Dubai: In a significant update to the UAE corporate tax framework, guidelines have been issued on which businesses can create ‘tax groups’.
Under a ‘tax group’ status, the parent company and subsidiaries can have a unified corporate tax return each financial year.
So, under the guidelines, a tax group can be formed only if the parent company or its major shareholder owns 95 per cent stake in ‘each’ of the subsidiaries.
"The parent company and subsidiaries must continuously meet the conditions of the tax group throughout the whole financial year," said Jeet Gainchandani of Dubai-based consultancy JCG. "Also, a business in a qualifying free zone can't form or be part of the tax group."
The structure of the UAE business landscape – especially family-owned enterprises – is that they will have multiple operating entities operating in related or other areas of business.
For instance, a real estate developer could have a facilities management company or one handling property sales. Or a business group that’s primarily into retail could have companies in manufacturing or in other operations.
While there are pros and cons to forming a tax group - and the decision needs to be taken based on facts.
For some time now, these had been the most eagerly awaited guidelines among businesses with multiple operating subsidiaries and shared ownership.
Who should form ‘tax groups’?
“Groups with multiple entities or complex structures are looking to align their holdings to form tax groups in the UAE corporate tax regime,” said Nimish Goel, Partner at WTS Dhruva Consultants.
“While there are pros and cons to forming a tax group - and the decision needs to be taken based on facts - tax grouping eases the tax return filing burden for companies. And, also helps them with ‘transfer pricing’ requirements.”
Transfer pricing relates to products sold or services rendered between companies within the same group. The UAE Corporate Tax rules require extreme transparency to be maintained at all times by businesses with multiple subsidiaries or affiliate companies. There are heavy penalties too for lacklustre disclosures.
The law defines whether it is directly or indirectly owned/controlled by the parent which automatically takes care of local sponsorship set up companies as long as it is clearly demonstrated that the local sponsor is not the ubo
A tax group has an advantage to avoid hassles of transfer pricing regulations. Hence, businesses should make all efforts to register as a tax group, of course subject to GAAR (General Anti-Avoidance Rule) on tax
Offset losses and profits
The other big plus from having a tax group is obviously to set off losses at any one business within the group against the profit of another.
This is what FTA states
To form a tax group:
- The parent company owns at least 95 per cent of the share capital of each subsidiary, either directly or indirectly through one or more subsidiaries.
- The parent company owns at least 95 per cent of the voting rights of each subsidiary, either directly or indirectly.
- The parent company is entitled to at least 95 per cent of each subsidiary’s profits and net assets.
Also, the FTA states that a tax group can be formed again ‘after it ceases to exist’ or ‘re-admit a subsidiary’ that left the group if relevant conditions are met in a later tax period. But there will need to be a submission made to this effect with the the FTA.
It is possible that a foreign company directly or indirectly holds shares' in resident entities - including a parent company.
Where its differs from VAT tax groups
Under the UAE’s VAT requirements, businesses with subsidiaries could form tax groups – but there the common shareholding was set at 50 per cent.
“Many companies confuse between VAT grouping and corporate tax grouping,” said a tax consultant.
“Another interesting point from the latest guidelines is that intra-group transactions could still be subject to transfer pricing/arm’s length principle in certain circumstances. Everyone was under the impression that once a tax group is formed, the transfer pricing will not be applicable.”
Have a clear think ox tax groups
Businesses must not rush into creating a tax group purely based on the obvious benefits from such a formation, senior tax consultants warn. It must be strictly on a case-to-case basis.
On what the likely flip side could be, Goel said:
- A tax group cannot be discontinued except on approval from FTA or in specific circumstances provided under the corporate tax law.
- Limit of Dh375,000 for 0 per cent UAE corporate tax rate to apply once regardless of number of entities within the tax group.
- Specific rules regarding eligibility to carry forward losses on cessation of tax group.
"Many corporates have undergone restructuring or created a holding company in the expectation that intra-group transactions would not be subject to transfer pricing," said Pankaj S. Jain, Managing Director at AskPankaj Tax Advisors. "Their entire planning would now need reevaluation in the light of FTA guidelines."
Only 'resident persons'
To qualify for a tax group, the parent company need to be operational in the UAE.
A foreign company that is not 'resident' cannot qualify to be a member of a tax group.
"It is possible that a foreign company directly or indirectly holds shares' in resident entities - including a parent company.
"In such a case, the subsidiaries of the foreign company can form a tax group' provided they are held by a parent company that is operational in the UAE.