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Having multiple group companies? Unlocking compliance efficiency in UAE corporate taxation

Understanding tax grouping provisions is key

The UAE’s corporate tax landscape is undergoing a significant transformation through the introduction of tax groups, governed by the Corporate Tax Act and Ministerial Decision No. 125 of 2023. This “business friendly” provision enables related group companies to streamline their tax procedures, resulting in simplified compliance and increased operational efficiency. This marks a crucial change in corporate tax management in the UAE.

Prerequisites for forming a UAE tax group

To establish a UAE tax group, the parent company must initiate the application with the FTA, encompassing both parent company and subsidiaries. Member firms need to be resident juridical entities under UAE’s corporate tax law, sharing the same financial year and accounting standards. Notably, exempt persons and qualifying free zone persons are excluded. Ownership conditions stipulate that the parent company must have a direct or indirect ownership of 95 per cent or more in the subsidiary’s share capital, voting rights, and profits, and neither the parent company nor a subsidiary can be tax residents in another jurisdiction under a double taxation agreement.

Formation and dissolution of a tax group

A tax group comes into existence from the specified tax period in the FTA application. The FTA may also determine an alternate formation date. The tax group can dissolve if the FTA approves it or if the parent company no longer meets the requirements. The FTA may also make dissolution or parent company changes based on available information.

Corporate tax compliance

The parent company represents the tax group and ensures compliance with its corporate tax obligations. Both the parent company and each subsidiary share joint and several liability for corporate tax in the tax periods they are part of the group. The FTA can limit this liability, if approved.

Taxable income in a tax group

In calculating a tax group’s taxable income, the parent company consolidates subsidiaries’ financial accounts, excluding intra-group transactions. Tax losses from a joining subsidiary become carried forward losses, capped at 75 per cent tax loss relief. Unutilised losses can’t offset new subsidiaries’ income. Leaving subsidiaries retain pre-grouping losses, while new losses stay with the tax group. Tax grouping provisions helps in streamlining compliance requirements under UAE corporate taxation, ensuring relatively overall less compliance burden, including optimising tax loss utilisation, and enhancing competitiveness in a dynamic tax business landscape.

Pros and cons of forming a corporate tax group in the UAE

Forming a corporate tax group in the UAE streamlines compliance with a single registration and simplified return filing, Furthermore, the application of transfer pricing documentation is not required for companies within a single tax group. Intra-group loss offsetting offers potential financial benefits, and consolidated financial statements reduce the compliance burden. However, there’s a single exemption limit, mandatory consolidated financial statements, joint and several liabilities, potential M&A complexities, and restrictions to parent-subsidiary relationships. Pros and cons should be thoughtfully weighed before choosing a corporate tax group structure in the UAE.

The writer is Partner - MI Capital Services.