Expert View: How to maximise tax efficiency and minimise liabilities

In the complex landscape of corporate taxation, businesses are constantly seeking ways to optimise their tax strategies and enhance their bottom line. One such strategy involves the formation of group structures known as tax groups and qualifying groups, which can offer significant tax benefits and streamline administrative processes. Understanding the differences between these group structures is crucial for businesses looking to maximise their tax efficiency and minimise their tax liabilities.

A tax group in the corporate tax law is defined as two or more taxable persons treated as a single taxable entity according to the conditions of Article 40 of the UAE Corporate Tax Law. To form a tax group under the corporate tax law, a parent company and one or more subsidiaries can apply to the federal tax authority if they meet several conditions. Both the parent company and subsidiaries must be juridical persons and resident persons. Additionally, the parent company must own at least 95 per cent of the share capital and voting rights of each subsidiary and be entitled to at least 95 per cent of their profits and net assets. Neither the parent company nor the subsidiaries can be exempt persons or qualifying free zone persons. Furthermore, the parent company and each subsidiary must have the same financial year and use the same accounting standards.

After the formation of the tax group, the parent company will be responsible for the computation, administration, and payment of corporate tax on behalf of the group. No foreign company can be included in the tax group unless it is owned and managed in the UAE and considered a UAE resident entity for the purpose of UAE corporate tax. If the parent company or a subsidiary no longer meets tax group requirements, they can apply for the subsidiary to exit, approved by the authority, while the tax group remains.

Tax groups allow for full consolidation, treating the group as a single taxable entity. This provides more significant benefits, including better tax planning, reduced administration costs, and the ability to offset tax losses and profits within the group. Additionally, inter-company balances and transactions between group entities are typically eliminated on consolidation, reducing transfer pricing compliance obligations.

The another important group for larger group structure under UAE CT is qualifying group. A qualifying group can exist between two or more entities if a person holds at least 75 per cent direct or indirect ownership in each entity, without requiring approval from the federal tax authority. Such a group exists when all members are juridical persons, either UAE residents or non-residents with a permanent establishment in the UAE. Either one entity owns 75 per cent or more of the other, or a third party owns 75 per cent or more of both. Neither member is an exempt person or a qualifying free zone person, and members use the same accounting standards and have the same financial year.

Qualifying groups offer limited consolidation benefits, allowing for the transfer of tax losses and assets between group members at book value without recognising gains or losses. However, each member must continue filing tax returns individually based on their standalone results, limiting the overall benefits of consolidation.

In a qualifying group, any group entity which meets the shareholding condition can transfer tax losses of up to 75 per cent of the recipient taxable income in that tax period. A single entity can transfer its tax losses to more than one recipient, and similarly, a recipient can claim tax losses from multiple entities, ensuring that the total offset does not exceed 75 per cent of the recipient's taxable income and all other transfer conditions are met. However, tax loss relief is not available for losses incurred before the effective date of corporate tax, before a person becomes a taxpayer for corporate tax purposes, or from activities or assets generating income exempt from corporate tax. Additionally, losses incurred by a free zone person that are not attributable to a permanent establishment in the mainland are also ineligible for tax loss relief.