UAE Corporate Tax Groups : Pros and Cons You Should Know

Are you a business owner in the UAE looking to simplify your tax obligations? Corporate tax groups might be the answer. By consolidating your tax obligations, you can reduce administrative burdens and improve compliance. For expert guidance in navigating these complex structures, effective Corporate tax services in UAE are essential.  But, as with any tax strategy, there are pros and cons. In this blog, we'll break down the benefits and drawbacks of corporate tax groups in the UAE so that you can make informed decisions for your business.

What are Corporate Tax Groups in the UAE?

A Corporate Tax Group in the UAE is an optional regime under which two or more juridical Resident Persons that meet the Article 40 conditions are treated as a single Taxable Person; the Parent Company reports consolidated Taxable Income and files one Tax Return for the Tax Group. The framework for corporate tax groups is outlined in the Federal Decree-Law No. 47 of 2022 regarding the taxation of corporations and businesses.

Eligibility Criteria for Forming a UAE Corporate Tax Group

To qualify for forming a UAE corporate tax group, certain criteria must be met:

• Ownership Requirement: The Parent Company must legally (directly or indirectly) hold at least 95% of the nominal issued or paid-up share capital of each Subsidiary; the voting-rights and profits/net-assets conditions must also be tested separately (legal ownership not merely economic arrangements is decisive).
• Tax Residency: All entities involved must be considered tax residents in the UAE.
  Exempt Status: None of the entities in the group can be classified as an exempt person under UAE corporate tax law.
• Shared Financial Year : All members of the tax group must have the same financial year-end and prepare their financial statements using consistent accounting standards.

Requirements for Registering a UAE Corporate Tax Group

To register a corporate tax group with the Federal Tax Authority (FTA), the following steps must be taken:

• Individual Registration: The Parent Company and each Subsidiary applying to join a Tax Group must each hold a Corporate Tax Registration Number before applying. If the FTA approves the application, the Tax Group will be issued a separate Tax Registration Number which the Parent Company will use to file the Tax Group’s single Tax Return and to settle tax due on behalf of the group.
• Application Submission: After obtaining individual registrations, an application to form a tax group must be submitted to the FTA, detailing compliance with eligibility criteria.
• Approval Process: The FTA will review the application and grant approval if all conditions are met.
  Consolidated Financial Statements: Once approved, the group is required to prepare consolidated financial statements for tax purposes.

Pros of Corporate Tax Groups in UAE

• Simplified Tax Compliance

Forming a corporate tax group in the UAE simplifies tax compliance, reducing the administrative burden on businesses. With a corporate tax group, companies can streamline their tax compliance procedures, making it easier to manage their tax obligations.

• Consolidated Tax Filing

One of the key benefits of a corporate tax group is the ability to file a single tax return for the entire group. This consolidated tax filing simplifies the tax filing process, reducing the complexity and administrative burden associated with filing multiple tax returns.

• Loss Utilization

A Tax Group is treated as a single Taxable Person so losses of members are generally offset against group profits on a consolidated basis; however, utilisation is subject to the Corporate Tax Law’s ordering and limitation rules (including special treatment for pre-group losses and other statutory limits), so companies should review the detailed loss utilisation rules before relying on intra-group offsets.

• Improved Cash Flow Management

By forming a corporate tax group, businesses can improve their cash flow management. This is because corporate tax groups enable companies to manage cash flow more efficiently within the group, reducing the need for external funding and minimizing cash flow disruptions.

• Enhanced Financial Reporting

Finally, corporate tax groups promote enhanced financial reporting, providing improved financial reporting and transparency within the group. This enables businesses to make more informed decisions, optimize their financial performance, and improve their overall competitiveness.

Cons of Corporate Tax Groups in the UAE

• Complexity in group structure: Complexity in setting up and maintaining a corporate tax group structure
• Risk of joint and several liability: Risk of joint and several liability among group members for tax liabilities
• Restrictions on group membership : Restrictions on which entities can be part of a corporate tax group
• Additional regulatory requirements : Additional regulatory requirements and compliance obligations
• Potential tax implications: Intra-group profit distributions are generally eliminated on consolidation for Tax Group purposes; specific rules (such as the Participation Exemption, Qualifying Group Relief and transitional rules) determine when gains, distributions or transfers are taxable, so implications depend on the facts and the relevant Corporate Tax provisions.

Key Considerations for Forming a UAE Corporate Tax Group

Group Structure and Membership

When forming a corporate tax group, careful consideration of the group structure and membership is crucial. The following aspects should be evaluated:

• Ownership Requirements: The parent company must hold at least 95% of the share capital, voting rights, and entitlement to profits and net assets of each subsidiary. This ensures that the parent company has significant control over the group members.
• Type of Entities: Only resident juridical persons can form a tax group. Non-resident entities or exempt persons cannot be included in the group, which limits membership to compliant entities within the UAE.
• Financial Year Alignment: All members of the tax group must have the same financial year-end and use consistent accounting standards, facilitating unified financial reporting.

Tax Implications

Understanding the tax implications on group members is essential for effective planning:

• Consolidated Tax Returns: The tax group can file a single corporate tax return, simplifying compliance. However, this means that the exemption threshold of AED 375,000 applies collectively to the entire group rather than individually to each member.
• Loss Offsetting: The ability to offset losses among group members can provide significant tax relief, allowing profitable entities to utilize losses from less profitable ones effectively.
• Joint Liabilities: Members of a tax group may face joint and several liabilities for tax obligations, meaning that if one member fails to meet its tax obligations, others in the group may be held responsible.

Regulatory Compliance

Ensuring compliance with regulatory requirements is critical for maintaining tax group status:

• Application Process: A joint application must be submitted to the Federal Tax Authority (FTA) for approval before the end of the relevant tax period. Failure to do so may delay or prevent the formation of the tax group.
• Ongoing Compliance: Once established, the tax group must adhere to all applicable regulations and maintain proper documentation to support their consolidated financial statements and tax filings.

Financial Reporting

Accurate and transparent financial reporting is essential for corporate tax groups:

• Consolidated Financial Statements: The formation of a tax group requires members to prepare consolidated financial statements in accordance with applicable accounting standards (e.g., IFRS). This process can increase complexity and compliance costs compared to individual reporting.
• Documentation: Maintaining thorough records is vital for justifying claims made in consolidated returns and ensuring compliance with both local regulations and international accounting standards.

Conclusion

Corporate tax groups in UAE have a lot to offer. They make tax compliance easier. You can file taxes together and use any losses better. This helps with cash flow and financial reporting, too. But to get the most out of these groups, it's important to get expert help. That’s where experienced tax consultants come in. At Reyson Badger, we have a team ready to offer support. We can help businesses understand corporate tax groups in the UAE.

By reaching out for advice and staying updated, businesses can sharpen their tax strategies. This can help cut down on what they owe and reach their financial goals.