CORPORATE TAX IN UAE - TAX GROUPS

CORPORATE TAX IN UAE - TAX GROUPS

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It is common for companies to operate within a group. Fundamentally, the basis of a group formation is a common ownership.

The basic Corporate Tax rules applicable on a company by company basis and could in some circumstances result in unfair tax consequences for companies within a group. The tax authority in UAE has incorporated various rules in the Corporate Tax Decree Law which aim to eliminate or minimize such unfair tax treatments by recognizing the existence of Tax Groups of companies. In this article we will see how a Tax group can be formed and what is its impact on the group members.

Who can form a Tax Group?

Two or more Taxable Persons who are Juridical Persons and resident in UAE are eligible to form a Tax Group, where one Taxable Person is a Parent Company who holds directly or indirectly at least 95% of all other Taxable Person's (Subsidiaries):

·??????Share Capital

·??????Voting Rights

·??????Profits and Net Assets

Additionally, all group companies should follow the same Financial Year and must use the same Accounting Standards. We have seen all Taxable Persons who meets the abovesaid conditions can form a Tax Group. However, a Qualifying Free Zone Person cannot form a part of Tax Group as it has different tax implications and enjoys the preferential rate of 0%.

A Government Entity who is an Exempt Person is not eligible to form a Tax group. Basically, all Exempt Persons are not eligible for Tax Grouping. As an exception to this, one or more Subsidiaries of a Government Entity may form a Tax group, provided that the Government Entity owns at least 95% of the ownership interest in the Subsidiaries and Subsidiaries meets all the other conditions required to be a part of Tax group.

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Application to FTA

Both Parent company and Subsidiaries shall be required to make an application to the authority to form a Tax Group. On approval the group is treated as a single Taxable Person which will be represented by the Parent Company.

The first Tax Period of the Tax group shall be the period specified in the application, unless the authority determined a different Tax Period.

Addition and Removal of a Subsidiary

A Subsidiary who meets all the conditions above discussed can join a Tax group following an application to Authority by Parent Company and the Subsidiary by itself.

A Subsidiary can leave a Tax Group voluntarily through an application by Parent company and the Subsidiary by itself. The effective date of such removal shall be the beginning of the period mentioned in the application, unless the authority determined a different date.

The removal of a Subsidiary can be mandatory if it no longer meets the conditions required to form a Tax group. The effective date of such removal shall be the beginning of the tax period in which the conditions required to form a Tax Group are no longer met.

Cessation of Tax Group

A Tax Group shall cease to exist in any of the following circumstances:

a)????Following approval by the Authority of an application by the Parent Company.

b)????Where the Parent Company no longer meets the conditions to form a Tax Group.

However, a Parent Company can apply to authority to be replaced by another Parent Company without a discontinuation of the Tax group if the new parent company meets all the conditions required to form a Tax group. The new Parent Company could be also a former or existing subsidiary.

Computation of Tax Group CT Liability

Although the companies are within a Tax Group, each company will still have to prepare their own Corporate Tax computation for the relevant Tax Periods. Moreover, the Parent Company will have to consolidate the Financial Statements and should not include any intra-group transactions before the computation of the Tax Group CT liability.

All the members will be jointly and severally liable for the Corporate Tax payable computed for the Tax Group.

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Unutilized Tax Losses

There may arise a scenario where a member company have unutilized Tax Losses at the time of joining a Tax group. An existing Tax Group may also have unutilized Tax Losses at the time of adding a new Subsidiary.

Any unutilized pre-grouping losses of a Subsidiary can be only carried forward to the succeeding years of Tax Group to the extend of Taxable Income of the relevant Subsidiary. Similarly, any unutilized Tax Losses of an existing Tax Group cannot be used to offset the Taxable Income of the Tax group to the extend of income of new Subsidiary.

In case if a Subsidiary leaves a Tax group, the Tax Losses of the Tax group shall remain with the Tax group. If the Tax group itself is ceased then all unutilized Tax losses of the Tax group shall remain with Parent Company if Parent Company continues to be a Taxable Person.

Any unutilized pre-grouping Tax Losses of the leaving Subsidiary can be still carried forward to the future years after leaving the Tax group to its own future Taxable Income.?

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