The Federal Tax Authority (‘FTA’) has released the Corporate Tax (‘CT’) Guide on Tax Groups.
This provides general guidance to taxpayers on the taxation of two or more juridical Resident Persons that form a Tax Group, covering:
- Eligibility to form or be a member of a Tax Group
- Formation of a Tax Group including subsequent changes, cessation and related tax compliance
- Determination of a Tax Group’s taxable income on the consolidated basis
- Other related aspects such as application of taxable income attribution, utilization of tax losses, applicability of interest deduction rules and determination of foreign tax credit.
This Guide covers the provisions of Federal Decree-Law No. 47 of 2022 (‘UAE CT Law’) and related Ministerial and Cabinet Decisions explained with certain illustrations.
It has also clarified the following specific provisions relating to Tax Groups:
Conditions to form a Tax Group
- Conditions include determination of residential status of juridical persons in cases where the Double Taxation Agreement (‘DTA’) does not provide for a conclusive tie-breaker rule for dual residency or there is no DTA between the UAE and another foreign jurisdiction.
- Members of a Tax Group are to have the same Tax Period and if not, align their tax periods by making an application to the FTA and comply with certain conditions. However, the Tax Period end date cannot be a date that does not relate to any of the intended Tax Group members.
- There is no requirement to prepare and maintain separate audited financial statements of the Parent Company and each Subsidiary which is a member of a Tax Group, even when a member’s revenue exceeds AED 50 million.
- A single accounting policy consistent with the applicable accounting standard should be applied by all members of the Tax Group to prepare the financial statements of the Tax Group.
- Consolidated financial statements for CT purposes should cover and be accompanied by a statement that aggregates the standalone financial statements of all entities included in the Tax Group.
- If a member of the Tax Group exits the Tax Group or the Tax Group ceases to exist, the Parent Company and each Subsidiary which was a former member of the Tax Group is required to prepare its standalone financial statements on the same accounting basis as applied by the Tax Group, including adoption of values of relevant assets and liabilities as recorded by the Tax Group as the opening values in the standalone financial statements and retaining the decision made during the first Tax Period to elect or not elect for recognizing gains or losses on a realization basis.
- Timelines for filing an application/notifying the FTA have been clarified for various scenarios covering the formation, joining, exit, replacing the Parent Company and cessation of a Tax Group.
- There is a pre-requisite for the Parent Company and each Subsidiary that wants to apply to form a Tax Group to have a Tax Registration Number. Forming or joining a Tax Group will not cause or require the members of the Tax Group to be deregistered, even though the members of the Tax Group will no longer be required to file a Tax Return as a standalone Taxable Person.
- Responsibilities of the Parent Company of the Tax Group include the election to exclude the net income of Foreign Permanent Establishments held by the Tax Group and to specify the change in election for the realization basis in the application to the FTA.
- Approval of application by the FTA does not necessarily confirm the satisfaction of conditions for forming a Tax Group for the relevant Tax Period; the FTA can reassess compliance with the conditions at any time.
Determination of Taxable Income of the Tax Group
- The Parent Company will compute the Taxable Income by consolidating the financial results, assets, and liabilities with all Subsidiaries. It will eliminate transactions between the Parent Company and any Subsidiary or between the Subsidiaries that are part of the Tax Group. An exception to this rule applies if a member has recognized a deductible loss in a Tax Period concerning those transactions before joining or forming the Tax Group.
- Expenditure incurred wholly and exclusively for the purposes of the Taxable Person’s Business that is not capital in nature is deductible under the UAE CT Law. In the case of a Tax Group, expenditure is deductible even if incurred wholly and exclusively for the Business(es) of other member(s) of the Tax Group since this is to be assessed on the basis of the whole Tax Group.
- A Taxable Person that has not made an election for Qualifying Group Relief is treated as making such an election if it forms a Tax Group or joins a Tax Group that includes one or more members that have made such an election. A Tax Group that has not made such an election is treated as making the election if a new Subsidiary joins the Tax Group and such Subsidiary has made such an election.
- Ownership and business continuity conditions are to be met for tax losses to be carried forward and utilized by a Taxable Person. In the case of Tax Group, only the ownership interest in the Parent Company is relevant; business continuity is to be determined by reference to the Business Activities of the Tax Group as a whole.
- The decision to make an election to recognize gains or loss on realization basis is deemed irrevocable, except under exceptional circumstances and pursuant to approval by the FTA. An exceptional circumstance where an entity is allowed to change its election is where a Subsidiary had elected for realization basis and later joins a Tax Group that has not elected for realization basis in a subsequent Tax Period. In such a case, separate approval from FTA need not be sought since the approval to join the Tax Group can be considered approval to revoke the Subsidiary’s previous election for the realization basis.
- An election in respect of transitional rules can be made by the Tax Group and will continue to apply to any members of the Tax Group after they exit the Tax Group or if the Tax Group ceases to exist. Where a Taxable Person becomes a member of a Tax Group after the first Tax Period, the transitional relief already applied by the member will continue to apply in relation to such assets and liabilities.
- Transactions between members of a Tax Group are to be determined consistently with the arm’s length principle even where these transactions have been eliminated under consolidation.
- Non-applicability of Small Business Relief is on a standalone basis to juridical Resident Persons that are eligible for such relief and are members of a Tax Group.
Foreign Tax Credits and Foreign Permanent Establishments
- The Guide specifies the manner of determining the amount of Foreign Tax Credit that can be claimed by a Tax Group in respect of relevant foreign source income earned by a member of the Tax Group.
- The attribution of income and expenditure to a Foreign Permanent Establishment is to be performed in accordance with internationally accepted profit attribution methods such as the Authorized OECD Approach and the relevant provisions of the CT Law.
- Determination of profits of Foreign Permanent Establishments is to be consistent with the arm’s length standard.
Tax Groups are an optional regime and are applicable to juridical Resident Persons only upon satisfaction of relevant conditions. While there are several benefits of forming a Tax Group, Taxable Persons need to take cognizance of the other provisions of the UAE CT Law that could possibly impact the members of the Tax Group in subsequent Tax Periods.
This Guide is not legally binding; it is a source of guidance for better understanding the provisions of the UAE CT Law.
- Assess the eligibility to form a Tax Group.
- Evaluate the pros and cons of being a member of a Tax Group.
- Intended members of a Tax Group should obtain CT registration and be in receipt of a Tax Registration Number before filing the joint application for forming a Tax Group to the FTA.
- File a joint application to the FTA to form a Tax Group before the end of the Tax Period.
The FTA portal is now open for obtaining separate entity CT registration and Tax Group registration.
KPMG Lower Gulf has a dedicated CT team that will be delighted to help you assess the impact of CT in your operations and activities.