This chapter explains the reliefs such as Transfers with a Qualifying Group and Business Restructuring Relief offered by the authority for certain businesses or income types to be exempt from corporate tax.
Article 26 – Transfers Within a Qualifying Group
- When determining taxable income for the transfer of assets or liabilities between two taxable persons who are part of the same qualifying group, gain or loss should not be considered.
- Two entities will be considered as part of a qualifying group:
if both the entities are juridical persons that are either residents in UAE or non-residents having a permanent establishment in the UAE.
if one of the entities/taxable persons has at least 75% direct or indirect ownership of another taxable person (or a third party owns both).
Moreover, the financial years of both taxable persons must end on the same date and follow the same accounting standards and should not be exempt persons or qualifying free zone persons.
- Tax Treatment of the Transfer If the above conditions are met:
The assets or liabilities must be transferred at net book value, so that neither a loss or gain arises, and the exchanged assets or liabilities are valued on the accounting records, not the market value.
If any payment made for the transfer should be based on the net book value. This ensures no profit or loss is recorded just because the transaction happened within the qualifying group.
- If the relief is withdrawn within two years from the transfer date of the assets or liabilities, then the entities cease to be part of the same group and consider transfer outside the qualifying group. In such cases, the original transfer will be treated as having occurred at market value for tax purposes. Consequences of Violating the Holding Rule If the two-year condition is broken, the original transfer is retroactively treated as if it occurred at market value, and tax adjustments are made accordingly.
Article 27 – Business Restructuring Relief
- As per the business restructuring relief, no gain or loss will be taken into account when determining taxable income, under the following conditions:
- a) if a taxable person transfers its entire business or an independent division to another person who could be a taxable person or will become a taxable person, in exchange for shares that is the transferee.
- b) if multiple taxable persons transfer their business or businesses to a taxable person, which shifts into new or existing businesses, and the original company or companies cease to exist, as a result, the transferor will receive their shares in return.
- As per corporate tax law, the following conditions need to be met to be tax-exempt using business restructuring relief:
- a) The transaction is done according to the laws and regulatory requirements in the UAE.
- b) Resident persons or Non-residents with UAE Permanent Establishments.
- c) Should Not be Exempt Persons.
- d) Should Not be Qualifying Free Zone Persons.
- e) All entities have the same financial year-end.
- f) All entities must prepare financials using the same accounting standards.
- g) The transaction must be for valid commercial or non-tax reasons, not be made for the purpose of tax avoidance.
- Tax treatment of taxable persons during the transfer of assets and liabilities will be based on the following factors:
- a) Transfer of assets and liabilities should be recorded at net book value at the time of transfer, where no gain or loss arises.
- b) The value of shares received by the taxable persons must not exceed the net book value of the assets transferred, unless there are any other considerations.
- c) Similarly, shares surrendered in mergers must not exceed the book value of assets received.
- d) Unutilized tax losses of the transferor may be carried forward by the transferee (subject to further conditions set by the Minister).
- The business structuring relief also applies in the following scenarios:
- a) When someone other than the taxable person receives the shares.
- b) When the shares or ownership interests are issued by someone other than the taxable person i.e transferee.
- c) When the transferor is a partner in an unincorporated partnership (if that partnership is treated as a taxable entity).
- If only a segment or division of the business is transferred, only the losses directly related to that part of the business can be carried forward to the transferee.
- The tax relief provisioned in the clause 1 of the article will not be applied for below scenarios if happened within 2 years of the restructuring:
- a) The shares or ownership interest of the transferor or transferee are sold or transferred either fully or partially to a taxable person that does not belong to the Qualifying Group in which the transferor or transferee belongs.
- b) The business or independent part of the business that is transferred is sold again or otherwise disposed of.
If the two-year condition is breached, in the above two scenarios, the transfer is treated as having occurred at market value, and taxes will be applied accordingly in that year.
