Tax Group Framework For Corporate Tax
UNDER UAE CORPORATE TAX, WHAT IS A TAX GROUP?
- If all of the requirements listed below are satisfied, UAE group companies may choose to establish a tax group: At least 95% of the (I) share capital, (ii) voting rights, and (iii) entitlement to earnings and net assets are held directly or indirectly by the parent business, which is required to be a tax resident of the United Arab Emirates.
- Tax Groups are an optional regime; the formation of a Tax Group requires the approval of the FTA and the application of juridical resident persons who meet the necessary requirements. Consequently, not every Taxable Person will be covered by the idea of a Tax Group.
- Forming a Tax Group has various advantages, one of which is that all members of the Tax Group can have their Parent Company file a single Tax Return. The creation of a tax group also makes it possible for members’ profits and losses to be offset against one another. Additionally, while calculating the Taxable Income of the Tax Group, the transfer of assets and liabilities as well as other agreements and transactions between members of the Tax Group are often to be ignored.
Requirements for creating a Tax Group
If all of the following requirements are met, a Parent Company and one or more Subsidiaries may apply to the FTA to form a Tax Group:
- The “juridical persons condition” states that the Parent Company and each Subsidiary are juridical persons.
- The “Resident Persons condition” states that the Parent Company and each Subsidiary are residents.
- The “share capital ownership condition” states that the Parent Company, either directly or indirectly through one or more Subsidiaries, holds at least 95% of each Subsidiary’s share capital.
- The “voting rights condition” states that the Parent Company, either directly or indirectly through one or more Subsidiaries, controls at least 95% of each Subsidiary’s voting rights.
- Whether directly or indirectly through one or more Subsidiaries, the Parent Company is entitled to at least 95% of each Subsidiary’s profits and net assets (the “profits and net assets condition”).
- The “Exempt Person condition” states that neither the Parent Company nor the Subsidiaries are Exempt Persons.
- The “Qualifying Free Zone Person condition” states that neither the Parent Company nor the Subsidiaries are Qualifying Free Zone Persons.
- The “Financial Year condition” states that the Parent Company and every Subsidiary must share the same Financial Year.
- The “Accounting Standards condition” states that all subsidiaries, including the parent company, must use the same accounting standards when preparing their financial statements.
Change of Tax Period to Form or Join a Tax Group
- The FTA shall permit that Person to change its Tax Period to align Financial Years for the purpose of forming a Tax Group or joining an existing Tax Group, provided the Tax Period is not extended to more than 18 months or reduced to less than 6 months. • If a juridical resident person satisfies all the requirements for forming or joining a Tax Group, with the exception of the Financial Year condition, that person may apply to the FTA to change the start and end dates of its Tax Period or use a different Tax Period and align their Financial Year (i.e., the start and end dates of a financial reporting period) in order to enable the formation of a Tax Group.
- If creating a Tax Group is the only reason for the date change in the Tax Period, Taxable Persons are unable to modify it to a date on which none of the intended Tax Group members apply. It will typically not be possible to form a Tax Group until 1 January of the following year if, for example, the conditions for forming a Tax Group are first met on 1 March of that year and the entities have a Financial Year that ends on 31 December each year. This is because the conditions were not met continuously throughout the relevant Tax Period. The companies involved cannot modify their Financial Year to begin a new Tax Period at an earlier date unless there are legitimate commercial, economic, or legal grounds to do so. An existing Tax Group may be joined by that individual.
Tax Registration for the Tax Group and Its Members
For corporate tax motive the Parent Company and any Subsidiary wishing to apply for formation of a Tax Group must obtain a Tax Registration Number. Following the FTA’s approval of the application for the formation of a Tax Group, the Tax Group will receive a unique Tax Registration Number, which it will use for Corporate Tax purposes.
Distribution of Taxable Income Among Tax Group Members
In the following circumstances, a Tax Group must determine the Taxable Income due to one or more of its members.
• Pre-Grouping Tax Losses that have not been utilized by a member of the Tax Group
• The Tax Group is eligible to claim a Foreign Tax Credit due to income obtained by one of its members.
• Any corporate tax incentives as listed in Article 20(2)(g) of the Corporate Tax Law are advantageous to a member of the Tax Group.
• Unused carried forward pre-Grouping Net Interest Expenditure belongs to a member of the Tax Group.
Guidelines for Assigning Taxable Income
- Using the Tax Group’s accounting foundation, the Taxable Income is computed as though each member were a distinct Taxable Person for the purposes of assigning it to Tax Group members.
- Where interactions between members of a Tax Group have been removed by consolidation, the arm’s length principle should be applied consistently to determine the nature of these transactions. 220 Such transactions between members of a Tax Group shall have the same value as shown in the Tax Group’s consolidated Financial Statements if they are not removed during consolidation.
- The guidelines discussed here should serve as the basis for the attribution. However, the FTA can mandate the application of other attribution criteria if these guiding principles fail to produce an acceptable outcome.