Consolidating Your UAE Businesses Into ‘Tax Groups’

There can be operational cost benefits for larger businesses with subsidiaries in the UAE by restructuring the corporate entity.  

As the UAE tax authorities provide more updates on the new corporate tax regime, the next set of updates will focus on the formation of ‘Tax Groups’.

A Tax Group is where multiple businesses operating under a single dominant shareholder(s) come together to form a tax group. The biggest gain from doing so will be the ‘reduced administrative burden’ from filing for corporate tax under a single consolidated return provided by the parent company.

For example, a mid-sized developer might have property and facilities management companies operating under the parent company. Or it could be a family business with multiple entities within its fold, and the single common thread between them obviously being the common shareholding. This is where applying to be recognised as a tax group would make sense. (Tax groups are allowed under VAT as well.)

Registering for Tax Group Status

The UAE tax authorities will need to give their approval for any such grouping to be recognised. Currently, the Federal Tax Authority (FTA) has enabled the online corporate tax registration process for certain types of entities. However, the online registration process for tax groups has not been enabled as yet. The individual entities forming a tax group need to get themselves registered first before applying for tax group registration.

There are three main factors for any business entity to consider creating a tax group:

• The elimination of intra-group transactions thereby resulting in reduced transfer pricing compliances;
• The setting off of losses between entities within such a tax group;
• A reduced administrative burden through filing a single consolidated return by the parent company as opposed to filing multiple returns.

Timeframe

Updates and registration of the first tax groups under the new corporate tax regime could happen any time now. Registration for the UAE corporate tax is happening at a brisk pace, while the UAE’s corporate tax regime came into effect from June 1^st this year.

According to the UAE corporate tax laws, UAE businesses still have time to opt for tax group status. There is a timeline provided in the new corporate tax law to apply for approval to form a tax group, or to join an existing tax group. The application must be submitted to the FTA before the end of the tax period within which the formation or joining of a tax group is requested.

Businesses with tax group plans must also keep in mind that transactions between member entities shall be ‘eliminated only if a member (unit) has recognised a deductible loss in a tax period on those transactions prior to joining – or forming – the tax group.” (This is as per Article 4 of the Ministerial Decision 125 of 2023 on transactions prior to forming or joining tax group.)

Setting Up The Parent Company

The large corporate entities in the UAE operate on the parent company/holding company structure. This is generally the same about businesses that have reached a certain size and operate multiple subsidiaries. But for smaller family or individual owned businesses, the parent company structure might still be absent.

Forming a tax group is an option and is not mandatory for any group of entities fulfilling condition given under clause 1 of Article 40.  However smaller entities should start to plan if they plan to use the tax group provision. Generally, having a holding company/parent company structure is one of the conditions of forming tax group – and this is pushing the business groups to restructure.

Businesses opting out from forming a tax group are also planning to restructure their corporate model by having a holding company structure to manage the ownership prudently.

Tax Group Pointers

• Only ‘juridical resident persons’ can join a corporate tax group. Natural persons and unincorporated JVs are ineligible.
• The parent company and subsidiaries must be ‘resident juridical persons’. Permanent Establishments (PE) or branches of foreign companies in the UAE cannot join.
• Neither the parent nor the subsidiary(s) are an exempt person or a qualifying free zone person.
• The parent company must be entitled to 95% of the profits, voting rights and net assets of the subsidiary.
• The parent company and subsidiary must have the same financial year, and must prepare their financial statements using the same accounting standards.
• The conditions for formation of a tax group must be met continuously throughout the relevant tax period.

For assistance with UAE tax structuring please contact Dezan Shira & Associates Dubai office at dubai@dezshira.com 

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