UAE CT Update: Corporate Tax (CT) Guide on Tax Groups in the UAE

(This Guide only addresses the tax implications for the Tax Group under the UAE CT Law)

The CT Law defines a Tax Group as two or more Taxable Persons to be treated as a single Taxable Person according to the conditions of Article 40 of the CT Law. Only Resident Persons can be part of a Tax Group.

A Tax Group for Corporate Tax purposes is distinct from a tax group for Value Added Tax purposes.

Resident Juridical persons means Juridical persons that are incorporated in the UAE or foreign juridical persons that are effectively managed and controlled in the UAE.

Benefits of forming Tax Group:

1. Parent Company to file a single Tax Return on behalf of all members of the Tax Group;
2. Loss of member of Tax Group can be set off against income of other members of Tax Group;
3. Transfer of assets, liabilities and other transaction and arrangements between members of Tax Group is to be disregarded when determining the Taxable Income of the Tax Group (i.e. such transfer does not attract tax under CT Law).

Conditions as per Article 40(1) for forming a Tax Group:

1. The Parent Company and each Subsidiary Are Juridical Persons (the “Juridical Persons’ condition”);
2. The Parent Company and each Subsidiary Are Resident Persons (the “Resident Persons condition”);
3. The Parent Company owns at least 95% of the share capital of each Subsidiary, either directly or indirectly through one or more Subsidiaries (the “Share Capital ownership condition”);
4. The Parent Company owns at least 95% of the voting rights of each Subsidiary, either directly or indirectly through one or more Subsidiaries (the “Voting Rights condition”);
5. The Parent Company is entitled to at least 95% of each Subsidiary’s profits and net assets, either directly or indirectly through one or more Subsidiaries (the “Profits and Net Assets condition”);
6. Neither the Parent Company nor the Subsidiaries are an Exempt Person (the “Exempt Person condition”);
7. Neither the Parent Company nor the Subsidiaries are a Qualifying Free Zone Person (the “Qualifying Free Zone Person condition”);
8. The Parent Company and each Subsidiary must have the same Financial Year (the “Financial Year condition”); and
9. The Parent Company and each Subsidiary must prepare their Financial Statements using the same Accounting Standards (the “Accounting Standards condition”).

Key Considerations for while forming Tax Group under CT Law.

1. Juridical Persons Condition:
   1. Members of the Tax Group must be Juridical persons such as private or public joint stock companies or limited liability companies and incorporated partnerships which have separate legal personality.
   2. Natural persons and unincorporated partnership carrying business activities cannot qualify to be a member of a Tax Group.

1. Resident Person Condition:

A Juridical Person is considered as Resident Person if

1. The juridical person is incorporated under the applicable legislation of the UAE; or
2. The juridical person is incorporated under the applicable legislation of a foreign jurisdiction but is effectively managed and controlled in the UAE.

If a resident person is also liable to an income tax or any other tax that is similar to Corporate Tax in a foreign jurisdiction by virtue of residence, place of management or any other criterion of a similar nature, then the Resident Person is considered a dual resident person.

Whether a dual resident person can be a member of a Tax Group will depend on the relevant facts and circumstances, as explained below:

1. If the Double Taxation Avoidance Agreement (DTAA) includes a tie breaker rule:
   1. If the dual resident person is regarded as a tax resident of only the UAE under the tie-breaker rule of an applicable Double Taxation Agreement with another jurisdiction, then that Resident Person is not considered a tax resident of that foreign jurisdiction. As a result, the dual resident person can be a member of a Tax Group.
   2. However, if a dual resident person is regarded as a tax resident of a foreign jurisdiction under the tie-breaker rule of an applicable Double Taxation Agreement, then that Resident Person cannot form or be a member of a Tax Group.
   3. If a dual resident person qualified as a member of a Tax Group in earlier Tax Periods, but subsequently is treated as a tax resident of a foreign jurisdiction under the tie-breaker rule of an applicable Double Taxation Agreement, then that member ceases to be a member of the Tax Group from the beginning of the Tax Period in which the member became a tax resident of the foreign jurisdiction.

The reason for this condition is that where a dual resident person is regarded as a tax resident of a foreign jurisdiction under an applicable Double Taxation Agreement, the restrictions under the Double Taxation Agreement would usually mean it is not effectively taxed in a manner similar to other Resident Persons for UAE Corporate Tax purposes as the UAE’s taxing rights on that person will generally be limited to specific instances.

1. 1. If the Double Taxation Avoidance Agreement (DTAA) has a mutual agreement procedure (MAP) as a tie breaker rule:
      1. After the mutual agreement procedure is concluded and the tax residence is allocated to one specific jurisdiction, a dual resident person can join a Tax Group only if the Resident Person is regarded as being tax resident only in the UAE by the competent authorities under the relevant Double Taxation Agreement.
   2. No DTAA between UAE and another foreign jurisdiction:
      1. It is possible that a Resident Person is also a tax resident under the domestic tax law of a foreign jurisdiction with which the UAE does not have an in force Double Taxation Agreement. In such cases, the requirement under Article 3(1) of Ministerial Decision No. 125 of 2023 does not apply, as this provision only applies if there is an applicable Double Taxation Agreement. Thus, the Resident Person would still be eligible to join a Tax Group.

Documentation to be maintained to prove tax residence:

1. A confirmation issued by the relevant tax authority of that foreign jurisdiction to support that they are not tax resident under domestic law of that foreign jurisdiction.
2. A confirmation issued by the relevant competent authorities for the purposes of the application of the relevant Double Taxation Agreement.

Share Capital Ownership condition:

1. Parent Company either directly or indirectly through one or more intermediate Subsidiaries of the Parent Company should legally own at least 95% of the nominal or paid up share capital of the Subsidiary.

Voting rights condition:

1. The Parent Company either directly or indirectly through one or more Subsidiaries to hold at least 95% of the voting rights in the Subsidiary.

Profits and Net Assets condition:

1. The Parent Company to have, either directly or indirectly, an entitlement to at least:

1. 95% of the Subsidiary’s profits; and
2. 95% of the Subsidiary’s net assets.

Exempt Person and Qualifying Free Zone Person condition:

1. An Exempt Person as per Article 4 of the CT Law and Qualifying Free Zone Person as per Article 18 of the CT Law cannot be a member of a Tax Group.

Financial Year condition:

1. The Parent Company and Subsidiaries are required to have the same Financial Year and have the same Tax Period.
2. Newly formed juridical person can join Tax Group if the conditions of Article 40(1) of the CT Law are met from the date of incorporation onwards and it follows the same Financial Year as Tax Group.

Accounting Standards condition:

1. All members of the Tax Group must prepare their Financial Statements using the same Accounting Standards.
2. If consolidated revenue is more than AED 50 million, then Financial Statements are required to be prepared as per IFRS. Where the consolidated revenue of the Tax Group does not exceed AED 50 million, it may choose to apply IFRS for SMEs.
3. Tax Groups are required to prepare consolidated Financial Statements eliminating any transactions between the members of the Tax Group using the above Accounting Standards for the purpose of determining the Taxable Income of a Tax Group.
4. If the consolidated revenue of the Tax Group exceeds AED 50 million, then consolidated Financial Statements of the Tax Group are required to be audited.

Other points:

1. Small Business relief Small Business relief is available to Tax Group if following conditions are satisfied:
   1. Consolidated revenue of Tax Group is below or equal to AED 3 million in a relevant Tax Period and all previous Tax Periods; and
   2. None of the members of the Tax Group is a Constituent Company of a Multinational Enterprises Group that is required to prepare a Country-by-Country Report under the UAE’s Country-by-Country Reporting legislation.

1. Liability for Corporate Tax Payable
   1. A Tax Group is treated as a single Taxable Person for the purposes of the CT Law.
   2. All members of the Tax Group shall be jointly and severally liable for any CT and administrative penalties for the Tax Periods when they are members of the Tax Group.
   3. Tax Group can make an application to FTA to limit the joint and several liabilities to one or more members of the Tax Group.

1. Tax Registration of the Tax Group and members of the Tax Group
   1. The Parent Company and each Subsidiary that wants to apply to form a Tax Group should have a Tax Registration Number for Corporate Tax purposes. Once the application for forming a Tax Group is approved by the FTA, it will be issued a separate Tax Registration Number and this Tax Registration Number will be used for the Tax Group for Corporate Tax purposes. A Tax Group is treated as a single Taxable Person for the purposes of the CT Law.

Subsidiary ceases to exist upon transfer of Business

1. If a Subsidiary transfer’s all of its Business to another member of the Tax Group and ceases to exist as a result of this transfer, the Subsidiary shall remain a member of the Tax Group until the date it ceases to exist and the Tax Group shall continue to exist. The Subsidiary shall be considered to leave the Tax Group on the date it ceases to exist.
2. Since the Subsidiary (which ceases to exist) leaves the Tax Group on the transfer of its Business, a gain or loss on the assets and liabilities transferred as part of the transfer of the Business may be taken into account while determining the Taxable Income of the Tax Group, except if such a gain or loss would not have been taken into account had the Subsidiary elected for Business Restructuring Relief or Qualifying Group Relief.

Change of the Parent Company of a Tax Group

1. The Parent Company of a Tax Group may submit an application to the FTA to be replaced by another Parent Company without a discontinuation of the Tax Group in any of the following circumstances:
   1. The new Parent Company meets all the conditions in relation to the former Parent Company. In this case, the request should be submitted after the new Parent Company meets the conditions for joining a Tax Group and the request should specify the Tax Period when the change is effective. The request should be filed before the end of the Tax Period for which the replacement of the Parent Company is being requested; or
   2. The former Parent Company ceases to exist and the new Parent Company or a Subsidiary is its universal legal successor, for instance as a result of a merger or other transfer under universal title.

Compliance impact of changes in a Tax Group

1. If the conditions for a Tax Group are not met continuously throughout a Tax Period in relation to a specific Subsidiary, that Subsidiary is considered to leave the Tax Group as of the start of that Tax Period. As a result, it would need to file a Tax Return as a separate Taxable Person for that Tax Period and is liable for its own Corporate Tax Payable.

Tax Deregistration

1. A Subsidiary leaving the Tax Group but which does not cease to exist is not required to deregister for Corporate Tax purposes. The Subsidiary’s own Tax Registration Number shall be used for its standalone Tax Returns, paying Corporate Tax and any other compliance obligations.

Financial Statements

1. If a member of a Tax Group leaves the Tax Group or the Tax Group ceases to exist, the Parent Company and each Subsidiary leaving the Tax Group shall prepare standalone Financial Statements using the same accounting basis applied by the Tax Group.
2. The opening values of the assets and liabilities in the standalone Financial Statements will be the value of those assets and liabilities recorded by the Tax Group at the moment that member left the Tax Group or the Tax Group ceased to exist.

Cessation of a Tax Group

1. A Tax Group shall cease to exist in any of the following circumstances:
   1. Approval by the FTA of an application by the Parent Company.
   2. The Parent Company no longer meets the conditions to form a Tax Group and is not replaced by another Parent Company without discontinuation of the Tax Group.
   3. If there are only two members of the Tax Group, and one of them transfers its entire Business to the other and ceases to exist as a result of the transfer.

Tax Deregistration of a Tax Group

1. If a Tax Group ceases to exist as a result of an application by the Parent Company, the application shall also be treated as an application for Tax Deregistration of the Tax Group. The Tax Group shall indicate in its application if all Corporate Tax and Administrative Penalties have been paid and all Tax Returns have been filed. If so, the FTA shall also process the Tax Deregistration

Taxable Income of a Tax Group

1. Determining the Taxable Income of a Tax Group

A Tax Group is treated as a single Taxable Person for the purposes of the CT Law. As a result, the Tax Group has a combined Taxable Income, which is reported by the Parent Company. The Parent Company shall calculate the Taxable Income after consolidating the financial results, assets and liabilities with all Subsidiaries and eliminating transactions between the Parent Company and any Subsidiary or between the Subsidiaries that are a member of the Tax Group.

1. Elimination of intra-group transactions

The requirement to eliminate intra-group transactions within the Tax Group applies to transactions between the Subsidiaries in the same way as it applies to transactions between the Parent Company and any Subsidiary.

The requirement to eliminate intra-group transactions within the Tax Group also applies to valuation adjustments and provisions in relation to transactions within the Tax Group and changes in the accounting value of assets and liabilities, where they arise as a result of a gain or loss from a transaction within a Tax Group.

Exception to the requirement to eliminate intra-group transactions does not apply to transactions where a member has recognized a deductible loss in a Tax Period in respect of those transactions prior to joining or forming the Tax Group, until the deductible loss is reversed in full.

Consequence of leaving a Tax Group or cessation of Tax Group on transfers within the Tax Group

1. The requirement to eliminate transactions within the Tax Group generally also applies to transfers of assets and liabilities between members of the Tax Group. However, the gain or loss on such a transfer may need to be taken into account at the level of the transferor or the transferee, if either party leaves the Tax Group within 2 years from the date of the transfer.
2. One exception to this is those cases where the associated income would have been exempt or not taken into account for Corporate Tax purposes (for instance, under the Participation Exemption, Business Restructuring Relief or Qualifying Group Relief) and the relevant conditions for such reliefs were and continue to be met (as applicable).

Application of the provisions of the Corporate Tax Law to Tax Groups

1. A Tax Group is treated as a single Taxable Person for the purposes of the CT Law. As a result, the provisions of the Corporate Tax Law have to be applied to the Tax Group as a whole, unless specifically provided otherwise in the CT Law.

Application of Qualifying Group Relief

1. A Taxable Person can elect to not take into account gains or losses in relation to transfers within a Qualifying Group. The election should be made when filing the Tax Return for the Tax Period in which the transfer within a Qualifying Group takes place. Such an election is irrevocable. If a Tax Group makes such an election for Qualifying Group Relief, it shall apply to all members of the Tax Group and the election would continue to apply to the members even after such members leave the Tax Group or after the Tax Group ceases to exist.

Application of limitation of Tax Losses carried forward

1. A Tax Loss can be carried forward by a Taxable Person provided any of the following applies:
   1. The owners of the Taxable Person continuously hold at least 50% ownership from the start of the period in which the Tax Loss is incurred to the end of the Tax Period in which the Tax Loss is used to offset against Taxable Income (the “ownership condition”), or
   2. There is a change in ownership of more than 50%, Tax Losses can still be carried forward provided the same or similar Business is carried on following the change in ownership (the “Business continuity condition”).

For the limitation of Tax Losses carried forward rule (under Article 39(1)(a) of the CT Law, i.e. the requirement to have continuous 50% ownership); when applying the ownership condition, only the ownership interest in the Parent Company of the Tax Group is relevant.

Attribution of Taxable Income between members of a Tax Group

1. A Tax Group is required to calculate the Taxable Income attributable to one or more of its members in the following situations:
   1. A member of the Tax Group has unutilized pre-Grouping Tax Losses.
   2. A member of the Tax Group has earned income for which the Tax Group can claim a Foreign Tax Credit.
   3. A member of the Tax Group benefits from any Corporate Tax incentives as specified under Article 20(2)(g) of the Corporate Tax Law.
   4. A member of the Tax Group has unutilized carried forward pre-Grouping Net Interest Expenditure.

1. If a Tax Group has not attributed its Taxable Income, it would not be possible to claim relief for the situations mentioned above.

Tax Losses

1. Tax Losses of a Tax Period can be carried forward to subsequent Tax Periods upon satisfaction of certain conditions. Tax Losses carried forward can be offset against the Taxable Income of subsequent Tax Periods, when the conditions of utilization are met. A Tax Loss carried forward to a subsequent Tax Period must be set off against Taxable Income of that period first, up to the 75% Taxable Income limit, with any remaining loss available for carry forward to further subsequent Tax Periods.

Limits on utilization

1. A Tax Group is treated as a single Taxable Person. This means that the Tax Group has a single, combined Taxable Income. In case one member of the Tax Group would have incurred a Tax Loss on a standalone basis and another member of the Tax Group realizes positive Taxable Income, these results are offset automatically within the Tax Group through the process of consolidation. If the calculation of the Taxable Income of the Tax Group results in a Tax Loss, this is a Tax Loss of the Tax Group and not a Tax Loss of any member of the Tax Group.
2. If a Subsidiary subsequently leaves the Tax Group, such a Tax Loss will remain with the Tax Group. If a Tax Group ceases to exist, such Tax Loss shall remain with the Parent Company.

Order of utilization where there are several Tax Losses

1. 1. Several clauses in the Corporate Tax Law and its implementing decisions place restrictions on the order in which different types of Tax Losses can be utilized. As a result of these restrictions, the utilization of Tax Losses by Tax Groups is in the following order:
      1. Pre-Grouping Tax Losses have to be utilized before Tax Losses of the Tax Group can be utilized.
      2. Where there are several pre-Grouping Tax Losses that could be utilized, the Parent Company shall determine the order in which they are utilized.
      3. After utilization of pre-Grouping Tax Losses, Tax Groups can utilize Tax Losses of the Tax Group.
      4. The Tax Losses of the Tax Group should be utilized in the order they were incurred.
      5. As restricted Tax Group Tax Losses Are Tax Losses which predate certain Subsidiaries joining the Tax Group, restricted Tax Group Tax Losses necessarily relate to earlier Tax Periods and are required to be utilized (if the conditions for utilization are met) before utilization of later Tax Losses of the Tax Group.
      6. After utilization of pre-Grouping Tax Losses and Tax Losses of the Tax Group, the Tax Group can utilize any Tax Losses that were transferred to it under Article 38 of the Corporate Tax Law.

Utilization of restricted Tax Group Tax Losses

1. Restricted Tax Group Tax Losses cannot be utilized against Taxable Income attributable to Subsidiaries which joined the Tax Group after the Tax Losses arose. If there are several Subsidiaries to which this applies, it is possible to limit this restriction to the net amount of Taxable Income attributable to such Subsidiaries.

Impact of changes in the members of a Tax Group on Tax Losses

1. If a Subsidiary joins a Tax Group, its existing unutilized Tax Losses become pre- Grouping Tax Losses that can only be offset against the Taxable Income of the Tax Group insofar as this income is attributable to the relevant Subsidiary. Existing unutilized Tax Losses of an existing Tax Group cannot be used against the Taxable Income of a Subsidiary that has joined the existing Tax Group after the Tax Losses were incurred (“restricted Tax Group Tax Losses”).

Transfer of Tax Losses

1. The Tax Group is treated as a single Taxable Person. If the conditions of Article 38 of the Corporate Tax Law are met, the Tax Group can transfer a Tax Loss to another Taxable Person or another Tax Group. Similarly, if another Taxable Person or another Tax Group meets the relevant conditions under Article 38 of the Corporate Tax Law, it can transfer a Tax Loss to the Tax Group.

Interest Deduction Limitation Rule

1. Application of General Interest Deduction Limitation Rule to Tax Groups

Where a Taxable Person’s Net Interest Expenditure exceeds AED 12 million for the relevant Tax Period, Net Interest Expenditure shall be deductible up to the greater of:

1. 30% of EBITDA (earnings before the deduction of Interest, tax, depreciation and amortization) for a Tax Period, calculated as the Taxable Income for the Tax Period.
2. The de Minimis threshold of AED 12 million.

1. Impact of changes in the members of a Tax Group on unutilized Net Interest Expenditure

If the General Interest Deduction Limitation Rule applies to a Tax Group, the resulting disallowed Net Interest Expenditure carried forward may be utilized in the subsequent 10 Tax Periods of the Tax Group. This Net Interest Expenditure carried forward is an attribute of the Tax Group as represented by the Parent Company and not an attribute of any member of the Tax Group. If a Subsidiary subsequently leaves the Tax Group the unutilized Net Interest Expenditure shall remain with the Tax Group, with the exception of any pre-Grouping Net Interest Expenditure of that Subsidiary.

1. Order of utilization of unutilized Net Interest Expenditure

If a Tax Group has unutilized Net Interest Expenditure and it also has members with pre-Grouping Unutilized Net Interest Expenditure, the Net Interest Expenditure should be utilized in the order in which the amount was incurred.

Interaction with Business Restructuring Relief

1. If the Parent Company or a Subsidiary cease to exist as a result of a Business restructuring under which it transfers all its assets and liabilities to another member of the Tax Group, it would remain a member of the Tax Group until such date as it ceases to exist. In case a Subsidiary cease to exist in this way, any unutilized pre-Grouping Net Interest Expenditure tied to the Subsidiary would be foregone. In case a Parent Company ceases to exist in this way, any unutilized Net Interest Expenditure of the Parent Company and the Tax Group would be foregone, unless the Tax Group continues to exist without discontinuation.

Thus the decision to form a Tax Group will need to be carefully assessed on case to case basis considering the group structure, compliances involved, benefits foreseen by the business group.