In some cases, a company entering a Tax Group may have pre-grouping tax losses, incurred before becoming a group member, eligible for set-off.

• Set-Off Calculation Example 1: Company A has pre-grouping tax losses of 5 million. Upon becoming a group member, it generates a standalone profit of 7 million, while the Tax Group’s total profit is 15 million. The set-off amount is the lower of the profit attributable to the subsidiary (7 million) and the Tax Group’s income (15 million), which is 7 million. Thus, the entire 5 million of pre-grouping tax losses can be set off.

• Set-Off Calculation Example 2: Company A’s profits are 7 million, but the Tax Group’s overall profit is only 4 million. The maximum set-off allowed is the lower of the subsidiary’s profit (7 million) and the Tax Group’s income (4 million), which is 4 million. Therefore, out of the 5 million pre-grouping tax losses, 4 million can be set off against the Tax Group’s income, and the remaining 1 million is carried forward for future set-off.

Key Point: The set-off of pre-grouping tax losses against Tax Group income is subject to the lower of the subsidiary’s profit and the Tax Group’s income, ensuring fair utilization of losses and potential carry-forward for subsequent years.

Practical Case Study

XYZ Corporation, a multinational conglomerate operating in the UAE, decided to form a Tax Group with its subsidiaries to optimize their corporate tax situation. However, certain subsidiaries had pre-grouping tax losses, and they needed to determine how much of these losses could be set off once they became members of the Tax Group.

Company Status:

1. XYZ Corporation: The parent company, a prominent multinational conglomerate.

2. Company A: A subsidiary of XYZ Corporation, specializing in technology services.

3. Company B: Another subsidiary of XYZ Corporation, focused on manufacturing.

Pre-Grouping Tax Losses Dilemma: As XYZ Corporation formed a Tax Group, they encountered a scenario where Company A had pre-grouping tax losses of 10 million. Once Company A became a member of the Tax Group, it generated a standalone profit of 12 million, while the Tax Group’s total profit was 18 million. 

Key Questions:

1. How much of Company A’s pre-grouping tax losses can be set off against its profit?
2. What is the maximum set-off allowed for these pre-grouping tax losses within the Tax Group?

Resolution:

1. Set-Off Calculation: In this scenario, Company A’s pre-grouping tax losses of 10 million can be set off against its standalone profit of 12 million. This set-off is based on the lower of two amounts: the profit attributable to the subsidiary (12 million) and the Tax Group’s income (18 million), which is 12 million.

2. Maximum Set off Allowed: Since, the lower is the 12 million but the pre-grouping tax losses were 10 million. Therefore, the maximum of 10 million of pre-grouping tax losses (i.e., the entire amount of pre-grouping tax losses) can be set off.

Conclusion: In the case of XYZ Corporation and their Tax Group, the treatment of pre-grouping tax losses is determined by comparing them to the subsidiary’s standalone profit and the Tax Group’s income. This calculation ensures that losses are set off against the lower of these two amounts, promoting fair utilization of losses and potential carry-forward for future years.