Requirements for Forming a Tax Group under UAE Corporate Tax?

Article 40 of the UAE Corporate Tax Law states the procedure and requirements for forming a Tax Group. A Parent Company by a Tax Group under the UAE Corporate Tax law is entitled to aggregate one or more Subsidiaries. The key ownership requirements include juridical status, 95% ownership threshold, control over voting rights and profits, non-exemption under corporate tax laws, identical financial years, and accounting standards. In addition, there are several compliance requirements, including joint liability and unified tax filing, that must be met to maintain Tax Group status.

Formation of a Tax Group under UAE Corporate Tax

Article 40 of the UAE corporate law provides for the application by a Resident Person, the “Parent Company,” seeking to constitute a Tax Group with one or more Resident Persons, so-called “Subsidiaries.” Certain requirements ensure that only those entities can constitute a Tax Group that has great consistency in financials and operations.

Ownership Requirements for Forming a Tax Group

Accordingly, the ownership criteria set by Article 40 require a high level of control and interrelatedness between members of the Tax Group. The primary prerequisites include the following:

Ownership Requirements	Details
Status of a Legal Entity	The Parent Company and Subsidiaries as a tax group deemed to the status of juridical persons. That is to say, natural persons or entities not recognized by UAE law as legal entities will not be taken into consideration.
Minimum Threshold for Ownership	Minimum share capital is 95 percent for the Parent Company in the Subsidiary whether directly or indirectly implies that the Group would have sufficient financial interest in ensuring control over the Subsidiary.
Voting Rights	Minimum 95% voting rights/control is held by the Parent Company in the Subsidiary. This further guarantees the fact that the Parent Company would also control major decisions in the Subsidiary.
Profits and Net Assets Entitlement	A minimum of 95% of the net assets and profits of the subsidiaries is the entitlement of the Parent Company directly or indirectly. This will assure unity in financial interest within the group.
Non-Exempt Status	None of the entities (the Parent Company & the Subsidiary) be an Exempt Person as per the UAE Corporate Tax Law. Exempt Persons include certain government entities and organizations operating under specific exemptions in free zones.
Exclusion of Qualifying Free Zone Persons	The qualifying free zone persons shall not comprise a tax group for their respective special tax regimes and privileges.
Same Financial Year	To maintain consistency in their consolidated financial statements, both the Parent Company and Subsidiaries need to operate on the same financial year.
Uniform Accounting Standards	It’s essential for the Parent Company and Subsidiaries to adopt identical accounting standards to prevent any inconsistencies or disruptions in financial reporting.

Other Instances for Forming a Tax Group

Government Shares

• Article 40 Clause 2: A Tax Group may be formed in which a Government Entity owns at least 95% of such an entity. This may have further conditions as determined by the tax authority.

Constitution and Cancellation

• The applications concerning the formation or dissolution of a Tax Group by the Parent Company are subject to the approval of the tax authority. The reasons for dissolution could be:
  • The Parent Company ceases to meet the requirements concerning ownership.
  • A Subsidiary does not continue fulfilling the eligibility criteria.

Continuous Compliance Requirements

Once the Tax Group is formed, several continuous compliance obligations would need to be fulfilled to maintain its status, namely:

• Single Taxable Person

1. 1. • The Tax Group shall be considered one Taxable Person, and the Parent Company is the representative. Though this simplifies the filing of taxes, it focuses compliance matters on the Parent Company.

• Several & Joint Liability

1. 1. • Tax Group entities are severally and jointly liable for corporate tax liabilities to ensure accountability within the group, but again it increases the financial risk of each member.

• Reporting and Record-Keeping

1. 1. • Compliance with Chapters Fourteen, Sixteen, and Seventeen of the Corporate Tax Law is compulsory. It involves filing of tax returns, maintenance of records, and preparation of audit-related documentation and hence requires adequate procedures and controls.

• Addition or Removal of Subsidiaries

1. • The addition of or removal of Subsidiaries to or from a Tax Group is permitted upon approval from the tax authority. Whenever any Subsidiary leaves, it has to pay due taxes; the Parent Company makes such record amendments accordingly.

Implications for Parent Companies and Subsidiaries

For Parent Companies

• Increased Responsibility: The responsibility of the Tax Group’s compliance is taken as primary by the Parent Company.
• Unified Tax Filing: Filing a consolidated return reduces the administrative burden but increases complexity.
• Liability Risks: Joint and several liabilities expose the Parent Company to risks arising from Subsidiary non-compliance.

For Subsidiaries

• Loss of Autonomy: Subsidiaries relinquish independence in tax matters, operating under the Parent Company’s directives.
• Shared Liability: All subsidiaries bear the responsibility for the group’s tax liabilities, which makes them more responsible.
• Challenges of Exit: The exit process from the Tax Group involves a lot of planning and requires the fulfillment of certain obligations.

Benefits of a Tax Group

1. Simplified Compliance: The compliance burden is eased by the consolidated tax return, which minimizes the administrative burden for the entities as a whole.
2. Optimized Tax Position: Tax Groups can use the losses of one entity to offset the profits of another, which could reduce the overall tax payable.
3. Improved Financial Reporting: The use of uniform accounting standards and uniform financial year end further enhances the integrity and comparability of financial reports across the group.

Conclusion

Under the UAE corporate tax law, businesses have the option to form a Tax group. Thus, businesses are advised to seek the expert services of premier Tax Consultants in UAE FAR Consulting Middle East to seamlessly meet the tax requirements and ensure compliance with corporate tax regulations. Contact us today, and we will be glad to assist you. 

FAQs on Tax Group Formation

What is a Tax Group?

Answer: A Tax Group is a consolidation of two or more entities under common control that consolidates entities as a single entity for taxation purposes. This simplification facilitates unified tax reporting and compliance.

What are the ownership requirements for forming a Tax Group?

Answer: To create a Tax Group, the Parent Company needs to own more than 95% of the share capital, voting rights, and profits or net assets of every Subsidiary deemed to be juridical persons with the same accounting standards and financial year.

What are the advantages of forming a Tax Group?

Answer: The benefits include simplified compliance through consolidated tax returns, optimized tax positions by offsetting losses across entities, and improved financial reporting due to consistent accounting standards. It can also lead to better control and financial coordination at the group level.

What are the compliance requirements for a UAE Tax Group?

Answer: After establishing a Tax Group, the entities shall maintain compliance, amongst other things, by filing unified tax returns, making mutual and several tax liabilities; maintaining an excellent record, and observing the established financial and accounting standards. Entry into or exit from the Subsidiary position shall be upon approval by the tax authority.

What difficulties could be encountered by Parent Companies and Subsidiaries in a Tax Group?

Answer: Challenges include a high ownership threshold of 95%, strict compliance requirements, and increased liability risks due to joint responsibility for tax obligations. Subsidiaries also lose autonomy and face complexities in exiting the Tax Group.