Tax Group Formation & Cessation: Impact of Subsidiaries Joining or Leaving

A tax group allows multiple companies to combine their business operations under one bracket for taxation, simplifying their tax liability. This article explains the process of Tax Group's formation, dissolution, and effects on Subsidiaries entering or exiting the group.

Joining a Tax Group Subsidiaries may join a tax group where:

• Application procedure:

  • The parent and the subsidiary may apply for inclusion in an existing Tax Group with FTA approval, therefore, the inclusion does not conflict with the strategy and overall compliance of the group.

• When to include the group:

  • Newly incorporated Subsidiaries are permitted to join a group effective their date of incorporation.
  • Open tax periods will be allowable for existing Subsidiaries and will be immediately consolidated within the Tax Group's taxation.

• Eligibility:
  • This include:
    • Ownership and Accounting
    • Should have the same residency

Consequences of Joining

• Pre-grouping Tax Losses:

  • The carried forward losses that are incurred in the pre-grouping period shall be part and parcel of the carried forward of the Tax Group. However:
    • These losses can be used to only offset income which is attributable to the Subsidiary which incurred them.
    • The 75% cap on Tax Loss applies at the group level.

• Benefits of Tax Consolidation:

  • The financial accounts of the Subsidiary are consolidated with those of the group, simplifying tax compliance and reporting.
  • The tax calculation of the group is simplified through the removal of intra-group transactions.

• Compliance Simplification:

  • The Parent Company assumes responsibility for filing and compliance and thus reduces administrative burden on the individual Subsidiaries.

• Access to Group Tax Losses:

  • By joining a Tax Group, the Subsidiary gains access to the group’s existing Tax Losses, potentially offsetting its taxable income.

Leaving a Tax Group

Subsidiaries are required to exit a Tax Group under specific circumstances:

• Voluntary Disengagement:

  • This requires a joint application from the Parent Company and the subsidiary to the FTA to approve the Subsidiary leave.

• Non-Compliance:

  • The entity automatically ceases to be treated in the group status if it satisfies none of any of the set criteria including owner thresholds or jurisdictional considerations.

• Change of Parent Company:

  • The tax group is not required to be dissolved if the parent company is replaced or is no longer in existence, the new entity being considered a new parent company.

Consequences of Exit

• Pre-Grouping Tax Losses are Carried Forward:

  • The existing Subsidiary retains all tax losses incurred during its existence prior to joining the group, which can be utilized against future taxable income of the existing Subsidiary.

• Loss of Group Tax Losses:

  • Tax losses incurred while the Subsidiary was still part of the group cannot be carried forward by the leaving Subsidiary to the group, and thus remain part of the Tax Group.

• Reconsolidation:

  • The Parent Company is required to reconsolidate the group's consolidated financial accounts and remove income or expenses and intra-group transactions the leaving Subsidiary had.

• Independent Compliance:

  • The Subsidiary will be responsible for its tax compliance and reporting alone after it leaves, thus increasing its administrative burden.

• Impact on Group Financial Planning:

  • The departure of a Subsidiary may disrupt the Tax Group's financial strategies, especially if the Subsidiary had significant income or losses.

Conditions of Eligibility for Formation

These conditions are to be fulfilled before a Tax Group may be formed:

• Ownership:
• The Parent Company should have an interest either directly or indirectly in at least 95 percent of the capital stock and votes of each member in the Tax Group.
• Common Accounting Standards: The members should maintain uniform standards for financial reporting, and have one common fiscal year.
• Tax Residency: The Parent Company and all of its Subsidiaries must be tax residents in the same tax jurisdiction, which means that they have to comply with the local tax laws.

Parent Company Responsibilities

The Parent Company is the representative entity for the Tax Group and is responsible for the following:

• Consolidation of the financial accounts of all the Subsidiaries in the group.
• Intra-group transactions and adjustments are eliminated during tax consolidation.
• Preparation of a group tax return in respect of one group.
• Ensure corporate tax compliance on behalf of each entity within a group.

Termination of a Tax Group

A Tax Group is terminated at the discretion of the ATO, where there are specific requirements that are being met, namely:

1. FTA Approval
   • The Parent Company or duly authorized agents may file a petition for dissolution of the Tax Group. In case the FTA has resolved that the conditions for dissolution are present, the petition will be granted.
2. Non-Compliance
   • The existence conditions such as minimum percentage of ownership or jurisdiction will make a Tax Group automatically cease to exist if these conditions are not met.
3. FTA Discretion
   • The FTA has the right to close a Tax Group or change its Parent Company for any reason they may deem fit. Usually, the exercise of FTA discretion occurs during restructure and mergers or other changes that transform the nature or composition of the group or change the compliance status.
   • In all cases, the FTA writes to the Parent Company to notify it of their decision to create adequate time for readjustments.

Conclusion

Businesses are advised to seek the expert services of reputable Tax Consultants in UAE such as Tax Consultants Dubai, a partner of Farhat&co. to seamlessly determine taxability and ensure compliance with corporate tax laws. Thus, contact us today and we shall be glad to assist you. 

FAQS

1. What is a Tax Group?
   A Tax Group enables the grouping of multiple entities owned by the same Parent Company to consolidate taxable income and make tax compliance easier.
2. What is the process to establish a Tax Group under UAE Corporate Tax Law?
   To establish a Tax Group in the UAE, an application is required to be submitted before the FTA by specific date mentioned regarding the tax period starting date. 
3. Define the qualifying criteria for a Tax Group formation?
   The Parent Company must own at least 95% of the capital stock and votes of each member, maintain common accounting standards, and all members must be tax residents in the same jurisdiction.
4. What are the obligations of a Parent Company in a Tax Group?
   The Parent Company consolidated accounts, removes intergroup transactions, prepares a tax return for a group, and ensures corporate tax compliance for the group.
5. What are the criteria for a Subsidiary to join a Tax Group already?
   A Subsidiary may join an existing Tax Group either from the date of incorporation or within an open tax period with the approval of FTA.
6. What happens when a Subsidiary leaves a Tax Group?
   The exiting Subsidiary retains its pre-grouping tax losses, but cannot carry forward tax losses incurred during its membership in the group.
7. What triggers the dissolution of a Tax Group?
   A Tax Group can be dissolved due to FTA approval, non-compliance with conditions, or at the FTA's discretion.
8. How does the FTA handle the demotion of a Tax Group?
   FTA notifies, in writing, the Parent Company for the adequate adjustments and compliance with a reasonable timeframe.
9. What happens when Subsidiaries become members of a Tax Group?
   Subsidiaries achieve access to group tax losses and a more simplified level of compliance, however, they are restricted by common financial reporting standards.
10. What should a Subsidiary do when moving out of the Tax Group?
    A Subsidiary preparing standalone Financial Statements, adopting tax group asset values and liability balances, and independent tax compliance handling.