Tax Group Requirements - Corporate Tax, UAE

Hello professionals, peers and colleagues,

In continuation of efforts and struggle to understand and practice tax laws as applicable in UAE, I will try to explain some implications of the Tax Group requirements in accordance with the Corporate Tax Law in UAE.

Today, we will be discussing the formation of a tax group for corporate tax purposes. To do so, I have categorized the requirements of the corporate tax law into four (4) broader classes.

1. The first category is the taxable person which stresses that every member of the tax group to be formed, must be a juridical person as well as a resident person according to the corporate tax law in UAE. To clarify this further, let's define what a "judicial person" is in the UAE. It refers to an incorporated entity that can be an LLC company, PJSC, trust, corporation, or any other incorporated entity. However, it does not include unincorporated partnerships, civil companies, establishments, or any other forms of unincorporated entities.

2. The second category of requirements is control and influence. In this category, three types of requirements have to be met, and all of these requirements must be met concurrently.

• The first requirement is 95% of the shareholding by the parent company in each of the subsidiaries that intend to be part of the tax group, and this shareholding must be through a legal instrument. There should not be an economic arrangement between parent and subsidiaries for the shareholding through some sort of internal agreement or other economic arrangement.
• Requirement number 2 in this category is the right to voting power, which must be at least 95% in each of the subsidies by the parent. Sometimes, shares are issued with a restriction on voting power which does not align with the respective shareholding and may hamper the ability of the subsidiary to be a part of the tax group.
• The third requirement in this category is the right to 95% of the net profits, as well as net assets. Net profit means, the profits earned each year by that subsidiary in which the holding company is required to hold 95% of shareholding. Right to net assets means here that, in the case of liquidation, the holding company has the right to at least 95% of the net assets in case the company is liquidated. For example, in certain cases, preference shares are issued to holders, which gives them priority over other shareholders in the profits of the company, and in the event of liquidation of a company, preferential rights are given to the holders of these preference shares in the net assets of the company.

3. The third category focuses on discussing the instances of privileges or benefits already extended by corporate tax law. Here, if a company is already exempt from corporate tax laws or is considered to be a qualifying free zone person enjoying certain tax benefits including zero rate of tax on its qualifying income, it is not permitted to form or be a part of a tax group with any other company.

4. The fourth and final category emphasizes financial compliance. All members of the company must follow the same financial year for accounting purposes, and follow the same accounting standard which is international financial reporting standards as applicable in UAE.

Example: Shareholding by Nominal Values irrespective of number of shares

Let's clarify how you can analyze the ownership structure with an example wherein Company A has 101 shares with a nominal value of AED 2,000 in total, and Company B holds 100% of Class 1 Shares in Company A. Company B holds 100 shares, representing 99% of the total number of shares in Company A. However, Company B only holds 50% of the total share capital in Company A in nominal terms, which does not meet the requirement of having 95% ownership in the company. Therefore, Company A cannot form a tax group with Company B.

Example: Shareholding through non-qualifying subsidiary

Let's take a look at another example to determine the difference between a qualifying and a non-qualifying subsidiary according to the law. When considering the possibility of forming a tax group, parent companies are required to hold 95% or more of either direct or indirect shareholding in their subsidiaries only through a qualifying subsidiary. A qualifying subsidiary is one in which the parent company either holds 95% of direct shareholding or indirect shareholding through a qualifying subsidiary which means a parent company is not allowed to utilize the ownership of less than 95% in its subsidiary to benefit from such subsidiary’s holding of shares in other companies. As we can see, in this example, Company A holds 90% directly and 8% indirectly (which is 80% of the 10% through Company C which is a non-qualifying subsidiary as discussed above), and hence, Company A cannot form a tax group with Company B for corporate tax purposes.

Example: Shareholding through qualifying subsidiary

To clarify further with an example, let's consider Company A's 95% ownership of Company B, which qualifies them to form a tax group. Company B, in turn, holds a 95% qualifying holding of shares in Sharing Company C, allowing them to form a tax group as well. However, it's important to note that Company A, B, and C cannot form a tax group together because Company A holds only 90.25% (95% x 95%) ownership in Company C, which is below the required level of 95% shareholding for forming a tax group with Company C. Nonetheless, Company A can still form a tax group with Company B, or alternatively, Company B and Company C can form a group with one another.

Example: Shareholding through qualifying subsidiaries

In this last and classic example of the tax group here, we can see that Company B holds 95% shareholding of Company B and In turn, Company B holds 50% of Company C. But here is the catch, we can see Company A also holds 50% of direct ownership in Company C. So, what Company A holds in Company C is the direct ownership of 50% and also an indirect ownership through a qualifying subsidiary, which is Company B of 50% in Company C. So the total holding of Company A in Company B accounts for 97.5%, which is more than 95% and hence, in this case, Company A is eligible to form a tax group with Company B as well as Company C.

In the end, I would like to thank you everyone for sparing your valuable time to see this video and provided me with an opportunity and platform to serve the fraternity of great professionals and intelligent people who are keen to learn various aspects of taxation in UAE. In case of any assistance to discuss the complications involved please feel free to shed the light and improve collective knowledge.

See you in next article, Bye !