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Transfer at book value if opted for business restructuring relief

To be eligible to enjoy the BRR, the transferer should be a taxable person

Published: Sun 21 Apr 2024, 5:46 PM

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  • Mahar Afzal/Compliance Corner

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Business restructuring relief (BRR) is provided to businesses to facilitate their smooth operation by treating them as a transfer of a going concern, without any change in ownership.

Article 27 of the corporate tax law (the law) mandates that, upon meeting specified conditions, assets and liabilities to be transferred at book value. This month, the Federal Tax Authority (FTA) has released a guide on this topic.

The BRR is optional and for our analysis, we have organised our discussion into three stages: the pretransfer phase, the transfer phase, and the post-transfer phase. In the pretransfer phase, we have examined the eligibility criteria. Moving on to the transfer phase, we have addressed aspects which are compulsory if the transaction is being executed. Following a smooth transfer, the post-transfer phase entails meeting certain legal requirements to enjoy the BRR.

To be eligible to enjoy the BRR, the transferer should be a taxable person and the entire business or independent part of the business is being transferred to another taxable person or person who becomes a taxable person due to this transfer against consideration in the form of shares, other equitable interest, or cash/other consideration. Where the entire business is being transferred, and transferer/transferers ceases/cease to exist due to this transfer, the transferer can be of one or more taxable persons. Like natural person transfer its business into limited liability company (LLC) or to third party and holds the shares of LLC or third party. For other various examples, you can refer to the related guide.

The transferer and the transferee should be resident taxable persons; or the permanent establishment of nonresident persons, none of them is exempt and qualifying free zone person. Moreover, they have the same ending of their financial years; and they are following the same accounting policies. The transaction must have commercial sense and all applicable local or foreign laws are being followed to execute the transaction.

After the transaction has commenced meeting the eligibility requirements mentioned above, the value of the shares or ownership interests received must not surpass the net book value of the assets transferred and liabilities assumed, after subtracting the value of any other received consideration in any form. In cases where the entire business is transferred and the current taxable person/persons ceases/cease to exist, the value should not exceed the book value of the surrendered shares or ownership interests, minus the value of any other form of consideration received.

Mahar Afzal is a managing partner at Kress Cooper Management Consultants.

Mahar Afzal is a managing partner at Kress Cooper Management Consultants.

The consideration should be in the form of shares, other equitable interest, or cash/other consideration. Where cash and other consideration received, it should be lower of the net book value of assets/liabilities transferred or 10% of the nominal value of the ownership interest issued. The consideration can be received by the transferer or any other person who is holding at least 50% ownership interest of transferor; and the payee can be the transferee or any other person who is holding at least 50% shares of transferee. There is no requirement for the consideration where owners of the unincorporated partnership are approaching the FTA to treat the unincorporated partnership as a taxable person.

The transferer can be natural taxable person, but the transferee or other person who pays on their behalf cannot be natural person, as it requires the issuance of shares or other equitable interest from the transferee.

When all applicable conditions are met, the entire business or independent party of it must be transferred without any profit or loss, and the assets or liabilities should be transferred at their net book value on the transfer date. The transferer should not realise any taxable gain or loss from the transfer of assets and liabilities.

The transferer’s tax losses can be transferred to the transferee for adjustment or carryforward. When an independent business segment is transferred, the utilised tax losses will be apportioned and transferred accordingly. However, any utilised net interest expenditure will not be transferred to the transferee.

In the post transfer phase, the relief becomes invalid if, within two years of the initial transfer, the shares or ownership interests of either the transferor or the transferee are sold, transferred, or disposed of to a non-member of the qualifying group, or if there is a subsequent transfer or disposal of the business or a previously transferred segment. In such instances, the transferer must treat the transfer as having taken place at market value on the transfer date. Any gains or losses must be accounted for in the tax return for the period in which the subsequent transfer occurs.

The writer, Mahar Afzal, 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.



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