Recent Developments in UAE Tax Group Legislation

The resident persons through a common control and ownership by forming a Tax Group are related that chose to be treated as a single taxable entity for the purpose of UAE Corporate Tax. A Resident person is a juridical entity that is registered in the state or with an effective management place in the United Arab Emirates. A Tax Group operates as a cohesive unit, where the Parent Company acts as the representative member and handles the compliance obligations on behalf of the group. In the Tax group, both the entities whether Parent Company or Subsidiary have joint and several liability for the tax due.

Registration of Tax Groups for Corporate Tax Purposes in UAE

How To Form a Tax Group?

To form a Tax Group, a Resident Person must meet the following conditions:

• Minimum Ninety-Five percent share capital and voting rights are mandatory
• The same accounting standard and method for that tax period 
• It must apply to the Federal Tax Authority (FTA) to form a Tax Group, and obtain its approval;
• It must notify the FTA of any changes or cessation of the Tax Group within the prescribed time limits.

The conditions for forming a Tax Group also apply to government entity subsidiaries, which are juridical persons that are wholly owned by a government entity in the UAE.

Key Aspects of the Latest Legislation Regarding Tax Group

The UAE Corporate Tax Law vide Federal Decree-Law No. 47/2022, in line with Ministerial Decision No. 125/2023 and Federal Tax Authority Decision No. 12/2023, stipulated procedure by defining the criteria for Tax Group formation. The FTA has also issued a detailed Corporate Tax Guide, which clarifies some of the complexities and nuances of the legislation. Here are some of the key aspects that you need to be aware of:

• Determination Of Taxable Income: -

Based on the consolidation of liabilities, financial results, income, expenses, and assets of each member of a tax group the Taxable Income is ascertained. It's noteworthy that transactions between entities within the Tax Group are canceled, except in cases where a member acknowledges a deductible loss tied to those transactions before joining or forming the Tax Group. The guide explains how to attribute taxable income to each member, how to utilize tax losses within the group, and how to calculate foreign tax credits in case of double taxation.

• Specific Provisions and Conditions: 

The guide elaborates on some of the specific provisions and conditions related to Tax Groups, such as the determination of the residential status of juridical persons, the treatment of transactions between group members, the allocation of tax incentives and exemptions, and the application of anti-avoidance rules.

• Uniformity In Tax Periods: 

The guide emphasizes the importance of uniformity in Tax Periods among the members of a Tax Group. This means that all members must have the same start and end date for their Tax Period, which is usually a calendar year. If a member has a different Tax Period, it must apply to the FTA to synchronize it with the rest of the group, subject to certain conditions.

• Accounting Practices: 

The guide clarifies that there is no requirement for separate audited financial statements for the Parent Company and the Subsidiaries within a Tax Group. However, all members must adopt a consistent accounting policy, in accordance with the applicable standards, when preparing their financial statements.

• Compliance Obligations: 

The guide provides a comprehensive overview of the compliance obligations of a Tax Group, such as filing tax returns, paying taxes, keeping records, and submitting information. The guide also covers the scenarios of formation, joining, exit, replacement, and cessation of a Tax Group, and the timelines and procedures for notifying the FTA of these events.

• Responsibilities Of the Parent Company: 

The guide outlines the specific responsibilities of the Parent Company within a Tax Group, such as electing to exclude net income from Foreign Permanent Establishments, specifying changes in the election for the realization basis, and communicating with the FTA on behalf of the group. The guide also explains how to submit an application to the FTA for these purposes.

• FTA Approval and Assessment: 

The guide underscores that the FTA’s approval of the application to form a Tax Group does not automatically confirm compliance with the conditions for Tax Group formation. The FTA has the authority to reassess the compliance of a Tax Group at any time, and to revoke its approval if the conditions are not met.

•  Deductibility Of Expenditure Clarified

The guide confirms that expenditure exclusively for the Taxable Person’s Business, devoid of capital nature, remains deductible under the UAE CT Law. Within the Tax Group context, expenditure is deductible even if it exclusively serves the business activities of other members with the assessment based on the collective activities of the Tax Group.

•  Exploring Qualifying Group Relief Election

Touching upon the Qualifying Group Relief election, the guide notes that abstaining from the election is considered an implicit election upon entering or forming a Tax Group. Likewise, a Tax Group without such an election is deemed to have made the election if a new Subsidiary joins and has already made the election.

• Utilization Of Tax Losses Strategized

Ownership and business continuity conditions play a pivotal role in the utilization and carrying forward of tax losses within the Tax Group. In this context, relevance is solely placed on the ownership interest in the Parent Company, with business continuity assessed by referencing the Business Activities of the entire Tax Group.

• Irrevocable Decision on Recognition Of Gains Or Losses

The guide makes it clear that the decision to elect for the recognition of gains or losses on a realization basis is deemed irrevocable, barring extraordinary circumstances, and subject to approval from the FTA. Notably, exceptions are recognized when a Subsidiary, initially choosing a realization basis, joins a Tax Group that hasn’t made such an election in a subsequent Tax Period.

• Transitional Rules: A Continuum Within the Tax Group

Within the framework of transitional rules, the guide grants the Tax Group the authority to make an election that persists even after members exit or if the Tax Group ceases to exist. Importantly, when a Taxable Person becomes a member after the initial Tax Period, the transitional relief continues concerning relevant assets and liabilities.

• Consistent Determination Of Transactions

Within a Tax Group, transactions between members are consistently evaluated based on the arm’s length principle, regardless of whether these transactions have been consolidated.

• Exclusion Of Small Business Relief

The guide specifies that the exemption from Small Business Relief stands independently for juridical Resident Persons eligible for such relief and who are members of a Tax Group.

• Calculating Foreign Tax Credits

In a step-by-step breakdown, the guide outlines the process for determining Foreign Tax Credits that a Tax Group can assert, especially concerning foreign source income earned by its members.

• Attributed Expenditure & Income Under OECD Approach: Global Best Practices

It is highlighted that following globally accepted profit attribution methodologies, such as the Authorized OECD Approach and regulations outlined in CT Law, is obligatory for assigning income and expenditure to Foreign Permanent Establishments. Consistency with the arm’s length standard is vital in determining profits for these establishments.

Forming a Tax Group in the UAE can offer significant benefits for Resident Persons, such as simplified tax compliance, reduced administrative costs, and enhanced tax planning. However, it also entails certain requirements and responsibilities, which are governed by the latest legislation and guidance from the FTA. Therefore, it is advisable to consult a qualified tax expert before forming a Tax Group and to ensure continuous compliance with the relevant rules and regulations.