Subsidiary Exit or Tax Group Dissolution

A subsidiary is a resident business partially or wholly owned by a parent company, as defined under corporate tax law. When companies within the same country form a tax group, they consolidate operations to manage taxes collectively as a single entity. Both the parent company and subsidiary must remain resident entities and not be recognized as tax residents in another jurisdiction under international treaties. If any tax group member acquires tax residency in another country, it automatically exits the group at the beginning of the tax period in which the change occurs.

Tax Group: Formation & Cessation

• Formation: -A Tax Group is created at the beginning of the tax year based on the group application submitted to the Federal Tax Authority (FTA). The FTA may also set a distinct commencement date, coeval with the start of any other tax period. This allowance facilitates the formation process to reckon with a multi-faceted business and regulatory timeframe.

• Cessation: - A tax group ceases to exist under the following circumstances:

• FTA Approval: The FTA consents to the disbandment of the tax group.
• Non-compliance: The parent entity does not satisfy the requisite conditions during the relevant tax timeframe.
• FTA Discretion: The FTA has the power to rub out or alter the parent company of a tax group when it holds the information. The parent company will then be informed by the FTA about the dissolution or change.

Joining Or Leaving a Tax Group

• Joining: - Subsidiaries can easily be integrated into an already existing Tax Group by making a group application with the Parent Company. New entities, such as recently formed Parent Companies or Subsidiaries, can join from the day they are incorporated, ensuring no delays in compliance. This is so as to facilitate compliance right from the start.

• Departing: - A subsidiary is required to sever its ties from an existing tax group when:

• Disengagement: A disengagement application from the tax group tabled by both the parent body and the subsidiary is sanctioned by the FTA.
• Non-compliance: The subsidiary fails to comply with the conditions it had to satisfy in order to remain in the tax group.

A parent company of a tax group is allowed to submit a request to the FTA to be substituted with another parent company without having to dissolve the tax group, in case the new parent company satisfies all the relevant criteria. An application can also be submitted where the previous parent company is no longer existent and the new parent company or one of its subsidiaries is the universal legal heir. A company is regarded to have parted ways with the tax group from the start of the tax period in which it no longer satisfies the conditions warranted.

Tax Computation of a Tax Group 

To compute the income tax incurred by a tax group, the head company is required to prepare consolidated financial accounts of all the subsidiaries for that particular tax period by means of aggregation. One key aspect of Tax Group administration is the elimination of intra-group transactions, including valuation adjustments and transactions between group members.

• Tax Losses (Pre Grouping): - “Pre-grouping tax losses,” also called carried forward losses, are tax losses that are not utilized by a subsidiary that belongs to a tax group. When a subsidiary joins a tax group, its tax losses become carried over to the tax group. These losses can only be utilized when the tax group has a taxable income and that income is attributed to the same subsidiary. The pre-grouping tax losses are restricted to 75% of tax losses relief limit.

• New Subsidiaries: -If a new subsidiary joins a pre-existing tax group, it must independently relieve taxes. All tax losses incurred by the already existing group cannot be reduced with this new subsidiary’s tax income.

• Leaving Subsidiaries: -When a tax group member leaves the group, it keeps all pre-grouping tax losses that were brought into the group but otherwise unutilized. The tax losses which were incurred during the membership of the tax group are however left in the tax group. Every pre-grouping tax loss that is carried forward has a 75% restriction for utilization.

Read more : Compute Tax Returns under Corporate Tax UAE

Subsidiary Leaving/Cessation of a Tax Group: Notification to the FTA

When a Subsidiary opts to leave a Tax Group, or when a Tax Group itself terminates its existence in light of non-compliance with the conditions stipulated under Article (40) of the Corporate Tax Law or the pertinent Decision, it is obligated that the Tax Group reports this to the relevant Authority. This notification shall be done within a period of twenty (20) business days from the date that conditions leading to the cessation or exit are no longer met. It is through this that the Authority is informed promptly of changes in the tax group's composition so that it may take the necessary steps or give directions appropriately.

Preparation of Financial Statements on Exit or Termination of a Subsidiary from a Tax Group

Article (20) of the Corporate Tax Law provides that when a Subsidiary leaves a Tax Group or when a Tax Group is dissolved, specific steps must be taken. These steps ensure proper financial documentation and compliance with tax regulations:

• Standalone Financial Statements: Each Subsidiary which is leaving the Tax Group, or the former Parent Company of the dissolved Tax Group, shall prepare standalone Financial Statements. These statements must be prepared on the same accounting basis and with the same accounting elections that were applied by the Tax Group.
• Adopted Values: The adopted values of relevant assets and liabilities that the Tax Group has recorded would become opening values in standalone Financial Statements that the departing Subsidiary or former Parent Company would record. This guarantees a consistent and fair financial reporting procedure.

Compliance and Tax Implications

1. Joint and Several Liability: The parent company and the subsidiary, until the date of departure, are jointly and severally liable for corporate tax payable by the tax group.
2. Business Transfer: The taxable income of the tax group might be affected at the time of leaving by any gains or losses on the assets and liabilities of the subsidiary, where those assets and liabilities represent part of the business transfer. This depends on whether those gains or losses would have been disregarded if the subsidiary had claimed relief either for business restructuring or qualifying group relief.
3. Tax Return Filing: From the date of exit, the subsidiary should file its tax return as a separate taxable person for the relevant tax period and fulfill its own corporate tax obligations independent of the tax group.

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FAQs

1. What happens if a tax group is dissolved?
   A tax group ends if the parent company fails to meet requirements, or the FTA approves the dissolution. The parent company can be changed by the FTA.
2. Can a subsidiary join a tax group?
   Yes, a subsidiary can immediately join an already existing tax group after incorporation. The parent and the subsidiary should apply together to the FTA.
3. What is the process for exiting the tax group by a subsidiary?
   A subsidiary shall apply to FTA for withdrawal from the group. It will be withdrawn if it has ceased to meet tax conditions.
4. Is there tax liability at exit by the subsidiary?
   Yes, the parent and subsidiary are jointly liable for corporate tax up to the date of exit.
5. What are pre-grouping tax losses?
   The tax losses incurred by a subsidiary before joining the group can be carried forward but only 75% of these losses can be utilized within the group.
6. Do new subsidiaries affect the tax group's losses?
   New subsidiaries must relieve their own taxes. Their income doesn’t offset the existing group’s tax losses.
7. How should financial statements be handled when a subsidiary exits?
   The subsidiary is required to prepare standalone financial statements as per the tax group asset values and accounting methods.
8. How do business transfers impact tax when leaving?
   This could change taxable income when leaving a tax group as long as gains and losses of an asset transfer can be accounted for as part of the business restructuring process.
9. What is tax filing for the exit of a subsidiary?
   Once the subsidiary leaves, the company would have to prepare its tax return as a single entity with their own corporate taxes.
10. What if a tax group failed to comply?
    Failure to comply with tax group rules may incur penalties, and at its worst, dissolution of the group or suspension of business activities.