Corporate Tax Group Formation in UAE

The implementation of the UAE's Corporate Tax regime introduced a significant concept for business groups: Tax Groups. These groups allow eligible companies to function as a single taxable entity, streamlining administration and potentially optimizing tax liabilities. But navigating the formation and operation of a UAE Corporate Tax Group under the new tax regulations can be complex. This guide dives deep into the key aspects you need to understand.

The Corporate Tax Law (Federal Decree-Law No. 47 of 2022) was issued on 9 December 2022 and applies to financial years beginning on or after 1 June 2023. This page explores the key features and advantages of this system, aiming to simplify the process of filing Corporate tax in Dubai for businesses of all sizes.

What are Tax Groups in the UAE?

Tax groups allow a group of companies under common ownership to be treated as a single taxable entity for UAE corporate tax purposes. This simplifies compliance by consolidating the financial statements of the group and enabling the parent company to manage the tax affairs for the entire group.

Who can form a Tax Group in the UAE?

• Legal Person : Tax Group members must be juridical persons since natural persons, or persons, cannot be members of this tax group.
• Tax Residents : All members of the group ought to be companies that are tax residents of the UAE.

Conditions for Forming a Tax Group in the UAE

• Juridical Person Condition : The tax group must comprise two or more juridical persons, such as companies, partnerships, or other forms of business entities.
• Resident Persons Condition : The Parent Company and each Subsidiary must be Resident Persons under the Corporate Tax Law (i.e., each member of the proposed tax group must be a resident juridical person).
• Ownership and Control Conditions : The Parent Company must hold at least 95% of the share capital and at least 95% of the voting rights, and be entitled to at least 95% of each Subsidiary’s profits and net assets (as required by the Corporate Tax Law) for the Parent to be the Tax Group parent.
• Exempt and Free Zone Conditions : Entities exempt from UAE Corporate Tax or operating in free zones can be part of a tax group, but only if they meet the other conditions.
• Financial Year and Accounting Standards : All members of the tax group must have the same financial year and follow the same accounting standards.
• Continuous Compliance : The tax group must continuously meet the conditions for forming a tax group and comply with all UAE Corporate Tax laws and regulations.

Steps to Form a UAE Corporate Tax Group

Verify Eligibility

Ensure that the Parent Company and Subsidiaries meet the required conditions:

• All members must be Resident Persons under the Corporate Tax Law.
• All members must be tax residents of the UAE.

Submit an Application to the FTA 

The Parent Company and each Subsidiary jointly apply to the Federal Tax Authority (FTA) to form a Tax Group

• Specify the first intended Tax Period for the Tax Group.
• Apply to the end of the current Tax Period for which the Tax Group is requested.

FTA Review and Approval

The FTA will review the application to ensure conditions are met

• Approval by the FTA is subject to ongoing compliance with the conditions.

Tax Group Formation

In the event of acceptance of this application, the Tax Group shall be established on the date referred to in the nominated Tax Period. However, the FTA may vary the date.

On approval of the Tax Group

There will be the issuance of a separate Tax Registration Number for the entire Tax Group, and individual Tax Registration Numbers will also be needed for every member.

Understanding the UAE Corporate Tax Grouping

In the UAE, a tax group allows two or more resident companies to combine their tax reporting as one entity. Under Article 40 of the Corporate Tax Law, this setup simplifies compliance by letting the group file a single Corporate Tax (CT) return covering all its members.

The Ministry of Finance (MoF) has outlined the process for forming a tax group. Here are the key steps:

Eligibility Requirements

• The parent company must hold at least 95% ownership and voting rights in its subsidiaries.
• All companies in the group must be UAE residents and subject to corporate tax (not exempt or in a 0% tax free zone).
• All members must share the same financial year.

Submission of Notice

• A signed notice by the parent company and all subsidiaries needs to be filed with the Federal Tax Authority (FTA).
• Additional subsidiaries can join an existing group by following the same process.

Benefits of Tax Groups

• Reduced Compliance Costs: Consolidated financial statements and centralized tax administration by the parent company streamline compliance for the entire group.
• Transfer of Losses: Tax losses from one company within the group can be offset against the profits of another, optimizing the group's overall tax liability. However, specific conditions apply to loss transfer.

Challenges of the Tax Group

• Shared Tax Liability: All companies in the group are responsible for paying the group's total tax.
• Complex Accounting: Preparing combined financial statements can be tricky and costly.
• Issues with Changes: Adding or removing companies can cause tax complications.

For further information, please refer to the Blog "UAE CORPORATE TAX GROUPS: PROS AND CONS YOU SHOULD KNOW".

Conditions for Transferring Losses

• The receiving company must be at least 75% owned by the group.
• The receiving company must not be exempt from corporate tax or located in a 0% tax free zone.
• The transferred loss cannot exceed 75% of the receiving company's taxable income.

The UAE's corporate tax regime offers tax groups as a valuable tool for simplifying compliance and optimizing tax liabilities for businesses operating under common ownership. By understanding the eligibility requirements, formation process, and benefits, companies can leverage this option to streamline their tax obligations in the UAE.

UAE Corporate Tax Group Liability: Sharing the Burden

The concept of joint and several liability for corporate tax within a Tax Group can seem daunting. Let's explore the implications:

• Shared Responsibility: All members of a Tax Group are legally responsible for ensuring the group's obligations regarding Corporate tax in the UAE are met. This means that if the parent company fails to pay the tax due, the FTA can pursue any member of the group to recover the dues.
• Limited Liability Option: While the default is joint and several liability, groups can apply to the FTA to limit liability to specific members. This offers greater financial control but requires FTA approval based on a strong justification.
• Impact of Group Restructuring: If a member leaves the Tax Group, they may still be liable for the group's tax obligations for the period they were a member. Careful planning and clear exit agreements are crucial to managing this aspect.

Compliance Requirements for a Tax Group

Ongoing Obligations:

When the Tax Group is operational, the Parent Company is supposed to submit consolidated financial statements, applying IFRS or IFRS for SMEs. Moreover, the entire group's tax return shall be submitted within 9 months from the end of the Tax Period. Additionally, it will ensure that the Corporate Tax is paid on behalf of the Tax Group at the due date. Also, the Parent Company can claim tax repayments if all the requirements are satisfied.

Tax Group Liability:

The Tax Group is treated as a single taxable entity, with the Parent Company handling all tax-related matters. If Corporate Tax is not paid or paid late, penalties can be charged to the entire group, and all members are jointly liable for outstanding taxes or penalties.

Tax Registration and Deregistration:

All members of the Tax Group, including the Parent Company, must have a valid Tax Registration Number. If the Tax Group or any member ceases its business activities, the Parent Company must apply to the FTA for deregistration of the group.

Changes to the Tax Group:

If adding or removing a member, the Parent Company must submit a joint application to the FTA to reflect these changes in the Tax Group.

Limitations and Considerations

• Loss Carry forward Restrictions: Losses from one group member may not always be used to offset profits from other members, limiting Tax Group benefits.
• Implications for Mergers and Acquisitions: Joining or leaving a Tax Group can complicate mergers and acquisitions. Changes in the group’s structure might require adjustments to the companies' tax positions.
• Operational Flexibility: The Parent Company must prepare consolidated financial statements, which can increase compliance costs. This responsibility might limit the flexibility of other group members.
• Foreign-Owned Entities: Only UAE residents and taxable entities can form a Tax Group. Foreign-owned subsidiaries or multinational groups may not qualify.
• Single Exemption Limit: The AED 375,000 exemption limit applies to the entire group, not each member. This could disadvantage smaller companies with lower profits.

Businesses should carefully assess these factors before joining or forming a Tax Group.

Advantages of a UAE Corporate Tax Group

• Simplify Tax Filing: The Tax Group consolidates into one tax return filing, saving time as it is not required to file each company separately.
• Loss offsets: This means losses suffered by one can be compensated by the profits of any other member in a group, thereby reducing the effective tax liability of the group.
• Less Administrative Work: With just one tax registration and one return, the group faces less paperwork, which reduces the time and costs spent on compliance.
• Improved Cash Flow: Offsetting losses can lead to immediate tax savings, boosting the group’s cash flow.
• Easier Internal Transactions: Transactions between group members are not subject to transfer pricing rules, simplifying internal dealings and reducing complexity.

To help you make an informed decision, we have prepared a detailed analysis of the advantages and potential challenges:  Corporate Tax Groups in UAE: Pros and Cons You Should Know

How can Reyson Badger assist you with UAE Corporate Tax Group Formation?

Forming a Corporate Tax Group in the UAE presents a strategic opportunity for eligible business groups. It can streamline tax administration, potentially optimize tax liabilities, and enhance group financial management. However, careful consideration of the eligibility criteria, operational changes, and potential liability implications is essential. Consulting with tax advisors experienced in the UAE's Corporate Tax regime is highly recommended to ensure a smooth and successful group formation process. Reyson Badger assists companies in forming groups for Corporate Tax purposes in the UAE.

By understanding these key aspects, you can make informed decisions about whether forming a UAE Corporate Tax Group aligns with your business strategy and maximizes the benefits offered by the UAE's corporate tax framework.