UAE Corporate Tax: Set up a tax group to optimise your compliance cost

PHOTO

This month, the Federal Tax Authority (FTA) released Corporate Tax Guide CTGTGR1 (the guide) focusing on tax groups. The guide offers detailed explanations on various aspects of tax group. This article addresses the conditions for establishing a tax group, while forthcoming articles will delve into other related areas.

The parent company and its subsidiary/ies can request the FTA to form a tax group, if they are resident juridical persons, with the parent company owning at least 95 per cent of the share capital, voting rights, and entitlement to profits and net assets of the subsidiary/ies. Both entities should not be exempt or qualified free zone persons. Additionally, the parent company and its subsidiary must share the same financial year and follow the same accounting standards for preparing their financial statements.

The juridical person condition clarified that the sole establishments, freelancers, and unincorporated partnerships cannot be part of the tax group.

The residency condition requires an assessment of an individual’s residency status as per the double tax treaty. If a person is deemed a resident of another country according to the treaty, they cannot join the tax group. However, a person with dual residency may be included if they are solely acknowledged as a tax resident of the UAE. Furthermore, a foreign company without resident status is not eligible to be a part of a tax group.

When evaluating the 95 per cent shareholding in a subsidiary’s share capital, only the nominal value of the paid-up or issued share capital is considered, regardless of the number of shares or authorised share capital. In cases where a company’s share capital lacks a nominal value, shareholders’ rights are typically determined using an alternative measure, such as a shareholder’s allocated capital account.

Voting rights are often linked to the nominal value of share capital, but it’s crucial to assess them independently from legal share ownership. In certain instances, an entity’s founding documents and shareholders’ agreement might allocate voting rights differently from legal share ownership. When a subsidiary issue shares with and without voting rights, only shares with voting rights are considered when evaluating compliance with the voting rights condition.

The requirement of possessing 95 per cent entitlement to profits and net assets are distinct conditions that must be evaluated separately. In cases where certain profits are unavailable for distribution, such as those allocated to a non-distributable legal reserve, shareholders generally retain the right to these profits. Entitlement to net assets is examined during the subsidiary’s winding up, with net assets representing the value of the subsidiary’s total assets minus its total liabilities.

Entities that are exempt, such as government entities, government-controlled entities, companies engaged in natural resource businesses, qualifying public benefit entities, qualifying investment funds, and public social security and pension funds, are ineligible to participate in a tax group. However, taxable subsidiaries of a government entity have the option to establish or join a tax group independently of the government entity, if they meet the relevant criteria.

A qualified free zone person is not eligible to join a tax group. A branch of a non-resident person registered in a free zone cannot be a part of a tax group as it does not satisfy the requirement of being a separate legal entity from its head office.

To form a tax group, the parent company and subsidiary must have the same financial year. In cases where their financial years differ, they have the option to request a modification of the financial year from the FTA. However, any adjustment cannot exceed an extension of 18 months or a reduction to less than 6 months.

Every member of the tax group is required to adhere to uniform accounting standards when preparing their financial statements. This entails utilizing either the cash basis or accrual basis of accounting, and employing full-fledged IFRS, IFRS for SMEs, or cash basis of accounting for all entities of the tax group.

The business groups should assess their position to form a tax group to reduce the administrative work; and enjoy many other benefits transfer of assets and liabilities, transfer of losses etc. in the tax group.

Mahar Afzal is a managing partner at Kress Cooper Management Consultants. The above is not the official view of Khaleej Times but an opinion of the writer. For any clarification, please feel free to contact him at mahar@kresscooper.com.