Tax Groups under UAE Corporate Tax

Introduction – Chapter 12 – Tax Group Provisions under the UAE Corporate Tax Law

Due to liberalisation and globalisation of international trade, corporate entities have expanded their business beyond domestic boundaries. also called as Multinational enterprises or MNEs. They have established business houses and operations across foreign jurisdictions, creating complex frameworks for its business activities. Tax structures for these entities will be complex as well, with multiple Financial Statements, Tax Returns and other documentation. The concept of Tax Groups under UAE Corporate Tax aims to tax overall profits of a group of entities within the UAE that are part of a multinational.

To reduce compliance burdens and ensure entities do not use such business structures to evade tax, the UAE Corporate Tax Law has come up with provisions to establish and regulate Tax Groups in regard to corporate taxation.

Article 40 – Tax Groups under the UAE Corporate Tax Law

In general, each person or company that is required to pay taxes is treated separately for corporate tax purposes. But Tax Group acts as an exception to that where multiple Tax Resident Persons are treated as a single Taxable Person.A Tax Group is when two or more Taxable Persons are treated as a single Taxable Person. This is subject to certain conditions to be satisfied as laid down under Article 40 of the UAE Corporate Tax Law.

Application for formation of Tax Group: The Parent Company, who shall be a Resident Person, can submit an application to the Federal Tax Authority to form a Tax Group with one or more  Resident Persons, which shall be called the Subsidiaries of the Parent Company. Furthermore, all the following conditions should be fulfilled as well:

1. Legal Persons: The Resident Persons are legal or juridical persons.
2. Share Capital: Either directly or indirectly through one or more Subsidiaries, the Parent Company owns at least 95% (ninety-five percent) of the share capital of the Subsidiary.
3. Voting Rights; Either directly or indirectly through one or more Subsidiaries, the Parent Company has at least 95% (ninety-five percent) of the voting rights in the Subsidiary.
4. Share in Income and Assets: Either directly or indirectly through one or more Subsidiaries, the Parent Company must be entitled to receive at least 95% (ninety-five percent) of the profit and net assets of the Subsidiary.
5. Not Exempt Persons: Neither the Subsidiary nor the Parent Company are Exempt Persons.
6. Not Qualifying Free Zone Persons: The Parent Company and the Subsidiary are not Qualifying Free Zone Persons.
7. Follow the Same Financial Year: The Financial Year for the Parent Company and the Subsidiary are the same.
8. Follow the Same Accounting Standards: The Parent Company and the Subsidiary both use the same accounting standards to prepare their Financial Statements.

Note: The 95% threshold provided in the provision allows for the situation where there is a minority interest holder, and the applicable law requires at least two shareholders for the incorporation of the juridical person. 

Tax Group can be formed with a Government Entity:

Notwithstanding that the Government Entity is an Exempt Person, a Tax Group may be formedwhere a Government Entity directly or indirectly has ownership interest of at least 95% (ninety-five percent) in:

1. A The share capital
2. The voting rights
3. the profit and net assets

Of one or more Subsidiaries.

Application to be submitted by Parent Company and its Subsidiaries for formation of Tax Group: The Parent Company and each Subsidiary wanting to be part of the Tax Group shall apply to the Federal Tax Authority.

Tax Group to be treated as one single Taxable Person: For the purposes of the UAE Corporate Tax Law, a Tax Group created under the provisions of this Article shall be treated as a single Taxable Person, represented by the Parent Company.

Parent Company to comply with certain provisions of the UAE Corporate Tax Law: On behalf of the Tax Group, the Parent Company must fulfill all requirements outlined in these chapters of the UAE Corporate Tax Law:

• Chapter Fourteen- Payment and Refund of Corporate Tax;
• Chapter Sixteen- Tax Registration and Deregistration;
• Chapter Seventeen- Tax Returns and Clarifications of the

Liability of Parent Company and Subsidiaries in the Tax Group: For the Tax Periods in which they are members of the Tax Group, the Parent Company and each Subsidiary are jointly and severally liable for any Corporate Tax payable and associated penalties by the Tax Group.

​​​Jointly and Severally means that all members of the Tax Group share the responsibility of meeting the Corporate Tax liability together, while each individual member also has an independent obligation to meet the liability. ​​​​ 

Restricting the liability of Tax Group: After the Federal Tax Authority’s approval, the joint and several liability under Clause 7 of Article 40 for a Tax Period may be restricted to one or more Tax Group members.

Withholding Tax provisions: The provisions of Withholding Tax of the UAE Corporate Tax Law must be complied with by the Parent Company and each Subsidiary.

​​​Under Clause 8, every member of the Tax Group is accountable for following Article 45 of the Corporate Tax Law regarding Withholding Tax. If the Withholding Tax rate increases from 0%, each member must deduct and remit the required Withholding Tax amount to the Authority for payments subject to Withholding Tax made by them. The Parent Company is not responsible for fulfilling the Withholding Tax obligations on behalf of the Subsidiaries in the Tax Group.​​​​ 

Subsidiary joining an existing Tax Group: After the Parent Company and the pertinent Subsidiary submit an application to the Federal Tax Authority, a Subsidiary may join an existing Tax Group.

When must a Subsidiary leave a Tax Group formed under the UAE Corporate Tax Law?

In the following situations, a subsidiary must leave the Tax Group:

1. On Application: The application can be made by the Parent Company and the relevant Subsidiary. After, the approval of the application by the Federal Tax Authority, the Subsidiary will leave the Tax Group.
2. Failure to meet conditions: When the relevant Subsidiary fails to comply with the conditions outlined in Clause 1 of Article 40 to be a member of the Tax Group.

Termination of Tax Group under the UAE Corporate Tax Law: Any of the subsequent events may result in the termination of a Tax Group:

1. On Application: The Parent Company can make an application to the Federal Tax Authority. After the Authority has granted the approval, the Tax Group will cease to exist.
2. Failure to meet Conditions: Where the Parent Company no longer fulfills the requirements to form a Tax Group as outlined in Clause 1 of Article 40.

Exception: The Parent Company has made an application to the Federal Tax Authority to allow for another new Parent Company to replace it in the Tax Group.

Substitution of Parent Company in a Tax Group: In any of the following situations, the Parent Company of a Tax Group may submit an application to the Federal Tax Authority to be replaced by a different Parent Company without discontinuation of the Tax Group.

1. Fulfils the Conditions: The new Parent Company satisfies the conditions specified in this Article regarding the former Parent Company.
2. Universal Legal Successor: The new Parent Company or a Subsidiary is the previous Parent Company’s universal legal successor when the former Parent Company ceases to exist.

Power of Federal Tax Authority  to govern a Tax Group under Article 40 of the UAE CT Law: The Federal Tax Authority may, in its sole discretion:

1. Dissolve a Tax Group, or
2. Replace the Parent Company of a Tax Group.

This is to be based on the information available with the Federal Tax Authority. The Federal Tax Authority will notify the Parent Company of such action taken by it.

Can you form a Tax Group under the UAE CT Law?

Article 41 – Date of Formation and Cessation of a Tax Group 

Date of formation of Tax Group or Date when a new Subsidiary joins the Tax Group:

The date of formation of a Tax Group or the date when a new Subsidiary joins the existing Tax Group shall be considered as:

• The date of beginning of the Tax Period specified in the application submitted to the Federal Tax Authority; or,
• From the beginning of any other Tax Period determined by the Federal Tax Authority; or,

Date of Cessation of Tax Group or Date when a Subsidiary leavesthe Tax Group :

A Subsidiary wishing to exit a Tax Group can file an application with the FTA for discontinuing its membership.The relevant date for when a Subsidiary shall cease to be a member of the Tax Group or a Tax Group will cease to exist will be:

• The beginning of the Tax Period specified in the application submitted to the Federal Tax Authority, or
• From the beginning of any other Tax Period determined by the Federal Tax Authority.

 

Furthermore, a Subsidiary may cease to be a member of a Tax Group from the date it fails to meet the conditions prescribed under Article 40.

This is relevant for a Tax Group as well. In case a Tax Group fails to satisfy the conditions mentioned under Article 40 of the UAE CT Law, the Tax Group shall cease to exist from date of such failure. 

Article 42 – Taxable Income of a Tax Group  

How to calculate Taxable Income of a Tax Group?

1. Consolidation of Financial statements, etc.: The Parent Company shall consolidate the financial results, assets, and liabilities of each Subsidiary for the applicable Tax Period in order to determine the Taxable Income of a Tax Group. The records should omit the transactions undertaken between the Parent Company and each Subsidiary that is a member of the Tax Group.
2. Applicability of the UAE Corporate Tax Law: The Tax Group shall be subject to the applicable provisions of the UAE Corporate Tax Law as required by the circumstances. For example, the threshold of Taxable Income for Corporate Tax rate given under Article 3 will apply to the Taxable Income of the Tax Group, and it will not apply to each member individually.
3. Carry Forward of unutilised Tax Losses: Unutilized tax losses from a subsidiary that joins a Tax Group (referred to as “pre-Grouping Tax Losses” ) become carried-forward Tax Losses of the Tax Group. They can be applied to reduce the Taxable Income of the Tax Group only in respect of income that is attributed to the relevant Subsidiary. It cannot be used to offset the Taxable Income of other members of the Tax Group. 
4. Limitation on use of unutilized Tax Losses: When a new subsidiary joins the Tax Group, the unutilized Tax Losses from the existing Tax Group cannot be utilized to reduce the Tax Group’s Taxable Income in cases where that revenue is attributable to the new Subsidiary.
5. Compliance with Tax Loss provisions: The clause of unutilized Tax Losses and Limitation on use of unutilized Tax Losses under this Article is subject to the provisions of Articles 37, i.e. Tax Loss Relief Provisions and Article 39, i.e. Limitation on Carry Forward of Tax Losses of the UAE Corporate Tax Law which must be met.
6. Effect of exit of subsidiary from Tax Group: When a Subsidiary quits a Tax Group, the Tax Group’s Losses are retained, except any pre-Grouping Losses that the relevant Subsidiary has not yet used.
7. Distribution of Unutilized Tax Losses on Termination of Tax Group: Unutilized Tax Losses of a Tax Group shall be distributed as follows upon termination of the Tax Group:
   1. Where the Parent Company continues to remain a Taxable Person: In cases when the Parent Company is still a Taxable Person, all Tax Losses will remain with it.
   2. Where the Parent Company ceases to be a Taxable Person: Except for any unutilized pre-Grouping Tax Losses of such Subsidiaries, Tax Losses of the Tax Group shall not be available for offset against future Taxable Income of individual Subsidiaries.

Exception: When the Parent Company of a Tax Group is replaced by a new Parent Company and the Tax Group continues to exist the Tax Losses of the Tax Group shall be available for offset against future Taxable Income of the Subsidiaries.

Effect of Entity leaving the Tax Group on transactions involving Transfer of Assets or Liabilities

• Where an asset or liability has been transferred between members of the Tax Group and either the transferor or transferee leaves the Tax Group within (2) two years from the date of the transfer, it will not prepare consolidated Financial Statement as per Clause 1 of Article 40.
  Exception: Unless the associated income would have been exempt from Corporate Tax or would not have been taken into account under any other provision of the UAE CT law.

• Corresponding Adjustments: On the date the transferor or transferee leaves the Tax Group, any income that was not taken into account with respect to a transfer of an asset or liability within the Tax Group shall be considered. Corresponding adjustments of the cost base of the relevant asset or liability for calculating the Corporate Tax Payable shall be calculated
• Preparation of consolidated Financial Statements: Consolidated Financial Statements must be prepared by the Tax Group in accordance with the accounting standards followed in the UAE.

Need help with calculating Taxable Income of your Tax Group under the UAE CT Law?