Tax Group in UAE – To Form or Not to Form

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The Corporate Tax Law of the UAE provides an option of forming a Tax Group. This means that two or more taxable persons who meet the following conditions can apply to form a Tax Group and be treated as a single taxable entity for Corporate Tax purposes:

- both, the parent company and its subsidiaries must be resident in the UAE, have the same financial year and prepare their financial statements using the same accounting standards;

- parent company must (directly or indirectly):

• own at least 95% of the share capital of the subsidiary;
• hold at least 95% of the voting rights in the subsidiary; and
• is entitled to at least 95% of the subsidiary’s profits and net assets.

A foreign juridical person may also be part of Tax Group if it is treated as resident by virtue of being effectively managed and controlled from the UAE. However, a Tax Group cannot include exempt persons or a Qualifying Free Zone Person (QPZP). It is important to note that the above conditions must be met throughout the tax period.

Pros and Cons of the Tax Group Regime

The Tax Group Regime offers some distinct advantages like:

a. Reduced compliance costs due to single tax return filing under direct and indirect tax;

b. Benefit of offsetting loss of a member company against profit of another entity of group; and

c. Non applicability of transfer pricing rules due to elimination of intra-group transactions in consolidated financial statements. 

Likewise, the regime also has some shortcomings as listed below:

a. Limited eligibility criteria since it is restricted to resident taxable persons;

b. Joint and several liability of members for tax liability of the Tax Group

c. Non eligibility to the favourable QFZP regime; and

d. Complexities of preparing consolidated financial statements.

Compliance

The parent company is primarily responsible for compliance of the Tax Group, though all entities are jointly and severally responsible. The application to form a Tax Group or join an existing group must be submitted to Federal Tax Authority (FTA) before the end of the relevant Tax Period. A subsidiary can join the Tax Group by making an application with parent company to FTA. If during any tax period, a subsidiary fails to meet the relevant conditions mentioned above of Tax Group, it must leave an existing Tax Group. Also, the parent company and subsidiary can opt to leave the Tax Group subject to approval by the FTA.

Treatment of Tax Losses

The unutilized tax losses of a subsidiary joining the Tax Group will be considered as that of the Tax Group (known as pre-grouping tax loss). Such loss can be set off against the taxable income the Tax Group only to the extent the taxable income is attributable to the subsidiary to which the tax loss belonged. The carried forward pre-grouping tax losses cannot exceed 75% of the tax loss relief limit. If a subsidiary leaves the Tax Group, it can retain the unutilized pre-grouping losses  brought into the Tax Group but any tax losses incurred while it was part of the Tax Group, will remain with the Tax Group.

Conclusion

Companies operating under common shareholding, with parent company being the dominant shareholder, or family businesses must evaluate if it is rational to form a Tax Group. For instance, companies under a Tax Group are entitled to a single basic threshold exemption of AED 375,000 which would otherwise be available for each entity. Further, the regime may be beneficial if there are substantial losses to be offset within the group. At the same time, it may not be beneficial if there are non-resident entities involved in the group and the benefit of tax treaties is also available.

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