UAE Corporate Tax Law : Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses
The United Arab Emirates (UAE) is renowned for its favorable tax regime, which attracts numerous businesses to set up their operations in the country. With a very minimal rate of corporate taxes, the UAE is an ideal location for business ventures. However, companies operating in the UAE must comply with the corporate tax regulations to avoid any penalties or fines. One way to ensure compliance is by forming a tax group under the UAE corporate tax regime.
A tax group is a legal entity consisting of two or more “Resident Person”. The Tax Group can be formed by Parent and Subsidiary companies if they meet eligibility criteria as described in later part of this article. In this article, we will discuss detailed overview of a tax group under the UAE corporate tax regime.
Explanations given in this article are supported by Chapter 12 of the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses.
Eligibility (Article 40)
To form a tax group under the UAE corporate tax regime, the companies must meet specific criteria. Application to form a Tax Group can be made to authority, if all the following conditions are met:
- The Resident Persons are juridical persons.
- The Parent Company hold at least 95% of the Share Capital, Voting Rights, Profits and Net Assets of the Subsidiary, either directly or indirectly through one or more Subsidiaries.
- Neither the Parent Company nor the Subsidiary is an Exempt Person or a Qualifying Free Zone Person.
- The Parent Company and the Subsidiary have the same Financial Year and prepare their financial statements using the same accounting standards.
Note: If one or more subsidiaries, wherein a government entity holds a direct or indirect ownership interest of at least 95%, as outlined in point 2, can form a Tax Group, subject to the conditions to be prescribed by the Authority.
Representative Member & Liability of Compliance
A Tax Group formed under UAE CT Law will be treated as a single taxable entity with the parent company designated as the representative member. The parent company will handle all compliance obligations, but all members of the Tax Group will be jointly and severally liable for corporate tax payment. However, liability can be limited for certain members with Authority approval.
Circumstances where A Tax Group shall cease to exist
- Where the Parent Company no longer meets the conditions to form a Tax Group as specified in Clause 1 of Article 40. (Conditions as mentioned in Eligibility criteria above)
- Following approval by the Authority of an application by the Parent Company.
If a relevant subsidiary no longer fulfils the requirements to be a part of the Tax Group, as stated in Clause 1 of Article 40, then the Parent Company and the respective subsidiary can apply to the Authority for the subsidiary to exit the Tax Group. However, the Tax Group as a whole will continue to exist.
Important note on Taxable Income of a Tax Group (Article 42)
For tax purpose of determining the taxable income of a tax group, a Parent Company must consolidate the financial results, assets, and liabilities of each Subsidiary in the Tax Group, eliminating any transactions between them.
If a Subsidiary joins an existing Tax Group, any unutilised Tax Losses become carried forward Tax Losses of the group and can be used to offset Taxable Income attributable to that Subsidiary.
However, if a new Subsidiary joins an existing Tax Group, the existing Tax Losses of that tax group cannot be used to offset income of the new member.
Additionally, if a concerned member leaves the group within two years of transferring assets or liabilities, any previously eliminated income will be taken into account unless the associated income would have been exempt from Corporate Tax.
The Tax Group must prepare consolidated financial statements in compliance with local accounting standards.
Forming a tax group in the UAE is beneficial for related companies as it simplifies tax compliance. However, Eligibility criteria and tax regulations must be carefully considered.
