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Critical aspects of business restructuring relief

Both parties must be taxable; or become taxable as a result of the transfer

In our previous article, we discussed the optional nature of business restructuring relief (BRR) and divided our analysis into three main stages: pre-transfer, transfer, and post-transfer. We explored the eligibility criteria in the pre-transfer phase, essential considerations during the transfer phase, and the circumstances triggering the clawback of BRR in the post-transfer phase. Our previous discussion provided an overview of these requirements, while the current article focuses on a detailed analysis of key areas.

The BRR requires that both the transferrer and transferee must be resident persons or permanent establishments (PE) of non-resident persons. Additionally, both parties must be taxable; or become taxable as a result of the transfer. Based on these criteria, it can be inferred that certain entities such as governmental bodies, natural persons having revenue less than Dh1 million, and non-residents are ineligible for BRR benefits. However, two PEs, even if one acts as the transferrer and the other as the transferee, may qualify for BRR if they meet all other conditions.

The BRR stipulates that the transferrer and transferee must not be Qualifying Free Zone Persons (QFZP) or exempt persons. This condition applies at the time of the transfer, and even if either party becomes a QFZP or exempt individual after the transfer, the BRR will remain valid.

Having the same start date for financial years is not mandatory for the parties involved, but it is crucial for them to have the same fiscal year end. If needed, the parties can align their financial years according to the directives provided in Federal Tax Authority Decision No. 5 of 2023. The requirement pertaining to using the same accounting policies will be fulfilled if both parties prepare their financial statements using consistent policies, even if different bases are utilised for management purposes or if financial statements are prepared using different basis but revised on the same basis for tax purposes.

In cases where an independent part of a business is transferred as per article 27(1)(a) of the UAE corporate tax law, and support functions such as IT, accounting, HR, etc., are continued to be provided by the transferor even after the transfer, the transaction will still be eligible for the BRR.

The payment, whether in cash or any other form aside from equity or equitable interest, must be capped at the lower of the net book value of the assets and liabilities transferred or 10 per cent of the nominal value of the ownership interest issued. This requirement dictates that a minimum of 90 per cent of the consideration should be in the form of shares or equitable interests, such as ordinary shares, preference shares, redeemable preference shares, etc., which grant the holder rights to profits and liquidation proceeds. If the consideration is not received unless there is an exception like partners requesting an unincorporated partnership be treated as a taxable person, or if the consideration is received but does not adhere to the specified ratio, the BRR will not be available.

The party providing or receiving consideration can be the transferee or transferrer, or any person holding at least 50 per cent of their shares directly or indirectly, even not a taxable person and residing anywhere. This implies that if an individual owns at least 50 per cent of the transferrer’s shares, they can be the recipient of consideration, but they cannot be the payer as it necessitates a minimum of 90 per cent issuance of shares or equitable interest.

The transferor will transfer the assets and liabilities at their net book value. The gain, which is the difference between market value and book value at the date of transfer, will not be taxed in the transferor’s records. Instead, an amount equivalent to the gain will be disallowed to the transferee for tax purposes. Upon realization, any previously unrecognized gain will be factored in, and the taxable income upon transfer will be determined by calculating the disposal income in the financial statements (proceeds from disposal minus net book value in the financial statements). This figure will be adjusted for gains or losses not accounted for earlier due to BRR, as well as a depreciation and amortization adjustment for previously disallowed amounts.

In addition to subsequent transfer of business or its independent part; the clawback of BRR will also be triggered if any share, even just one, that was issued because of the transfer, is sold, transferred, or disposed of to any person who is not a member of the qualifying group within two years from the transfer date.

The writer is a managing partner at Kress Cooper Management Consultants. The above article is not an official opinion of Khaleej Times but an opinion of the writer. For any queries/clarifications, please feel free to contact him at mahar@kresscooper.com.