The UAE Corporate Tax Law provides a unique structure for resident companies to consolidate their tax liabilities by registering as a Tax Group. The basis of this provision is Article 40 of the Corporate Tax Law, where at least two or more resident companies can register with the authorities as a single taxable person. On fulfillment of the terms and conditions, the Federal Tax Authority accepts the application; henceforth, a Tax Group can file a consolidated CT return in the UAE, which will make the payment of taxes easier for them. However, this system has its own set of advantages and disadvantages. This blog outlines the pros and cons of forming a Corporate Tax Group in UAE.
Definition of the UAE Corporate Tax Group
The UAE Corporate Tax Group consists of a resident parent company and one or more resident subsidiaries, which operate as a single taxable unit when determining the corporate tax. The following listed conditions apply when forming a group:
Juridical Persons – The members in a group shall only be juridical persons. In such a scenario, the joining of natural persons (individuals) is not meant to form a Tax Group.
Tax Residency – All the members must be resident companies in the UAE.
Ownership Test – The parent company has at least 95% ownership of the capital, profit shares, and voting rights in each subsidiary.
Non-Exempt Person – Neither the parent nor the subsidiaries should be an exempt person or a Qualifying Free Zone Person (QFZP).
Pros of a Corporate Tax Group Formation
Single Filing Requirement – The most crucial advantage of creating a Corporate Tax Group is the ease with which the tax compliance process occurs.
Consolidated Tax Return – Instead of individual returns for each member, only one consolidated tax return is required to be filed by the group. This cuts down on administrative burdens and streamlines the overall tax filing process.
Ownership Requirements – Transactions among members of the same group are exempted from arm’s length principles and transfer pricing documentation. This substantially simplifies and reduces the burden of proof of fair market value in transactions within the same group, and hence easier to manage internal financial relationships.
Group Loss Utilisation – Losses of one group member can be utilised against the profits of the other members in the same tax year. Such a possibility to set off losses against the profits reduces a tax liability chargeable from the group as a whole and, therefore, provides cash flow benefits immediately and enhances the efficiency of financial management.
Reduced Compliance Burden – The formation of a Corporate Tax Group reduces the compliance burden since only one corporate tax registration would have to be effected and one return submitted. This would make the administration more accessible and, in turn, cost less compliance-related money, which shall make the entire taxation process effective and cost-friendly.
Cons of a Corporate Tax Group Formation
Single Exemption Limit – The UAE Corporate Tax Laws specify that the threshold limit of AED 375,000 applies collectively to the entire tax group and not to every member of the group. This situation can be rather disadvantageous, as the smaller profit-making companies involved in a tax group might lose their exemption limits while joining a tax group, which further adds to the collective group with more enormous taxable profits. Hence, the net tax liability may be comparatively more for the smaller units in the group.
Mandatory Preparation of Consolidated Financial Statements – The formation of a Tax Group mandates the preparation of consolidated financial statements by the accounting standards applicable. This, therefore, increases accounting hassles and may proportionately increase the compliance cost as well compared to the preparation of separate financial statements for each one of them.
Joint and Several Liabilities – All members in a tax group share joint and several liabilities with the whole corporate tax liabilities for the entire tax group. In simple terms, it means each of them is both responsible for the payment of tax obligations and collectively responsible at the same time. The failure to pay can lead others to be entirely held accountable, thus considerably raising the financial risk of all persons involved.
Complexities in M&As – Having to deal with a Tax Group can make things complicated regarding going in for mergers and acquisitions. Changes in the composition of the group will mean tax changes in the members’ positions and may call for restructuring during the merger or acquisition processes, leading to more administrative work and legal complexities.
Formation Limited to Parent-Subsidiary Relationship – The option to set up a Corporate Tax Group applies solely to parent-subsidiary relationships. It involves only those entities that are residents and taxpayers of UAE as legal entities. This means that there are categories of business entities that cannot come together in a Tax Group and are, therefore, limited in the scope of the benefit they can realize from group taxation.
UAE Corporate Tax Law defines a corporate tax group as a more stringent structured framework exclusively for resident companies to benefit from features such as a single registration, single-tax computation, single loss utilisation, etc.
This also comes with some cost factors regarding collective exemption limit, combined mandatory consolidated financial statements, joint liabilities, and complexities in M&A activities.
Thus, the formation of a Tax Group requires a careful analysis based on the benefits derived and the possible drawbacks of the group structure and is about one’s financial and operational position; this will help ensure a well-advised decision based on an enlightened basis.
These known elements will position a business advantageously when forming a Tax Group by realizing the benefits and offsetting the risks and associated complexities.