UAE Corporate Tax Update — Stop and Rethink on the decision to Tax Group under the UAE Corporate Tax
On 31 January 2022, the UAE Ministry of Finance (MOF) announced the introduction of Federal Corporate Tax (CT) on business profits effective for financial years starting on or after 01 June 2023, with a standard statutory tax rate of 9% and a 0% tax rate for taxable profits up to AED 375,000.
Following the announcement, the MOF recently released a Public Consultation Document (the “Document”) on the proposed Corporate Tax (CT) regime in the United Arab Emirates (UAE) with the intent to obtain input/suggestions from the stakeholders. The Document contains the main features of the CT regime.
The UAE group companies can elect under the CT regime to form Tax group and be treated as a single taxable person. Below we have summarized the key takeaways relating to the Tax grouping under the UAE CT regime.
I. Conditions for tax grouping under CT regime
- The parent company must hold at least 95% of the share capital and voting rights of its subsidiaries directly or through other subsidiaries.
- Neither of them should be an exempt person or a Free Zone entity availing the benefit of a 0% CT rate.
- All group members must use the same financial year.
- The parent company and all subsidiaries must sign and submit a notice to the Federal Tax Authority (FTA) to form a tax group.
A single CT return would be submitted for the entire CT group. This is expected to reduce the compliance burden of businesses with multiple entities.
II. Can the existing VAT group be a CT group?
- For the VAT group, a minimum of 50% of the voting or market value interest or control by any other means is required. Whereas at least 95% of the share capital or voting interest is required for the CT group.
- Free Zone or exempt companies can be members of a VAT group, but they cannot be a member of a CT group.
- The liability is joint and several for VAT and CT group members; however, for the CT group, subject to approval from the FTA, it can be limited to one or more members.
For the businesses with the exiting VAT group, having a separate CT group could lead to an increase in administrative burden and would require maintaining separate records for VAT as well as CT compliance purposes.
III. Will forming a CT group always be beneficial?
- The threshold of AED 375,000 for 0% CT will be applied only once in the case of a CT group, whereas for the standalone entities, the threshold will be applied separately for each entity.
- The tax group may not be beneficial if all the entities in the group are generating profits.
- UAE group companies (other than free zone and exempt companies) that do not meet the tax grouping conditions or do not want to form a tax group can still transfer losses from one group company to another, provided certain conditions are met.
- Though not tax grouped, the transfer of assets and liabilities at net book value between the UAE resident companies having 75% common ownership will not be subject to CT, provided certain conditions are met.
Businesses are recommended to carefully analyze the financial position of each entity before forming a CT group.
HOW CAN WE HELP?
Rethink as an entity provides tax advisory, optimization, registration, implementation, compliance, and training services in UAE, Bahrain, KSA, and the GCC.
Our team of senior qualified tax advisors, finance experts, and tax accountants are happy to provide practical help and advice to ensure timely and cost-effective tax services.
Associate Director – Tax