Navigating the Guide to Business Restructuring Relief Under the UAE's Corporate Tax Law

Introduction:

Corporate Tax is a direct tax imposed on business profits.In January 2022, the UAE’s Ministry of Finance announced the introduction of Federal Corporate Tax. Subsequently, businesses operating in the UAE whose financial year began on or after June 1, 2023, came under the purview of Federal Corporate Tax law. The Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, as amended by Federal Decree-Law No. 60 of 2023, govern corporate tax in the UAE. The introduction of this law firmly positions the UAE as a leading global hub for business and investment while reaffirming the UAE's commitment to meeting international standards for tax transparency.

For businesses falling under the purview of the UAE’s Corporate Tax, the tax is 0% for taxable income up to AED 375,000 and 9% for taxable income above AED 375,000. For companies that will fall under the OECD-prescribed “Pillar Two,”the UAE Ministry of Finance (MoF) has already held a public consultation on the Global Minimum Tax to receive feedback from stakeholders, including businesses, tax professionals, and particularly multinational groups operating in the UAE.

Article 27 of the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses specifically talks about Corporate Tax relief for Business Restructuring. A comprehensive guidance on the same was also published on April 17, 2024, on the UAE FTA Portal. In this article, we will look at different aspects of Article 27 as well as how this guidance is intended to help companies navigate provisions of Business Restructuring Relief.

What is Business Restructuring Relief?

Restructuring is defined as a “type of corporate action taken that involves significantly modifying the debt, operations, or structure of a company as a way of limiting financial harm and improving the business.” This can involve mergers (combining with other companies), demergers (splitting into smaller units), acquisitions (buying other companies), or reorganisations (changing internal structure). Article 27 of the Federal Decree-Law No. 47 gives businesses relief during restructuring. Often, business restructuring is associated with tax gain or loss even when the ultimate ownership isn’t changed.However, under the provisions of this article, companies going through mergers and certain other kinds of corporate restructuring can do so without having any immediate impact on their taxes. The Corporate Tax Guide CTGBRR1 provides general guidance on the Business Restructuring Relief available under Article 27 of the Corporate Tax Law. Although not legally binding, the guide, through examples and flowcharts, simplifies the provisions of Article 27 of UAE’s Corporate Tax Law.

Scope of the Guide

The Corporate Tax Guide CTGBRR1 covers several key areas including types of transactions that are eligible for relief, detailing the specific requirements that businesses need to meet to qualify for the Business Restructuring Relief. The guidance also helps in clarifying what happens once a company decides to opt for the relief, including how it affects their taxes and what they need to do to maintain these benefits. The guide also details the scenarios where the relief could be reversed or “clawed back” if certain conditions are not met, and the potential consequences of such clawbacks.

The guide is also meant to help companies stay compliant with broader UAE Corporate tax law while they go through business restructuring. This guidance is designed to ensure that businesses navigate restructuring smoothly, understanding both the opportunities and obligations that come with the relief.

Transactions under Business Restructuring Relief

Two specific categories of business restructuring are eligible for the relief covered in Article 27(1)(a) and Article 27(1)(b) of the Corporate Tax Law. The first is when the transfer of the whole business or an independent part happens from one taxable entity to another, and the second is when an entire business is transferred to another entity, with the original entity ceasing to exist.

The guidance also elaborates with specific examples of the types of Business Restructuring transactions that are covered by both articles. It is also important to note that some transactions do not qualify for Business Restructuring Relief. For example, if a Taxable Person liquidates and its assets or liabilities are transferred to another Taxable Person because of liquidation or, say, when a subsidiary company merges into its parent company after which the subsidiary company stops existing as a separate legal entity, then Business Restructuring Relief would not apply to them. There are other examples given in the guidance detailing transactions that will not be covered under Business Restructuring Relief provisions.

Conditions to Qualify for Business Restructuring Relief

Legal Compliance - The transfer must be done according to UAE law and meet all required conditions.

Taxable Persons - Both the transferring company (Transferor) and the receiving company (Transferee) must be Taxable Persons who are either residents or non-residents with a permanent establishment in the UAE.

Exempt Person or Qualifying Free Zone Person - Neither the Transferor nor the Transferee can be either an Exempt Person or a Qualifying Free Zone Person. A Free Zone Person but not a Qualifying Free Zone Person may still meet the requirements for Business Restructuring Relief.

Financial Year End - Both the Transferor and the Transferee should have their financial year ending on the same date.

Accounting Standard - Both parties must prepare their financial statements following the same accounting standards.

Economic Reality - The transfer must be done for valid commercial reasons or other non-fiscal reasons that reflect economic reality.

When transferring a part or the entire business, the payments (consideration) must go to the Transferor. An exception to this rule is if the payment is received by a person who has a direct or indirect ownership interest of at least 50% in the Transferor.The payment to the Transferor should be in the form of shares or other ownership interests, as detailed in the guidance. In the case of other kinds of transfers such as cash, Business Structuring Relief will still be possible if the cash amount doesn’t go above the lower of the following two values: the recorded book value of the assets and liabilities being transferred, or 10% of the value of the shares or ownership interest given out.

The transfer of assets and liabilities as part of restructuring should be transferred at their recorded book value and not the current market value. Also, within two years after the transfer if there is a change in ownership by which the shares or other ownership interests of either the Transferor or the Transferee are sold, transferred, or disposed to one who isn’t a member of the Qualifying Group then the Business Structuring Relief would be reversed or “clawed back”.

Conclusion

Business Restructuring Relief provision in the Corporate Tax regime firmly establishes the UAE as a business-friendly nation. This relief helps companies navigate through changes such as mergers or reorganisations, by easing the financial burdens on them. The provisions of Business Restructuring Relief also enhance the UAE’s appeal to businesses worldwide. The guide on Business Restructuring Relief is a great way to assist businesses in understanding the provision of Article 27 of the Corporate Tax Law.

Explore how AKW Consultants can help you in your journey of restructuring your business as well as complying with other provisions of the Corporate Tax Law.