Tax Groups in the UAE: A Comprehensive Guide for Businesses

What Are Tax Groups in the UAE?

In the United Arab Emirates, companies can form a Tax Group for corporate tax purposes. This arrangement allows multiple related entities to be treated as a single taxable person. It’s crucial to note that a corporate tax group is distinct from a value-added tax (VAT) group, which serves different purposes.

Criteria for Forming a Tax Group

To be eligible for a Tax Group, companies must meet specific criteria set by the UAE Federal Tax Authority (FTA):

1. Residency and Legal Status

• Both the Parent Company and all Subsidiaries must be juridical persons.
• All entities involved must be residents of the UAE for tax purposes.

2. Ownership Structure

• The Parent Company must hold at least 95% of:
  • Share capital
  • Voting rights
  • Entitlement to profits and net assets of its Subsidiaries
• This ownership can be direct or indirect through one or more subsidiaries.

3. Exclusions

• Neither the Parent Company nor any Subsidiaries can be:
  • A qualifying free zone person
  • An exempted person

4. Financial Alignment

• The Parent Company and all Subsidiaries must:
  • Have the same financial year
  • Apply the same accounting standards

The Application Process for Tax Groups

Forming a Tax Group involves a specific application process:

1. Joint Application: The Parent Company and each Subsidiary must submit a joint application to the FTA.
2. Timing: The application should specify the desired tax period for group formation.
3. FTA Decision: The FTA may approve the formation from the specified tax period or determine another starting date.

How Tax Groups Function in Practice

Once approved, a Tax Group operates under specific guidelines:

• Single Entity Treatment: The entire group is treated as one taxable person for corporate tax purposes.
• Administrative Responsibility: The Parent Company takes charge of compliance processes for the entire group.
• Financial Consolidation: The Parent Company must consolidate financial accounts by aggregating the financial statements of all members.
• Shared Liability: All members of the Tax Group are jointly and severally liable for the group’s UAE corporate tax obligations.

Benefits of Forming a Tax Group

Joining a Tax Group can offer several advantages:

• Income and Loss Offsetting: Taxable income and losses of group members can be offset against each other, potentially reducing overall tax liability.
• Simplified Reporting: The Parent Company can file a single tax return on behalf of all group members, streamlining the compliance process.
• Intra-Group Transaction Treatment: Generally, transfers of assets and liabilities and other transactions between group members are disregarded when calculating taxable income.
• Utilization of Pre-Grouping Losses: Tax losses incurred before joining the group may be utilized, subject to certain limitations:
  • Up to the amount of taxable income attributable to the member with pre-grouping losses, or
  • 75% of the Tax Group’s total taxable income, whichever is lower.

Potential Drawbacks of Tax Groups

While Tax Groups offer benefits, there are also some potential disadvantages to consider:

• Shared Tax Threshold: The AED 375,000 threshold for the 0% corporate tax rate applies once to the entire Tax Group, regardless of the number of entities involved.
• Increased Financial Reporting Complexity: The requirement to prepare consolidated financial statements can add complexity to accounting processes.
• Membership Restrictions: Qualifying Free Zone Persons and Exempt Persons cannot become members of a Tax Group, which may limit options for some businesses.
• Structural Limitations: Tax Groups are limited to Parent Company-Subsidiary relationships, meaning horizontal groups (e.g., between sister companies) cannot be formed.

Conclusion: Is a Tax Group Right for Your Business?

Tax Groups in the UAE offer significant potential benefits, including simplified reporting and possible tax savings through loss offsetting. However, they also come with increased responsibilities and potential limitations.

When considering whether to form a Tax Group, businesses should:

• Carefully evaluate their corporate structure
• Assess potential tax savings
• Consider the administrative implications
• Consult with tax professionals for personalized advice

By thoroughly understanding the pros and cons of Tax Groups, UAE businesses can make informed decisions to optimize their tax strategy and compliance approach.

Remember, tax regulations can be complex and subject to change. Always seek professional advice to ensure your business remains compliant with the latest UAE corporate tax laws.

Ready to form a Tax Group or need more personalized advice? Contact CTC Accounting today to speak with our tax experts.