Dubai: Even as UAE tax authorities provide more updates on the corporate tax, for many business owners the next big set of updates will be on the formation of ‘tax groups’.
This is where multiple businesses operating under a single dominant shareholder(s) come together to form a tax group. The biggest gain from doing so will be the ‘reduced administrative burden’ from filing for corporate tax under a single consolidated return provided by the parent company.
For instance, a mid-sized developer might have property and facilities management companies operating under the parent company. Or it could be a family business with multiple entities within its fold, and the single common thread between them obviously being the common shareholding. This is where applying to be recognised as a tax group would make sense. (Tax groups are allowed under VAT as well.)
Registering for tax group status
The UAE tax authorities will need to give their approval for any such grouping to be recognised. “Currently, the Federal Tax Authority (FTA) has enabled the online corporate tax registration process for certain types of entities,” said Rakesh Nair, Director – Corporate Tax at Crowe UAE.
“However, the online registration process for tax groups has not been enabled as yet. The individual entities forming a tax group need to get themselves registered first before applying for tax group registration.”
Nair cites three main factors for any business entity to consider creating a tax group:
• The elimination of intra-group transactions thereby resulting in reduced transfer pricing compliances.
• Allowing for the setting off of losses between entities within such a tax group. And, of course,
• The reduced administrative burden such as through filing a single consolidated return by parent company.
Industry sources say that updates and registration of the first tax groups under corporate tax regime could happen any time now. Registration for the UAE corporate tax is happening at a brisk pace, the sources say. (The UAE’s corporate tax regime came into effect from June 1.)
Set up the parent company
The big corporate entities in the UAE obviously operate on the parent company/holding company structure. One can say the same about businesses that have reached a certain size and operate multiple subsidiaries. But for smaller family or individual owned businesses, the parent company structure might still be absent.
Yes, forming a tax group is an option and not mandatory for any group of entities fulfilling condition given under clause 1 of Article 40. These entities better get started on forming one if they plan to use the tax group provision. “Having a holding company/parent company structure is one of the conditions of forming tax group - and pushing the business groups to restructure,” said James Mathew of UHY James Chartered Accountants.
“Even businesses opting not to form a tax group are planning to structure their model by having a holding company structure to manage the ownership prudently.
• The parent company and subsidiaries must be ‘resident juridical persons’. Permanent Establishments (PE) or branches of foreign companies in the UAE cannot join.
• Neither the parent nor the subsidiary(s) are an exempt person or a qualifying free zone person.
• The parent company must be entitled to 95 per cent of the profits, voting rights and net assets of the subsidiary.
• The parent company and subsidiary must have the same financial year, and must prepare their financial statements using the same accounting standards.
• The conditions for formation of a tax group must be met continuously throughout the relevant tax period.
Source: Crowe, UAE
Still time to decide on tax group
As per the UAE corporate tax laws, a business does have time to opt for tax group status. “There is a timeline provided in the law to apply for approval to form a tax group,” said Mathew. “Or to join an existing tax group. “The application must be submitted to the FTA before the end of the tax period within which the formation or joining of a tax group is requested.”
Businesses with tax group plans must also keep in mind that transactions between member entities shall be ‘eliminated only if a member (unit) has recognised a deductible loss in a tax period on those transactions prior to joining - or forming - the tax group.” (This is as per Article 4 of the Ministerial Decision 125 of 2023 on transactions prior to forming or joining tax group.)