Stock - Corporate Tax
The UAE corporate tax rules allow tax groups to be created by a business entity with multiple companies under it. But these must have a single shareholder with rights over 95 oer cent of the equity in each of the subsidiaries. Image Credit: Shutterstock

Dubai: UAE based business groups with multiple companies under them are checking all the legal angles before deciding whether to apply for a ‘tax group’ status under the corporate tax framework.

In particular, they are checking how the tax group status can be attained when they have businesses operating with a UAE National as sponsor.

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The issue of having a local sponsor is not of much concern for the recent wave of businesses that are formed and licensed in the UAE, with the laws being changed to allow 100 per cent direct ownership across multiple sectors.

But when it comes to older businesses, there could be grey areas and which might require the tax authorities to give their verdict on whether these entities can form a tax group.

What exactly is a tax group?

Under the UAE corporate tax rules, businesses that can show a shareholder having 95 per cent or more equity in them can be clubbed under a tax group. Where this helps is with these companies can present a unified tax filing with the FTA (Federal Tax Authority) for each tax year.

It doesn’t matter whether the group is made up of 5 companies, 10 or more – as long as the 95 per cent shareholding is adhered to. And they can present a unified tax returns filing.

Certain aspects of tax groups are still being analyzed and some more clarifications are expected from FTA.

- Atik Munshi of Finexpertiza UAE

Recently, the tax authorities gave a detailed outline on how businesses can go about applying for tax groups.

“There are three significant aspects to be complied to form a tax group - (a) legal shareholding (b) voting rights (control) and (c) profit/assets of the entity,” said Atik Munshi, Managing Partner at Finexpertiza UAE, an audit consultancy.

Presence of local sponsor

As long as the business group’s owner can show the 95 per cent of more equity in each of the subsidiaries, it’s pretty straight forward.

But what if one of the companies has a local sponsor?

For businesses incorporated before 2022, the conditions of Article 40 remain and are to be mandatorily met to qualify for a tax group.

- Dr. Nabeel Ahmed of DVS Management

“In the scenario where UAE National is a sponsor, which in most cases is 51 per cent, the aspect of ‘legal shareholding’ is not complied with.

“One can argue that an UBO (Ultimate Beneficial Ownership) declaration, side agreements with the local sponsor, a proxy voting arrangement, or a full power of attorney would be enough to be compliant with the tax group status.

“However, when registration of the individual entity is done, the FTA insists on receiving legal documents like the trade license, articles of association, etc.

“It is obvious that the legal shareholding shown in these documents will be different.

“It remains to be seen whether FTA considers such additional documents to be in adherence with Article 40.”

This is the crux of the issue that businesses – especially family-owned ones – in the UAE will need to check out. Ideally, they would wait for the tax authorities to set the precedent on who can or can’t be part of a tax group under such circumstances.

"In most scenarios, even existing LLCs can opt for a 100 per cent foreign ownership," said Munshi. "This however has other implications as they would need to convince the local sponsor to transfer the shares."

Applying to be a tax group

  1. The recently released tax guide says the parent company and each subsidiary seeking to be members of the tax group must jointly make an application to the FTA.
  2. This application should specify the first intended tax period of the tax group.
  3. A request should be filed before the end of the tax period for which the formation of the tax group is requested.
  4. In principle, the tax group will be formed from the beginning of the tax period specified in the application, but the FTA has the right to determine the tax period from which a tax group may be formed, even if this differs from the date requested in the application.

Register independently

But first, ‘to register for a tax group, the individual entities within the group must first register independently,” said Munshi. “Only at the second stage they can apply to be registered as a tax group.

“They qualify to be a tax group only where there is a parent subsidiary relationship with 95 per cent common shareholding.”

Based on what tax consultants are saying, business groups in the UAE are still analyzing the pros and cons of coming under a tax group, even though the benefits are clear enough.

Getting clarity on what it means when a local sponsor is on the books is one aspect of it…

Getting that tax group status
Forming a tax group necessitates meeting all specified conditions.

If either the parent company or subsidiary is a 'qualifying free zone' or 'exempt person', it disqualifies the business.

Eligible entities must fulfill all Article 40 conditions, including the critical requirement that the parent company owns at least 95% of the subsidiary's share capital, voting rights, and is entitled to 95% of its profits and net assets, directly or indirectly through one or more subsidiaries.

Structural changes are crucial for businesses to adhere to these stringent criteria and benefit from tax group status.

Foreigners are now allowed to establish companies with 100 per cent full ownership, based on the provisions of Federal Law No. 32 of 2021 (New Companies Law), which came into force on January 2, 2022.

For businesses incorporated before 2022, the conditions of Article 40 remain and are to be mandatorily met to qualify for a tax group.

- Dr. Nabeel Ahmed, Partner at DVS Management