Streamlining Compliance and Boosting Efficiency for Corporate Groups
The UAE has introduced a pivotal update to its corporate tax framework, allowing businesses with multiple entities to form Tax Groups. This new measure is designed to simplify tax management, improve compliance, and enhance operational efficiency across group companies.
A crucial question for companies preparing for corporate tax is whether a group with multiple entities can establish a Tax Group for the 2023 tax period or whether they must evaluate their eligibility for 2024. The answer depends on the group’s ability to meet all conditions for forming a tax group at the beginning of the tax period. If these conditions are met, the Tax Group can be established for the current period. However, if the group needs or plans any structural changes during the current tax period to meet these requirements, it must defer the T.G. formation until the following year.
Establishing a corporate tax group in the UAE offers several advantages, including a simplified compliance process through unified registration and consolidated return filing. It also reduces the burden of transfer pricing compliance for intra-group transactions and allows for intra-group loss offsetting, which can yield financial benefits. However, companies must carefully weigh these advantages against potential challenges such as the single exemption limit, mandatory consolidated financial statements, joint and several liabilities, and possible complexities in mergers and acquisitions (M&A).
Before deciding to form a T.G., companies should thoroughly assess all associated benefits and drawbacks. This includes analyzing potential cash savings, additional costs, and the overall impact on the company’s tax strategy. A well-informed decision will ensure that forming a Tax Group aligns with the company’s strategic financial goals and operational requirements.
To establish a UAE Tax Group, the Parent Company must apply to the Federal Tax Authority (FTA) to include itself and its subsidiaries.
To be eligible, all member companies must be juridical entities under UAE law, share the same financial year and accounting standards, and not include exempt persons or Qualifying Free Zone Persons. Additionally, the Parent Company must hold at least 95 percent of the share capital, voting rights, and profits of the subsidiary. Neither the Parent Company nor the subsidiary can be tax residents in another country under a Double Taxation Agreement.
Once formed, the Tax Group’s structure takes effect from the specified tax period in the FTA application unless the FTA sets a different date. The FTA may dissolve the Tax Group if the Parent Company no longer meets the eligibility criteria, or it may require changes based on available information.
In this setup, the Parent Company is responsible for representing the T.G. and ensuring compliance with corporate tax obligations. Both the Parent Company and its subsidiaries are jointly and severally liable for corporate tax during the periods they are part of the group.
The decision to form a T.G. will differ based on each entity’s specific circumstances, making a detailed evaluation essential for making the best choice. By understanding the intricacies of tax grouping, businesses can boost compliance efficiency and strengthen their competitive standing in the UAE’s tax landscape.
