UAE Corporate Tax: Who makes the cut as ‘qualifying group’ and ‘tax group’

One of the hallmarks of the UAE economy has been the ease of doing business. Considering an almost negligible expense of creating a new company, business owners have often chosen to create separate companies for distinct business activities over operating separate divisions within a single company. The operations amongst the (group) companies are generally so intertwined that the individual company’s profit or loss is immaterial. In other words, there may be a net loss for few companies while the profits will sit in other companies.

Under the erstwhile no-tax regime, the individual company’s tax positions did not matter. The VAT grouping options supported such structures to remain VAT-neutral.

The status will change under Corporate Tax (CT). To protect excessive tax outflows through the (group) companies earning profits, business owners could evaluate the grouping options. UAE CT has two distinct concepts of groups namely, ‘Qualifying Group’ and ‘Tax Group’.

Qualifying Group

Two or more entities are eligible to form a qualifying group if, amongst other conditions, a person has a direct or indirect ownership of at least 75 per cent in each of such companies. The person so holding the ownership interests could be an individual or another company. A formal approval from FTA is not required to create a ‘qualifying group’.

Any transfer of an asset or liability among the members of a qualifying group will be treated as at net book value, irrespective of the actual sale price. In other words, the transfer of assets or liabilities will not result in any gain/loss for tax purposes. Companies eligible to form a ‘qualifying group’ could also transfer tax loss from one company to another in certain scenarios.

However, each member of a qualifying group will arrive at its own profit or loss, and undertake tax compliance individually.

Tax group

A tax group can be formed between two or more entities only if, amongst other conditions, a company directly/indirectly holds at least 95 per cent of the voting rights in such entities. FTA’s formal approval is required to form a tax group.

A tax group is treated as a single taxable person. The taxable income of a ‘tax group’ will be determined by aggregating the net taxable income/loss of all group members. Even if the profits are sitting in one set of companies while the expenses are parked in others, the group will pay CT only on the net income of the entire group.

Tax restructurings and anti-abuse rules

A qualifying group apparently requires a person to hold at least 75 per cent of the ownership. If two or more persons hold 75 per cent or more ownership, the qualifying group may not be formed. Similarly, a tax group could be formed only if a company holds 95 per cent or more of the voting rights. If an individual holds the voting rights in various companies, the tax group could not be formed.

Business owners might be considering to revamp the ownership structures to avail the tax grouping benefits. If the 75 per cent ownership is held by more than one person, the owners may consider consolidating the ownership under a single person to take the benefits of a qualifying group.

A question arises whether anti-abuse rules would apply in such scenarios? Any transaction or arrangement, without valid commercial reasons, aimed to gain tax benefits could be disregarded under the anti-abuse rules.

One could argue that a tax group could be formed only after an express approval from FTA and hence the anti-abuse rules could not be invoked at a later stage. A question remains if the tax group will be approved if a new holding company is set up only to meet the eligibility criteria and avail the tax benefits.

This could have significant impact on tax planning by the corporate groups.