Tax Group UAE: Eligibility, Benefits and Drawbacks Explained

Exploring the Key Features of Tax Group UAE

The UAE Corporate Tax (CT) Law introduces the concept of a “Tax Group,” allowing eligible resident companies to be treated as a single taxable entity for tax purposes. This article explores the key aspects of Tax Groups in the UAE CT framework.

What is a Tax Group?

As per the Corporate Tax Law, two or more Taxable Persons would be treated as a single Taxable Person if such persons fulfill the conditions of Article 40 of the CT Law. Such two or more Taxable Persons should be resident juridical persons in order to form a Tax group. It is through this provision of the law, that a parent company and its subsidiary can become a single taxable person under the CT law and the tax liability is determined on a consolidated basis for the entire tax group and a single tax return is submitted. In order to form a tax group, the taxable persons, who fulfill the relevant conditions should make an application to FTA. Post the approval from FTA, such taxable persons can function as a tax group.

It is noteworthy that a Tax group under CT law is distinct from the tax group as per the VAT law.

UAE Tax Group Eligibility Criteria:

A Tax Group can be formed by a parent company and its subsidiaries upon application to the FTA, subject to fulfillment of the following conditions:

1. The Parent Company and each Subsidiary are juridical persons. Meaning such taxable person should have separate legal existence from its founders, owners and directors. A sole proprietor is not a juridical person hence cannot form a tax group. Unincorporated joint ventures are also barred from forming a tax group.
2. The Parent Company and each Subsidiary are Resident Persons as per the CT law. The Parent Company and its Subsidiary should not be considered resident for tax purposes in another country under international agreements. Thus, PE or branches of foreign companies cannot form tax group.
3. The Parent Company owns at least 95% of the share capital of each Subsidiary, either directly or indirectly through one or more Subsidiaries.
4. The Parent Company owns at least 95% of the voting rights of each Subsidiary, either directly or indirectly through one or more Subsidiaries.
5. The Parent Company is entitled to at least 95% of each Subsidiary’s profits and net assets, either directly or indirectly through one or more Subsidiaries.
6. Both the Parent Company & Subsidiaries should not be an Exempt Person.
7. Both the Parent Company & the Subsidiaries should not be a Qualifying Free Zone Person.
8. The Parent Company and each Subsidiary must have the same Financial Year AND
9. The Parent Company and each Subsidiary must prepare their Financial Statements using the same Accounting Standards.

Note:

• Resident Person can only be part of one Tax Group at any given time.
• To claim Small business relief, Tax Group shall be treated as a single person and revenue threshold of AED 3 million applied on the consolidated revenue of the tax group.

Understand the tax rates in UAE VAT to better assess your business’s readiness for group registration.

Tax Group Benefits

1. Simplified Compliance & Administration:

Enables streamlined registration process for all taxable persons eligible to form a tax group, under a single tax registration. Also, filing a single consolidated tax return significantly reduces administrative burden and compliance costs compared to individual filings. For more insights on VAT refunds, visit our comprehensive guide on navigating VAT refunds in Dubai.

2. Benefit of offset of tax losses:

Allows for the offsetting of losses incurred by one entity against profits of another belonging to the same tax group, leading to immediate tax savings and improved cash flow.  By utilizing group-wide losses to offset overall taxable income, the tax group can achieve a lower overall tax burden compared to individual entities filing separately. Explore the benefits of outsourcing accounting services in Dubai to manage tax-related compliance effectively.

3. Reduced Transfer Pricing Complexity:

Eliminates the need for arm’s-length pricing analysis for transactions between group entities, reducing associated compliance costs & by lowering the risk of scrutiny, subject to certain exceptional cases wherein arm’s length is required to complied with.

UAE Tax Group Drawbacks

1. Strict Eligibility criteria:

Taxable persons are required to fulfill all the conditions laid down under the law in order to be eligible to form a tax group. These conditions are primarily focused on parent-subsidiary relationships. Due to these strict criteria, many entities cannot form a tax group.

2. Loss of Individual Exemption:

The basic exemption limit of AED 375000 is applied collectively, meaning individual members lose their individual exemption thresholds. This can increase the tax liability for groups with lower overall profitability. Small business relief threshold of AED 3 million is also applied collectively to the tax group, lowering the chance of obtaining the benefit. For a detailed understanding of UAE corporate tax thresholds, check our comprehensive guide.

3. Increased Accounting Complexity:

The requirement to prepare consolidated financial statements can increase accounting complexity and costs compared to individual financial statement preparation.

4. Joint and Several Liability:

All taxable persons forming the tax group are jointly and severally liable for the tax liability of the entire group. This increases the potential financial risk for each of the taxable person.

5. Challenges posed at the time of reconstitution/restructuring:

Any changes in group’s constitution, such as entry, exits and mergers and acquisitions can create complexities in tax group administration and compliance, as the Law specifies rules for offset & carry forward & forfeiture of losses in the case of reconstitution or restructuring.

Learn about the common tax mistakes businesses make and how to avoid them to mitigate risks.

To summarize, forming a corporate tax group offers significant advantages & also presents certain challenges. Businesses should carefully evaluate their specific circumstances and assess whether the potential benefits of forming a tax group outweigh the potential drawbacks. Professional tax advice is crucial to determine eligibility, assess the potential tax implications, understand and analyze the complexities of tax group formation and administration.

We, at BCL Globiz, provide assistance in all matters relating to the corporate tax compliance. For further inquiries, get in touch with us today at nikhil@bclglobiz.com.