Introduction
The Ministerial Decision by the UAE has brought forth certain guidelines regarding the Tax Groups as per Article 40 of the UAE Corporate Tax Law.
What are the Ownership Requirements?
It is necessary to fulfill the continuous requirements listed in Article 40(1) of the UAE Corporate Tax Law for the complete duration of the applicable Tax Period to establish or maintain the Group.
What is a Share Capital?
The word “share capital” refers to the nominal value of the shares issued and fully paid up, or the Capital invested in Memberships or Partnerships of each respective Subsidiary.
Resident Person
The Parent Company and the Subsidiary must be legal entities that are treated as residents for tax purposes solely in the UAE and not in any other nation or foreign territory, unless otherwise provided for in a relevant international agreement.
To be treated as leaving the Group: A member of a Group is deemed to have left the Group at the beginning of the Period in which it has become a resident in another country or foreign territory.
Maintaining Documents: To prove its Non-Resident status for tax purposes in the aforementioned country or foreign territory, a foreign legal entity that is recognized as a Resident Entity or a legal entity that is established or acknowledged under the applicable laws of the State but is effectively managed and controlled in another country or territory, must maintain supporting documentation.
What will be included in the Documentation?
One of the following items must be present in the documentation are:
- A statement provided by the relevant tax authorities of the aforementioned nation or another foreign territory.
- A statement provided by the pertinent, Competent Authorities to aid in the implementation of the relevant, current international agreement in the UAE.
Rules related to Transactions prior to Forming or Joining a Tax Group
Transactions between members of the Group are not to be eliminated where a member has recognised a deductible loss in a Tax Period for transactions before joining or forming the Group, until such deductible loss is reversed in full.
Transaction is not eliminated: If a transaction is not eliminated, then the Group will include any income related to that transaction in determining the Taxable Income of the Group. It will be for the Tax Period in which that income arose, and it will be up to the amount of the deductible loss that was previously deducted before joining or forming the Group.
Date of the Formation or Joining of a Tax Group
Before the conclusion of the Tax Period in which the formation or joining is requested, an application must be made to the Authority to propose the formation or joining of a Group.
This will also apply when a new Parent Company takes the place of an existing Parent Company. The conditions outlined in Article 40 must be met by the new Parent Company.
Transferring The Business to another: If a parent company transfers all of its business to another member of the same group and goes out of business as a result of the transfer, the other member shall take the parent company’s place as of the transfer’s effective date.
If a newly formed legal entity fits into one of the following categories, it can join an existing Group as of the date of its formation, except the exception of the conditions in Clause (1) of this Article:
- A newly created subsidiary
- A newly created Parent Company that takes the place of the Group’s current Parent Company.
Assets, Liabilities and Financial Positions of Members
The transactions between the Parent Company and each Subsidiary that is a member of the Group shall include the following:
- Transactions between two or more subsidiaries belonging to the same tax category,
- Valuation adjustments and clauses about transactions involving two or more members of the same tax group.
Gain or loss is eliminated: When a gain or loss from a transaction involving members of the same Group is eliminated, this elimination must also account for any adjustments to the relevant assets’ and liabilities’ accounting values that might have resulted from the gain or loss.
Relief from Pre-Grouping Tax Losses in Tax Group
It focuses on the relief of pre-grouping tax losses to improve the effectiveness and clarity of the law. It determines the use of tax losses within a group.
Offsetting the pre-Grouping Tax Losses: The lesser of the following two amounts will be used to determine the pre-grouping tax losses that can be used to offset the taxable income of a group in a specific tax period:
- The tax group’s taxable income that is attributable to a given subsidiary.
- The tax loss that qualifies that is used to reduce the taxable income of the tax group in the applicable tax period.
Any available pre-grouping tax losses must be offset against the taxable income of the tax group in that period before using other carried forward tax losses of the group in cases where the calculation of taxable income for a tax group results in a tax loss carried forward to subsequent periods.
Subsidiary’s Tax Losses: It is the parent company’s responsibility to decide which subsidiary’s pre-grouping tax losses will be carried forward by the group if the total amount of pre-grouping tax losses available for utilization in a tax period exceeds the amount mentioned in Clause (1) of this article.
Pre-grouping tax losses are also subject to the provisions set out in Article 37 of the Corporate Tax Law.
Requirements for Transfer Pricing Documentation and the Arm’s Length Principle
The following factors must be taken into consideration when determining the amount of taxable income that can be attributed to one or more Group members:
- If a Group member has unutilized Pre-Grouping Tax Losses.
- When a Group member has income that qualifies for Foreign Tax Credit.
- If a group member receives the corporate tax incentives listed.
- If a Group member has Pre-Grouping Net Interest Expenditure that has been carried forward but not yet used.
Calculation of Taxable Income by the Tax Group: The Group must:
- Calculate the taxable income attributable to each relevant member of the Group as per Article 34 of the Corporate Tax Law.
- Completely disclose all information that the Authority requests via notice or decision about transactions and agreements between the relevant members as well as between the relevant members and their Related Parties and Connected Persons.
Determination of ownership interest for the transfer of Tax Losses
The direct and indirect ownership interest of members belonging to the same Group shall be determined by combining the assets and liabilities of the Parent Company and its Subsidiaries, to establish ownership interest to satisfy the ownership requirements.
Streamlining Tax Groups’ Business Restructuring
The following measures are intended to make business restructuring across Tax Groups easier:
- The transferring member will be regarded as a part of the Group up until the Group’s dissolution date if a member of the group decides to transfer all of its operations to another member of the same group. The Group will therefore continue to operate.
- If there are only two members in the Group and one of them transfers all of their business to the other, making the transferring member no longer exist, then, it will cease to exist on the day the transfer takes effect.
Transfer within the Group: A member of the Group’s transfer of all of its assets to a newly formed legal entity, or a portion thereof, will be regarded as an internal transaction within the Tax Group if the newly formed entity joins the existing Group.
It is significant to note that the circumstances mentioned in Clauses (1) and (2) of this Article do not necessitate an election for Business Restructuring Relief.
Income from Internal Transfers and Deals Relating to Business Restructuring
The income related to such transfers shall be treated as if it had not been taken into account for Corporate Tax purposes in circumstances where members transfer one or more assets or liabilities.
Any income that was not taken into account in relation to the transfer under Clause (1) shall be subject to the provisions of Article (42) of the Corporate Tax Law if the circumstances set forth.
Subsidiary y Leaving or Termination of Tax Group Status Notification
The Tax Group shall promptly notify the Authority within a period of 20 business days from the date on which the conditions cease to be met when a Subsidiary elects to leave it or when a it terminates because it no longer satisfies the conditions under Article 40 of the Corporate Tax Law.
Preparing Financial Statements after Leaving or Dissolving a Tax Group
If a Subsidiary departs from a Group or it is dissolved, the departing Subsidiary and then the former Parent Company must prepare their financial statements by the Group’s accounting standards.
Additionally, they must include the beginning values of the relevant assets and liabilities in their financial statements as well as the recorded values of such assets and liabilities.
Conclusion
The UAE Ministerial Decision brings the much-needed clarity on the Tax Groups and further guidelines on the same.
Do you need help with understanding the implications of a Tax Group? Contact us today.
FAQs
What are the ownership requirements for the formation or continuation of a Tax Group under the UAE Corporate Tax Law?
To form or maintain a Tax Group, it is essential to comply with the ownership requirements stated in Article 40 of the Corporate Tax Law continuously during the relevant Tax Period.
What happens if a member of a Tax Group becomes a Resident for tax purposes in another country or foreign territory?
If a member of a Tax Group becomes a resident for tax purposes in another country or foreign territory, that member will be treated as leaving the Tax Group from the beginning of the Tax Period in which it becomes a tax resident in the other country or foreign territory.
Will transactions between members of a Tax Group be eliminated if a member has recognized a deductible loss in respect of those transactions before joining or forming the Tax Group?
No, transactions between members of a Tax Group will not be eliminated if a member has recognized a deductible loss in a Tax Period prior to joining or forming the Tax Group. The deductible loss will continue to be recognized until it is fully reversed.
What is the deadline for submitting an application to form or join a Tax Group?
The application to form a Tax Group or join an existing Tax Group must be submitted to the Authority before the end of the Tax Period within which the formation or joining of the Tax Group is requested.
Can a newly established juridical person join an existing Tax Group?
Yes, a newly established juridical person can join an existing Tax Group. They can join from the date of incorporation if they are either a newly established Subsidiary or a newly established Parent Company, replacing the existing Parent Company of the Tax Group.
