What Are the Key Ownership Requirements for Forming a Tax Group?

A tax group enables two or more entities to be constituted under one corporate framework for corporate tax purposes. This article discusses the criteria for the formation and existence of tax groups as per the UAE corporate tax. 

Salient Ownership Criteria (Article 2 and Article 40)

• Ownership Threshold

For incorporation into a tax group, there must be at least 95% ownership in each of the subsidiaries by the parent company, both direct and indirect, to ensure that the ultimate parent company will have substantial control over entities constituting a tax group.

• Legal and Residency Status

Businesses should be legal entities, established in the UAE and registered for corporate tax purposes, besides adhering to the UAE residency requirements.

• Coherence of Taxable Periods

The parent and subsidiary companies should each be within the same financial year. Some chances mismatched taxable periods may disallow entities from coming into or being part of a tax group.

• Tax Registration on a Single Basis

TRN unifies the compliance matters of all members in the tax group with the Federal Tax Authority-FTA in conducting the tax business, and they all had only one single tax registration number.

Ongoing Compliance Obligations

Businesses are required to maintain proper compliance with the ongoing UAE corporate tax laws.

1. Single Tax Returns

Once a tax group has been formed, consolidated tax returns become the parent company’s responsibility. While individual entities no longer have to file separate returns, this increases the accountability of the parent company.

2. Transparent Financial Reporting

There should be proper and efficient financial reporting. The holding company should ensure that the subsidiaries within its group all use the same accounting practice; failure to this might lead to fines or exclusion from the group for tax purposes.

3. Threshold of Ownership

The 95% ownership threshold should be maintained during the existence of a tax group. If at any time in its existence, this ownership percentage drops below the specified limit, then tax group status may be revoked.

Impact on Subsidiaries and Parent Companies

A tax group impacts both a parent and a subsidiary company in several ways.

For Parent Companies

• More Responsibility: The responsibility for compliance, reporting, and making payments on behalf of the whole group rests with the parent company in consolidated reporting.
• Centralized Control: In consolidated reporting, the parent company enjoys more knowledge and control regarding the financial activities of subsidiaries.

For Subsidiaries

• Simplified Compliance: Subsidiaries are no longer under any obligation to submit individual tax returns and hence lessen the administrative workload.
• Loss of Autonomy: The subsidiaries must tailor their financial operations to meet the needs of both the parent company and the group for tax purposes.

Benefits of Creating a Tax Group

There are numerous advantages to forming a tax group:

1. Ease of Administration: The amount of paperwork is minimized, and so are administrative costs, because of the centralization of tax filings.
2. Cost Efficiency: Losses of one group entity may be set off against the taxable profit of another group entity, resulting in reduced tax liability.
3. Operational Synergy: Group reporting integrates various group entities and leads to much-improved strategic decision-making.

Challenges to Look Out For

While tax groups have numerous benefits, there are also possible challenges that include:

• Complex Compliance Requirements: Compliance for the whole group is hard to maintain.
• Change in Ownership Structure: In case of a change in the ownership structure, the FTA needs to be immediately informed. The parent company will be fully liable for the tax dues and may pose some financial risk if not paid on time.

The UAE requires the tax groups to be formed in compliance with the requirements of ownership provided under Article 2 and Clause (1) of Article 40 of the Corporate Tax Law. The 95% ownership and other conditions aim at fulfilling the requirements for the holding and subsidiary entities under the law. 

Premier Tax Consultants at FAR Consulting Middle East. stand ready to help you meet your tax requirements and ensure compliance with tax laws in the UAE. Contact us today and we shall be glad to assist you.