The Federal Tax Authority (FTA) has released a Corporate Tax Guide on Business Restructuring Relief, providing guidance on how the provisions of the United Arab Emirates Corporate Tax Law apply to business restructuring transactions.

In this summary, we will explain the transactions covered by the relief, the conditions for eligibility, the consequences of electing for the relief, the circumstances under which the relief may be revoked, and the compliance requirements 

What is Business Restructuring Relief?

Business Restructuring Relief refers to the neutralization or elimination of the corporate tax impact on specific transactions, like mergers and demergers, conducted during business restructuring or reorganization, which could result in a taxable gain or loss. The relief enables these actions to proceed without tax consequences.

Business Restructuring Relief is available only if the relevant conditions are met and the Transferor has elected for the relief to apply.

Transactions Covered Under Business Restructuring Relief

1. Transfer of an Entire Business or an Independent Part: From one taxable person to another.
2. Transfer of an Entire Business Leading to the Ceasing of the Transferor: From one or more taxable persons to another, resulting in the transferor ceasing to exist.

Conditions for Eligibility

To qualify for Business Restructuring Relief, the following conditions must be met:

• Legally Compliant Condition: The transfer must adhere to UAE legislation.
• Taxable Persons Condition: Both the transferor and transferee must be resident persons or non-residents with a permanent establishment in the UAE.
• Exempt Person Condition: Neither the transferor nor transferee should be exempt persons.
• Qualifying Free Zone Person Condition: Neither party should be a qualifying free zone person.
• Financial Year Condition: Both parties’ financial years must end on the same date.
• Accounting Standards Condition: Both must use the same accounting standards.
• Valid Commercial Reasons Condition: The transfer should reflect economic reality and be undertaken for valid commercial or other non-fiscal reasons.

Consequences of Electing for Business Restructuring Relief

Transfer of Assets and Liabilities at Net Book Value

Assets and liabilities transferred on a no gain or loss basis will be treated at their net book value on the transfer date. This ensures no taxable gain or loss for the transferor.

Value of Shares or Ownership Interest Received

Transferors or shareholders holding at least 50% of the transferor’s ownership interests must treat the shares or ownership interests received as having a value not exceeding the net book value of the transferred assets and assumed liabilities.

Transfer of Tax Losses

Unutilized tax losses incurred by the transferor before the restructuring can be carried forward and considered as the transferee’s tax losses, provided the transferee continues the same or a similar business activity.

Consequences of Not Meeting Requirements or Not Electing for Relief

If the conditions for a no gain or loss transfer are not met or if the transferor has not elected for Article 27 application, the transfer falls outside the scope of the relief.

Clawback of Business Restructuring Relief

Business Restructuring Relief can be clawed back (revoked) if:

• There is a sale or disposal of shares to a non-qualifying group member within two years of the transfer.
• Another business restructuring occurs under Article 27 within two years.

Compliance Requirements and Interaction with Other Tax Provisions

• An election for Relief is required for each restructuring transaction.
• Transferor and transferee must maintain records and documentation as per Article 27 of the CT Law.
• Unutilized tax losses can be carried forward under specified conditions, but unutilized net interest expenditure cannot be transferred

 This Business Restructuring Relief offers UAE businesses a valuable tax advantage, helping them optimize their tax positions and reduce tax liabilities during business restructuring transactions.