Understanding Corporate Tax Groups in the UAE

Starting January 2024, the UAE has begun implementing corporate income tax. This new tax regime significantly affects companies with subsidiaries, as it is common for UAE businesses to operate in groups. For instance, a common structure might involve a headquarters in a free zone owning a subsidiary in the mainland or another emirate.

Such arrangements are often driven by factors like foreign ownership rights, logistics, or other strategic reasons. These groups are now prompted to seek the most efficient structure and strategy to ensure tax efficiency, leading them to reevaluate their organizational frameworks. A key strategy emerging in this context is the formation of a tax group.

In this article, we will explain what constitutes a corporate tax group, explore its potential benefits and drawbacks, and discuss other critical implications that UAE businesses must consider to optimize their tax positions.

What is a Corporate Tax Group?

In the UAE, a Corporate Tax Group, or simply ‘Tax Group’, is an optional arrangement where two or more corporate entities, or juridical Resident Persons, choose to be recognized as a single taxable entity. This consolidated approach to taxation, approved by the Federal Tax Authority (FTA), allows these entities to submit just one tax return for the entire group, making the tax handling process more streamlined.

It’s important to note that Corporate Tax Groups are distinct from VAT Groups. Each has its own separate application process and specific conditions that need to be met.

Before committing to a tax group, businesses must thoroughly understand its benefits and challenges. Understanding these aspects is crucial for effective tax management and evaluating the impact on your business operations.

What to Consider Before Forming a UAE Corporate Tax Group?

Key Benefits of Forming a Tax Group

• Simplified Tax Management: One tax return is filed for the whole group by the parent company, easing administrative duties.
• Financial Synergy: Losses among group members can be offset, potentially lowering overall tax dues.
• Efficient Resource Allocation: Internal transactions, such as asset transfers between group members, are not considered for tax purposes, which may lead to additional financial benefits.

Drawbacks to Consider

• Restrictions on Loss Utilization: Certain limitations are in place, particularly for subsidiaries that are newly joining or exiting the group.
• Group-Wide Limitations: The 0% corporate tax rate, which would normally apply to the first AED 375,000 of taxable income for each individual member company, is consolidated for the entire group. Thus, the entire tax group is limited to a single AED 375,000 allowance at the 0% rate, regardless of the number of entities within the group.

Eligibility Criteria for Forming a Tax Group:

A Parent Company, along with one or more Subsidiaries, may submit an application to the FTA to establish a Tax Group, provided all the following criteria are met:

• Corporate Structure: Each entity must be a juridical person, such as an LLC.
• Residency: All members must be UAE residents.
• Ownership: The parent company should hold at least 95% of the share capital and voting rights in each subsidiary.
• Financial Control: The parent company must control at least 95% of each subsidiary’s profits and net assets.
• Uniform Financial Practices: All entities must align their financial year and adhere to consistent accounting standards, like IFRS.
• Exclusions: Exempt persons and qualifying free zone entities are not eligible.

Who Can’t Join a Tax Group?

Entities such as sole proprietors, unincorporated partnerships, exempt persons, and qualifying free zone entities are excluded from forming or joining a tax group.

Role of the Parent Company

Once established, the parent company assumes responsibility for the tax group’s compliance, including consolidated financial statements and tax filings, maintaining records, and managing tax-related administrative tasks.

Tax Law Implications for Tax Groups

A Tax Group is treated as a single taxable entity, subject to the Corporate Tax Law. This collective approach influences everything from tax calculations to eligibility for Small Business Relief, which applies to the group’s total revenue, not individual members.

Key Takeaways

• Corporate tax groups differ from VAT groups.
• Forming a corporate tax group is optional.
• The primary benefits of corporate tax grouping include improved utilization of losses to minimize tax liability and single tax return filing.
• Eligibility for joining a tax group is stringent; only subsidiaries that are 95% owned and controlled can participate.
• The advantages of corporate tax grouping depend on the group’s size, profitability, and various other factors.