Entities can make significant changes to business activities during their time of operations for reasons in the business's best interest. These changes may be regarding their financial status, operational structure or transfer of ownership, to mention a few. Corporate Tax Law in UAE recognizes that businesses undergo various restructuring, such as business mergers, and legal mergers. Therefore, it furnishes tax reliefs in calculating the Taxable Income for a restructured business. Thus, this article seeks to explain the tax reliefs available to restructured businesses under Corporate Tax Law in UAE.
Conditions for Restructured Businesses to Avail Corporate Tax Relief
Under the Corporate Tax Law in UAE, determining the taxable income of a restructured business, the Taxable Person may not take into account any gain or loss provided that;
- The taxable person transfers an independent part of the business to another taxable person or to a person who, as a result of the transfer, will become a taxable person
- The entire business is transferred by one or more taxable persons to another taxable person or to another person who will become a taxable person by the transfer in exchange for shares or ownership interest of the transferee, and the transferor taxable person(s) cease to exist as a result of the transfer
Qualification for Business Restructured Tax Reliefs under Corporate Tax Law in UAE
A restructured person, under the UAE Corporate Tax Law, shall qualify for tax relief if the following conditions are met.
- The transferee meets all the requirements prescribed by the UAE's applicable law. This means that restructuring transactions of any sort must adhere to all provisions of any UAE Federal and/or Emirate-level laws and regulations to benefit from tax relief under the UAE Corporate Tax Law
- The taxable persons must be resident persons, or if non-resident persons, the taxable non-income person must have a permanent establishment in the UAE.
- Both the transferee and transferor must not be exempt persons for corporate tax purposes under the UAE Corporate Tax Law to enjoy business restructure tax relief
- Both the transferee and the transferor must not be Qualifying Free Zone Persons unless Qualifying Free Zone Persons who have elected to be subject to Corporate Tax at the rates
- specified under the Corporate Tax Law.
- Both taxable persons must have their financial year ending on the same day.
- Both taxable persons must use the same accounting method in preparation of the financial statements.
- The objectives of the transfer must be for valid commercial or non-fiscal reasons reflecting economic reality.
Requirement for Restructure Businesses to Avail to Tax Relief
The UAE Corporate Tax Law requires Taxable Persons to meet the following when applying for Restructuring Business Tax reliefs:
- That at the time of the transfer, the assets and liabilities are transferred at their netbook value to avoid incidents of gains or losses
- The value of the shares or ownership must not exceed the net book value of the assets transferred and assumed liabilities less than the value of any other forms of consideration received.
- The values of shares or ownership interest received must not be more than the book value of the shares or ownership interest surrendered less than the value of any other form of consideration received.
- Any unutilized tax losses incurred by the transferor before the tax period within which the transfer is completed may be treated as carried forward tax losses of the transferee subject to the recommendation of the Minister. If the transfer involves the tax person transferring an independent part of the business, only unutilized tax losses can be applied to the independent part of the business being transferred.
A taxable person shall be entitled to restructure tax relief where
- The shares and ownership interest transferred are received by another person and not the transferor taxable person
- The shares and ownership interest are issued or transferred by another person and not the transferee taxable person
- Where the shares or ownership interest are not received by a taxable partner in an Unincorporated partnership.
This clearly shows that under the UAE Corporate Tax Law, a third party is required to be the recipient or the issue of the right or consideration of the transfer while adhering to all other conditions.
In the case of a partial transfer of the business, the tax relief shall only apply to the unutilized tax losses attributed to the transfer of the independent part of the business.
Tax Relief conditions time limit and restrictions
The UAE Corporate Tax Law requires all parties to the transaction to meet the conditions of the tax relief under the law for a minimum of two years. This requirement is to ensure that the business restructuring tax relief will only be applicable to business restructuring transactions and not just to provide for a tax-neutral transfer of assets and liabilities of a mere sale transaction.
The UAE Corporate Tax Law further restricts the transfer of shares or ownership interest in the transferor or transferee to a person outside the Qualifying Group of the relevant taxable person within two years of the initial transfer. Thus, no subsequent transfer of either an independent part or the whole business is allowed under the UAE Corporate Tax Law within the first two years of transfer under the business restructuring tax relief. Under the law, where there is a transfer within the first two years in violation of the abovementioned restrictions, the transfer shall be taken to have taken place at the market at the date of transfer value transfer. The taxable income shall be adjusted, reflecting the tax losses of the involved taxable persons.
Seek the expert services of top Tax Consultants in the UAE
For Restructured Businesses to avail Tax Relief in compliance with the Corporate Tax UAE, it is advisable to seek the services of top Tax Consultants in UAE. Thus, contact us today and we shall be glad to assist you.
Abrar Ahmad holds a Master’s as well as an MPhil in Finance and has an extensive experience of 10+ years in managing all aspects of Taxation, VAT Consulting and Accounting. He also carries with him a working knowledge of corporate tax and has helped drive value and growth to the businesses of numerous clients.