UAE Corporate Tax: Business owners have some thinking to do before signing up for 'tax group' status

Dubai: Memo to entrepreneurs in the UAE with multiple businesses – should you be setting up a ‘parent company’ to group all the diverse businesses under it?

Because it will be based on that entrepreneurs can decide whether apply for the status of ‘tax group’ with the UAE tax authorities, which on Tuesday issued guidelines on the norms under which such grouping can be formed.

The main one relates to shareholding – the parent company must have at least 95 per cent in each of the other businesses and only then can they be grouped together.

And the benefit from being part of a ‘tax group’?

This is what the Ministry of Finance said on Tuesday – ‘Forming a tax group simplifies the calculation and reporting of taxable income by allowing the parent company to file a single tax return based on the aggregated taxable profit or loss of the group’.

That’s the main point. There is also another factor that helps connected businesses to come under such a tax group.

The Ministry says that ‘transactions between members of the tax group being generally disregarded’. Businesses forming part of a tax group can engage in transacting – be it a product, service - between them without these deals falling under the wider corporate tax purview on ‘transfer pricing’ and keeping it at ‘arm’s length’.

Who should form a ‘tax group’?

Raju Menon, Chairman and Group Managing Partner at the audit consultancy Kreston Menon, makes one point – the decision on seeking tax group status should be on a case-to-case basis.

“While handling and spreading out of losses can be optimized being part of a tax group, it may be worth noting the UAE Corporate Tax Law contains a provision for transfer of tax losses between ‘resident juridical persons’ who have a common- or cross- holding of at least 75 per cent,” said Menon.

“Accordingly, one need not form a tax group merely to enjoy the benefits of transfer of tax losses.”

Pros of forming a tax group

But creating such a structure can ease the burden on business owners with multiple associate entities. And where he/she has 95 per cent shareholding in each.

“A tax group could reduce the administrative burden, given the fact that this would be considered as a ‘single taxable person obligated to file a single UAE corporate tax return,” said Menon.

“Even then, tax groups need to maintain consolidated (even audited in certain cases) financial statements that could be different from consolidations for financial reporting purposes.”

At present, there will be few companies which will be able to qualify for a tax group. Because the parent company must hold 95% shareholding in each of the subsidiary companies.

- Jeet Gianchandani of Jitendra Consulting Group

Parent/holding companies

The big business groups in the UAE already operate under a holding company structure. Think of the big developers with multiple subsidiaries. Or retail-focussed groups with malls and franchises under their corporate umbrella.

But among smaller entities, the practice of creating a parent company to hold the different entities together is less of a practice.

Here’s what one business owner had to say – “I have four companies where my wife and I are shareholders. We have not formed a parent company that holds shares in the others. Most of the small/medium sized business owners with multiple operations don’t have either.”

Another business owner said he would wait a while before taking a final decision on whether it made sense to opt for a tax group status.

"Many groups are not working under a parent company structure, but under personal common shareholding," said Jeet Gianchandani, Partner at Jitendra Consulting Group. "In the UAE, which predominantly is about entrepreneurs and family-owned businesses that believe in common shareholding then subsidiary or parent-companies. There is no wide culture or awareness of setting up a holding company and subsidiaries."

Ultimately, the UAE tax authorities want business owners to decide the best option. "The new decisions reflect how the UAE's corporate tax regime maintains flexibility and ensures straightforward tax processes to enable compliance, while reinforcing the UAE's position as a leading business and investment hub,” said Younis Haji Al Khouri, Undersecretary of the Ministry of Finance.

“With tax grouping, groups are treated as if they were one entity which alleviates the administration and compliance burden.”

So, business owners, would you choose a tax group? Or retain the status quo?