Demystifying CTP007: Financial Statements & Audit Requirements for Tax Groups

Listen This Article

When the UAE Corporate Tax Law came into force, one of the most attractive features for group structures was the ability to form a Tax Group. At first glance, it seems straightforward: instead of each company filing separately, combine them into one tax return, let the parent pay the Corporate Tax, and simplify compliance.

However, the Federal Tax Authority (FTA) has made it clear through Public Clarification CTP007 that Tax Grouping comes with its own set of obligations, particularly around Financial Statements and Audit Requirements.

This article breaks down the rules in simple language, highlights the traps for small, medium, and large companies, and answers the key question: Should you go for a Tax Group despite the added complexity?

1.What Is a Tax Group?

A Tax Group is created when two or more UAE companies meet the conditions of Article 40 of the Corporate Tax Law and apply to the FTA for group treatment. Once approved:

a. The group is treated as a single taxable person.
b. One parent company files the return and pays the tax on behalf of the group.
c. All members are jointly and severally liable for the tax due.

Sounds simple, but here’s the twist: to calculate taxable income, you cannot rely on your normal consolidated accounts. Instead, you must prepare Aggregated Financial Statements.

2.Aggregated FS vs Consolidated FS
Many CFOs assume that if they already prepare consolidated financial statements under IFRS, they can simply submit those. But that’s not true.
a. Consolidated FS (IFRS): Designed for investors and auditors. They merge parent and subsidiaries into “one company,” eliminate intercompany balances, and adjust for goodwill, fair value, etc.
b. Aggregated FS (Tax Group): Designed purely for tax purposes. They simply add together each member’s standalone financial statements, line by line, and then eliminate only transactions between group members.
Aggregated FS are a special purpose framework. They may look similar to consolidated accounts but follow different rules and exclusions.

3.Rules of the Game Under CTP007
Here are the compliance requirements in plain English:
a. Same Financial Year-End: Every member of the Tax Group must align to the same year-end. If one subsidiary currently has a December year-end and another has March, one of them will need to change.
b. Uniform Accounting Policies: All group members must follow the same accounting policies. You cannot have:
- One company using straight-line depreciation while another uses reducing balance.
- One applying FIFO for inventory while another uses weighted average.
- One capitalising borrowing costs (IAS 23) while another expenses them off.
This alignment is not optional. Otherwise, aggregated results will be distorted.
c. Intercompany Eliminations: Intercompany sales, management charges, and loans between members of the Tax Group must be eliminated. BUT If a company claims a deductible loss before joining the group (for example, impairment of a loan), that transaction cannot be eliminated until the loss is reversed.
d. No IFRS Consolidation Adjustments: Goodwill, bargain purchase gains, step acquisition adjustments, and fair value uplifts must not appear in Aggregated FS.
e. Audit Requirements: If the Tax Group as a whole cross’s audit thresholds, the Aggregated FS must be audited separately. Having an audit opinion on the parent’s IFRS consolidated FS does not cover this requirement.
f. Disclosure Rules: Aggregated FS must disclose:
- That they are prepared under a special framework.
- The list of group members with ownership details.
- Accounting policies, estimates, and judgments.
- Explanatory notes in line with IAS 1.

4.Practical Examples
Let’s see how this plays out for different types of businesses:

Small Group Example (2 Companies, Family Business)
Company A (parent) and Company B (subsidiary) form a Tax Group.
- A gives B a loan. B defaults. A writes it off → tax deduction taken.
- Next year, they form a Tax Group. Under IFRS consolidation, the loan would disappear. Under Aggregated FS, it stays until the loss is reversed.
- Risk: If they eliminate too early, they understate taxable income.
For small family businesses, this is a common trap — many assume loans can be eliminated immediately once grouping is approved.

Medium Group Example (Manufacturing Parent + 4 Subsidiaries)
Parent: Large manufacturing unit.
Subsidiary 1: Trading company (uses FIFO).
Subsidiary 2: Logistics company (uses weighted average).
Subsidiary 3: Maintenance services.
Subsidiary 4: Holding company (capitalises borrowing costs).

When aggregated:
- Inventory methods must be aligned → either all use FIFO or all use weighted average.
- Borrowing cost policies must be standardised.
- Depreciation must be consistent across entities.
Risk: Without alignment, the Tax Group will show overstated/understated costs → wrong taxable income.

Large Group Example (Multinational with UAE Sub-Holdings)
Parent Company in UAE owns 10 subsidiaries across different emirates. Some are in free zones, others onshore.
- Parent consolidates accounts under IFRS. Goodwill from acquisitions, fair value revaluations, and foreign subsidiary adjustments are all in place.
- For Corporate Tax purposes, all of these must be stripped out.
- Aggregated FS must start with standalone financials of each UAE entity, then adjust.
Risk: If the group reuses IFRS consolidated FS instead of preparing Aggregated FS, they may carry through adjustments like goodwill impairment or revaluation gains, which the FTA does not recognise.

5.Deferred Tax Complications
For larger groups, there is also the issue of deferred tax:
a. Consolidated FS might recognise a Deferred Tax Asset (DTA) for deductible temporary differences like impairments.
b. Aggregated FS do not aggregate tax balances.
c. This means Tax Group accounting profit is not the same as IFRS consolidated profit, creating confusion if finance teams are not careful.

6.Member Leaving the Tax Group – The Depreciation Trap
CTP007 highlights that when a company leaves a Tax Group, the treatment of previously eliminated transactions can create hidden risks, especially around depreciation.

Example: Parent sells an asset to Subsidiary within the Tax Group at a gain.
- Under Aggregated FS, that gain is eliminated (since it’s an intragroup transaction).
- Subsidiary continues to depreciate the asset based on the stepped-up value.

 If Subsidiary leaves the Tax Group within 2 years of the transaction:
- The earlier elimination is reversed.
- The gain that was ignored must now be recognised in the Tax Group’s taxable income at the time of exit.
- Subsidiary’s depreciation is effectively clawed back to prevent a tax advantage.

If Subsidiary leaves after 2 years:
- The elimination remains intact (no reversal).
- The depreciation impact stays with the leaving company, meaning the Tax Group does not need to adjust past eliminations.

7.Should You Form a Tax Group Despite This Complexity?
It depends on your structure and goals.
a. Benefits of a Tax Group
- Single tax return: Administrative simplicity.
- Offsetting profits and losses: Profitable entities can offset the losses of loss-making group members, reducing overall tax liability.
- Cashflow efficiency: Only the parent needs to make payment to the FTA.
- Easier intra-group restructuring: No taxable gain recognition on transactions between members.

b. Challenges of a Tax Group
- Extra compliance cost: You must prepare Aggregated FS in addition to your usual IFRS consolidated FS.
- Audit requirement: Aggregated FS may need a separate audit.
- Policy alignment headache: Subsidiaries with different policies must adjust their FS which may be time-consuming and costly.
- Joint liability risk: Even if one subsidiary defaults, the FTA can recover tax from any group member.

CTP007 reminds us of a crucial point: Tax Grouping is not just a registration formality.
- Aggregated FS are a special purpose framework.
- Compliance requires uniform policies, same year-end, eliminations, disclosures, and audits.
- Mistakes like premature eliminations or misaligned inventory policies can create tax risks.
If you’re considering a Tax Group, treat it as a project, not a form.
Get accounting, tax, and audit teams aligned from day one. The benefits of grouping are real, but so are the compliance demands.

 Author: CA Ramesh Jha

Disclaimer: Content posted is for informational and knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.