 26 of the UAE Corporate Tax Law. This decision attempts to simplify tax compliance and foster uniformity in tax calculations by defining essential words, creating norms for ownership interests and transfers, and emphasizing the value of record keeping. To ensure compliance with tax laws and maximize their tax strategies, taxpayers, businesses, and experts in the finance and accounting fields must fully comprehend and put into practice the rules set forth in this decision. 

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FAQs 

1. What will Ownership Interest include as per transfer of assets and liabilities within the same Qualifying Group? 

Taxable Person holding any one or a combination of the following instruments is sufficient to constitute ownership interest for the purposes of Article 26 of the Corporate Tax Law. 

• Ordinary Shares 
• Preferred Shares  
• Redeemable Shares  
• Interests in Membership and Partnership. 
• Additional securities 

2. What will happen in the subsequent transfer within the same Qualifying Group? 

Any resulting gain or loss must be taken into account when determining the Transferor’s Taxable Income if a future transfer takes place outside the Qualifying Group or if the Transferor and Transferee stop being members of the same Qualifying Group. 

3. Can adjustments be made in the Taxable Income for the transfer within the same Qualifying Group under Article 26 of the UAE Corporate Tax Law? 

The transferee must make the required adjustments to their Taxable Income. Any depreciation, amortization, or other changes in the value of an asset or liability that have been previously adjusted for this transfer by the transferee are intended to be reversed by these adjustments.