Offsetting losses, simplifying compliance, and potentially reducing transfer pricing woes - the UAE's ‘tax group’ regime offers a bouquet of benefits for qualifying businesses. However, navigating the eligibility criteria can be tricky.
With the release of the tax group guide, we explore certain key conditions and their effects.
The 95 per cent rule - This picky lock only opens for parent companies with at least 95 per cent control in the legal ownership of the subsidiary’s shares and similarly in the voting rights, profits, and even the net assets.
This can snag on structures where ownership isn't quite so straightforward, like those with a local sponsor holding your hand. With the UAE liberalizing its foreign investment policy allowing 100 per cent foreign ownership, it’s time for business groups to review the legal holding status, and assess potential restructuring options to explore tax group benefits.
Transfer pricing puzzle
Even though one family, the tax group guide wants a fair (or arm’s length) play in specified situations – namely, where a member has unutilized pre-grouping tax losses or net interest expenditure, or where a member is eligible to claim a foreign tax credit or any tax incentive.
These cases require income attribution through the lens of transfer pricing provisions, supported by documentation, even if they are eliminated during consolidation. On an overall basis, it is recommended that a consistent policy be adopted for all inter-company transactions within and outside the tax group, to prevent complications and ensure consistency during future income attribution requirements.
Tax loss ballet
The tax group provisions also contain restrictions on pre-grouping and post-exit losses, with the deduction of pre-grouping loss of any subsidiary prioritized over carry-forward losses of the tax group from previous years.
When a subsidiary exits, it retains only its unutilized pre-grouping losses, while the fate of the tax group's unutilized losses rests on the parent company's future tax status. In addition, detailed rules are given on the order of set off, restriction on utilization, and transfer of losses.
One needs to put the maths hat on to review alternative tax loss set-off computations, including assessing the future profitability of subsidiaries to enjoy due benefits.
Foreign tax credit
If a member of the tax group earns income from outside the UAE, you can claim a credit for any taxes paid on that income, potentially lowering your overall tax group UAE corporate tax liability. But there's a catch: the credit can only be for the effective corporate tax rate on the specific income of that member, calculated as if they were independent (at arm's length).
One more thing – if you don't use up all the foreign tax credit (e.g. no corporate tax because of losses), tough luck. It doesn't get carried back or forward and stands lapsed.
Once formed, the tax group designates the parent company as the orchestrator, overseeing among others, registration, returns, maintenance of financial statements, and transfer pricing records. The parent company's authority extends to payment of tax, with joint liabilities for members unless limited by FTA.
Companies must reconcile and report numbers carefully, avoiding conflicts between transactions within the UAE VAT group and the corporate tax group due to their distinct regulations. Aligning the tax group concept with international treaties is crucial for companies with a global presence.
With apt conceptualization and implementation, businesses can unlock the tax group’s treasure chest and help their bottom-line.