The UAE Federal Tax Authority (FTA) recently published detailed guidance on the tax group rules in the Corporate Tax Law (CTL) that applies for financial periods commencing on or after 1 June 2023 (for prior coverage, see the article in the February 2022 issue of Corporate Tax News). The guidance clarifies various aspects of the tax group rules, such as formation, termination, taxable income and compliance.
The benefits of forming a tax group include being able to file a single group tax return and the ability to transfer tax losses, assets and liabilities between group members without creating a tax impact. There can also be disadvantages to tax grouping:
The timing of the application for group treatment will determine when the tax group is formed. The FTA guidance confirms that an application must be submitted before the end of the tax period in which grouping is desired. If it is not, tax group status will commence with effect from a subsequent tax period or other period determined by the FTA.
When a tax group is formed, a new tax reference number (TRN) is issued that represents the group for administrative purposes. Group members also have individual TRNs that can be used if they were to leave the group.
Tax losses between group members can be transferred provided they were incurred while being in the tax group. Any pre-group tax losses belonging to a member can be utilised against taxable profits attributable to that member.
The new guidance sets out the process to be followed for calculating taxable income when a member leaves the group, the applicability of qualifying group relief, tax losses and transitional rules.
Attribution of taxable income
Notwithstanding the requirement to prepare consolidated accounts for the group as a whole, a tax group will need to attribute taxable income to individual members of the group in the following cases:
Where income is allocated in the above circumstances, the arm’s length principle must be applied.
Interest deduction limitation rule
Net interest expenditure is subject to a restriction that allows a deduction up to the greater of either 30% of EBITDA or AED 12 million. Any interest expenditure that is disallowed because of this limitation is carried forward and deductible for the following 10 tax periods. As a tax group is seen as a single entity for corporate tax purposes, the restriction applies to the entire group, not to each individual member.
If a tax group ceases to exist and the parent company is not replaced by another parent company, any unutilised net interest expenditure of the group will be lost.
Foreign tax credits
Tax groups can claim a tax credit on overseas income that has been subject to foreign tax. The credit that can be claimed is the lower of the foreign tax paid on overseas income and the UAE corporate tax due on the same income after deducting related expenses.
Tax groups can make an election to exclude foreign permanent establishment income from their total profits. It is up to the parent company to make this election, which will be binding on all group members.
The group parent company is the representative of the group and is responsible for compliance. Compliance requirements include:
When a member joins or leaves a tax group, the nature of the event will determine when the member joined or left the group for corporate tax purposes, whether at the beginning of the tax period or at the time of the event in the case of a transfer or cessation of a business. This will impact the make-up of the single tax return for the group.
Failure to comply with the rules could lead to the imposition of tax penalties for the submission of incorrect tax returns.
When a tax group ceases to exist, it will also be deregistered from corporation tax. When making application to disband a tax group, the parent company must confirm that all corporate tax liabilities and penalties have been paid and all tax returns have been filed.
The benefits of forming a tax group include being able to file a single group tax return and the ability to transfer tax losses, assets and liabilities between group members without creating a tax impact. There can also be disadvantages to tax grouping:
- The zero rate on profits up to AED 375,000 will apply at the group level; it will not increase or decrease in proportion to the members in the group;
- The revenue limit for small business relief remains at AED 3 million for the group as a whole; and
- Tax group members are jointly and severally liable for tax debts arising during the time they are member of the group.
Tax grouping conditions
The CTL defines a tax group as two or more resident taxable persons that are treated as a single taxable person. Tax grouping is elective and requires the parent company and the subsidiaries concerned to meet certain eligibility requirements and submit a joint application to the FTA. The following conditions must be fulfilled throughout the relevant tax period:- All companies must be resident juridical persons, i.e., be separate legal entities and incorporated or effectively managed and controlled in the UAE;
- The parent company must own directly or indirectly at least:
- 95% of the share capital of each subsidiary;
- 95% of the voting rights of each subsidiary; or
- 95% of the profits and net assets of each subsidiary;
- None of the entities in the group can be exempt persons or qualifying free zone persons; and
- All companies in the group must have the same accounting period and follow the same accounting standards (IFRS or IFRS for small and medium-sized companies).
The timing of the application for group treatment will determine when the tax group is formed. The FTA guidance confirms that an application must be submitted before the end of the tax period in which grouping is desired. If it is not, tax group status will commence with effect from a subsequent tax period or other period determined by the FTA.
When a tax group is formed, a new tax reference number (TRN) is issued that represents the group for administrative purposes. Group members also have individual TRNs that can be used if they were to leave the group.
Taxable income of the group
The parent company is required to calculate the group’s taxable income by consolidating the financial accounts of each subsidiary, eliminating intragroup transactions. As the consolidated accounts for tax group purposes may include tax-specific adjustments, tax consolidation might be different to the consolidation drafted for accounting purposes.Tax losses between group members can be transferred provided they were incurred while being in the tax group. Any pre-group tax losses belonging to a member can be utilised against taxable profits attributable to that member.
The new guidance sets out the process to be followed for calculating taxable income when a member leaves the group, the applicability of qualifying group relief, tax losses and transitional rules.
Attribution of taxable income
Notwithstanding the requirement to prepare consolidated accounts for the group as a whole, a tax group will need to attribute taxable income to individual members of the group in the following cases:
- A member has unutilised pre-grouping tax losses;
- A member has income that is subject to a foreign tax credit;
- A member benefits from any of the tax incentives available under the CTL; and
- A member has unutilised carried forward pre-grouping net interest expenditure.
Where income is allocated in the above circumstances, the arm’s length principle must be applied.
Interest deduction limitation rule
Net interest expenditure is subject to a restriction that allows a deduction up to the greater of either 30% of EBITDA or AED 12 million. Any interest expenditure that is disallowed because of this limitation is carried forward and deductible for the following 10 tax periods. As a tax group is seen as a single entity for corporate tax purposes, the restriction applies to the entire group, not to each individual member.
If a tax group ceases to exist and the parent company is not replaced by another parent company, any unutilised net interest expenditure of the group will be lost.
Foreign tax credits
Tax groups can claim a tax credit on overseas income that has been subject to foreign tax. The credit that can be claimed is the lower of the foreign tax paid on overseas income and the UAE corporate tax due on the same income after deducting related expenses.
Tax groups can make an election to exclude foreign permanent establishment income from their total profits. It is up to the parent company to make this election, which will be binding on all group members.
Compliance
The tax group must ensure it remains compliant with the conditions in each tax period. If the conditions are not satisfied in any tax period, tax group status will be terminated with effect from the beginning of that period. It is also important to note that if administrative requirements are not met, the group may be subject to penalties under the Tax Procedures Law and the CTL.The group parent company is the representative of the group and is responsible for compliance. Compliance requirements include:
- Making a separate joint application for new entrants to the group;
- Preparing consolidated financial statements for the group in accordance with IFRS or (in certain circumstances) IFRS for small and medium-sized companies;
- Filing a tax return for the group;
- Paying corporate tax for the group;
- Requesting corporate tax refunds from the FTA;
- Registering and deregistering the tax group;
- Maintaining documentation on transfer pricing and financial records; and
- Communicating with the FTA on matters relating to corporate tax on behalf of the group.
Changes in the tax group
The CTL contains provisions for a parent company to be replaced by another parent entity, a member to transfer its business to another group member followed by a cessation of trade, or a member joining or leaving the group. In these circumstances, the parent company will be required to submit an application to the FTA specifying the tax period that is affected by the changes. Deadlines apply for submitting the applications.When a member joins or leaves a tax group, the nature of the event will determine when the member joined or left the group for corporate tax purposes, whether at the beginning of the tax period or at the time of the event in the case of a transfer or cessation of a business. This will impact the make-up of the single tax return for the group.
Failure to comply with the rules could lead to the imposition of tax penalties for the submission of incorrect tax returns.
Cessation of the group
A tax group will cease to exist in the following circumstances:- When approved by the FTA following a successful application by a parent company;
- When a parent company no longer meets the eligibility requirements to form a tax group and is not replaced by another parent company that would meet the requirements without discontinuation of the tax group; or
- When there are only two members of the tax group and one transfers their entire business to the other member and ceases to exist as a result.
When a tax group ceases to exist, it will also be deregistered from corporation tax. When making application to disband a tax group, the parent company must confirm that all corporate tax liabilities and penalties have been paid and all tax returns have been filed.
BDO insights
Tax grouping will provide simplified compliance for businesses that can fulfil the conditions. However, the conditions and exclusions are strict and many trading groups will not qualify. Any groups that wish to consider tax grouping should carry out an assessment of their ability to qualify, as well as the potential implications and benefits for the group.
The FTA registration portal recently opened for tax groups and early registration is recommended to ensure adequate time is available to deal with any queries or delays during the process. Registration must be complete before filing the first tax return.
Kabir Nazrul
Kapil Bathija
BDO in United Arab Emirates