In the United Arab Emirates (UAE), the corporate tax framework provides mechanisms that permit related entities to consolidate their tax reporting obligations for efficient tax process and compliance reasons. One such mechanism is the formation of a Tax Group, which allows resident juridical persons to be treated as a single taxable entity under the corporate tax law.
This chapter twelve of the Federal Decree Law No.47 of 2022, sets out the eligibility criteria, requirements, application procedures, and consequences associated with forming, maintaining, and dissolving a Tax Group. It also outlines the methods for calculating taxable income within the tax group. These provisions help businesses with accurate tax reporting, simplifying administrative processes, and preventing misuse of group structures for tax avoidance.
Article 40 – Formation and Membership of a Tax Group
A Tax Group may be formed when a Resident Person, referred to as parent company, applies to the tax authority to consolidate with one or more Resident Person, referred as Subsidiary, provided all the following conditions are met:
- Both the Parent Company and Subsidiaries must be juridical persons.
- The Parent Company should directly or indirectly hold at least 95% of the share capital, voting rights or entitlement to profits and net assets of the subsidiary.
- Neither the parent company nor the subsidiaries may be exempt persons or qualifying free zone persons
- All members must have the same financial year and apply the same accounting standards
Government entities with at least 95% ownership in subsidiaries are also eligible to form a Tax Group, subject to conditions approved by the tax authority.
Once formed, the Tax Group is treated as a single taxable entity for UAE corporate tax purposes.
- The Parent Company acts as the representative for fulfilling all obligations under Chapters Fourteen, Sixteen and Seventeen of this Federal Decree-Law No.47 of 2022 on behalf of the Tax Group.
- All members are jointly and severally liable for the tax group’s corporate tax payable by the tax group for the tax periods when they are members of the tax group, unless the authority approves a limitation of liability to certain members.
- Any Changes in membership, such as adding or removing a subsidiary to the tax group require a formal application and approval from the tax authority.
- A Tax Group ceases to exist if the Parent Company no longer meets the eligibility criteria as mentioned in this article, unless replaced by another qualifying Parent Company without interruption of the group.
Article 41 – Date of Formation and Cessation of a Tax Group
The beginning and end of the Tax Group membership is critical for accurate tax reporting.
- Formation or Addition of a Subsidiary:
- A subsidiary can be added to the tax group from the start of the tax period specified in the approved application submitted to the authority or the tax authority may determine any other tax period or a different commencement date.
- A subsidiary can be added to the tax group from the start of the tax period specified in the approved application submitted to the authority or the tax authority may determine any other tax period or a different commencement date.
- Exit of a Subsidiary:
- If leaving by approved application, effective from the start of the tax period stated in the application or as determined by the authority.
- If leaving the tax group due to ineligibility, effective from the start of the tax period when conditions ceased to be met.
- If leaving by approved application, effective from the start of the tax period stated in the application or as determined by the authority.
These provisions provide clarity in determining the exact tax periods during which the entities are liable for corporate tax as part of the tax group.
Article 42 – Taxable Income of a Tax Group
When calculating the taxable income for a Tax Group, the Parent Company must consolidate the financial reports of all the member companies and eliminate any intra-group transactions.
Pre-Grouping Tax Losses:
- Unutilized tax losses incurred by a subsidiary before joining the group can be carried forward only if it is offset against the income attributable to that subsidiary, and are subject to the conditions specified under Articles 37 and 39 of this Federal Decree Law.
Unutilized Losses from Existing Group Members and New Members:
- Losses of the existing group cannot offset taxable income from a newly added subsidiary, and vice versa.
When a subsidiary leaves the group, tax losses generally remain with the Tax Group and unutilized pre-grouping losses revert to the departing subsidiary.
On dissolution of a tax group, unutilised tax losses of the Tax Group shall be allocated as follows:
- If the parent company continues to be a taxable person, all tax losses remain with the parent company itself.
- If the parent company ceases to exist, tax losses shall not be available for offset against future Taxable Income of the individual Subsidiaries, except for their pre-grouping losses.
When a Parent Company is replaced in the tax group, tax losses remain with the Tax Group if the parent is replaced without any discontinuation.
In case of transfer of asset or liability:
- If the assets or liabilities transferred within the same tax group and one party leaves within two years, income generated from the transfer must be recognized. The cost base of such assets or liabilities need to be adjusted, unless such income would have been exempt.
The Tax Groups must prepare their consolidated financial statements in accordance with UAE accounting standards accepted by the tax authority.
