UAE Guidance On Group Taxation

The Federal Tax Authority (FTA) of the United Arab Emirates (UAE) has recently issued comprehensive guidance on the tax group regulations outlined in the Corporate Tax Law (CTL). These regulations are applicable for financial periods starting on or after June 1, 2023. The guidance delves into various aspects of the tax group rules, including formation, termination, taxable income computation, and compliance obligations.

Forming a tax group offers several advantages, such as the ability to submit a unified group tax return and the flexibility to transfer tax losses, assets, and liabilities among group members without incurring tax consequences. However, there are also potential drawbacks to tax grouping:

  1. The zero rate on profits up to AED 375,000 applies at the group level and does not vary based on the number of group members.
  2. The revenue limit for small business relief remains capped at AED 3 million for the entire group.
  3. Tax group members bear joint and several liability for tax debts arising during their membership in the group.

Conditions for Tax Grouping: According to the CTL, a tax group is defined as two or more resident taxable entities treated as a single taxable entity. Electing for tax grouping requires the parent company and relevant subsidiaries to meet specific eligibility criteria and jointly apply to the FTA. The following conditions must be met throughout the relevant tax period:

  • All companies must be resident juridical entities, distinct legal entities incorporated or effectively managed and controlled within the UAE.
  • The parent company must directly or indirectly own at least 95% of the share capital, voting rights, or profits and net assets of each subsidiary.
  • None of the entities in the group can be exempt persons or qualifying free zone persons.
  • All group companies must share the same accounting period and adhere to the same accounting standards (IFRS or IFRS for small and medium-sized companies).

Application Timing and Group Formation: The timing of the application for group treatment determines when the tax group is established. The FTA’s guidance emphasizes that the application must be submitted before the end of the desired tax period for grouping. Failure to do so results in tax group status commencing in a subsequent tax period, as determined by the FTA.

Upon the formation of a tax group, a new tax reference number (TRN) is assigned to represent the group administratively. Individual TRNs are retained by group members and can be utilized if they exit the group.

Taxable Income Calculation for the Group: The parent company is obligated to compute the group’s taxable income by consolidating the financial accounts of each subsidiary, eliminating intragroup transactions. Tax consolidation may differ from accounting consolidation due to potential tax-specific adjustments. Transfer of tax losses between group members is allowed, provided they were incurred during their membership in the tax group. Pre-group tax losses can be offset against taxable profits attributed to the respective member.

Attribution of Taxable Income: Despite preparing consolidated accounts for the entire group, taxable income must be attributed to individual members in specific cases, such as unutilized pre-grouping tax losses, income subject to foreign tax credit, benefits from CTL tax incentives, and unutilized carried forward pre-grouping net interest expenditure. Attribution must adhere to the arm’s length principle.

Interest Deduction Limitation Rule: The limitation on net interest expenditure, allowing a deduction up to 30% of EBITDA or AED 12 million, applies to the entire tax group as a single entity, not to individual members. Disallowed interest expenditure is carried forward for ten tax periods. Ceasing to exist as a tax group without replacement results in the loss of unused net interest expenditure.

Foreign Tax Credits: Tax groups can claim a tax credit for foreign tax paid on overseas income, limited to the lower of the foreign tax and UAE corporate tax due on the same income, deducting related expenses. An election is available to exclude foreign permanent establishment income from total profits, with the parent company making the election binding for all group members.

Compliance Requirements: Ensuring compliance with conditions in each tax period is essential for the tax group. Non-compliance leads to termination of tax group status, effective from the beginning of the non-compliant period. Compliance obligations include filing a joint application for new entrants, preparing consolidated financial statements, filing a tax return for the group, paying corporate tax, seeking tax refunds, registering/deregistering the tax group, maintaining transfer pricing documentation, and liaising with the FTA on corporate tax matters.

Changes in the Tax Group: Provisions exist in the CTL for scenarios such as replacing a parent company, transferring a member’s business, joining or leaving the group. The parent company must submit an application to the FTA, specifying the affected tax period, with deadlines for submission. Events like a member joining or leaving the group impact the composition of the single tax return for the group.

Cessation of the Tax Group: A tax group ceases to exist if approved by the FTA following a parent company’s application, if the parent company is no longer eligible, or if there are only two members, and one transfers its business to the other. Dissolution can occur either from the beginning of the tax period or the effective date of the transfer of business. Upon cessation, the tax group is deregistered from corporation tax. Disbanding requires the parent company to confirm the payment of corporate tax liabilities and penalties, along with filing all tax returns.

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