Business Restructuring Relief in UAE

Business restructuring relief is covered under Article 27 of the UAE Corporate Tax that when a qualifying business is transferred between two tax-paying entities in return for shares or an ownership stake, there won’t be any immediate tax on the gains or losses from this transfer. To keep this tax relief, the shares or ownership received must be held for at least two years. The entity giving away the business (the transferor) must choose this type of transfer specifically, and both the transferor and the recipient (transferee) must follow the general rules set out for such transactions.

1. Criteria For Business Restructuring Relief and Qualifying Group

If all of the following conditions are met, a transaction may qualify for both business restructuring relief and qualifying group relief:

• Access to Transferor’s Company:-

  A Transferee may have access to all or part of a Transferor's company. The original owner, the transferor, will continue to operate once ownership is transferred.

• Payment for Transfer:-

  The new owner (Transferee) or a third party with a significant (at least 50%) direct or indirect investment in the new owner's business will pay for this transfer with shares or stakes in the company.

• Qualification Criteria:-

  Both the former and new owners are members of an established group that qualifies for such transactions.

• Business Restructuring Relief:

  In this case, the Transferor may choose to seek Business Restructuring Relief. Qualifying Group Relief applies to assets and liabilities transferred as part of a corporate restructuring, even if the Transferor has already elected to receive it for each asset and liability (kept on capital account).

• Terms of Transaction:-

  If any elected relief, such as company restructuring or qualified group relief, has been granted, the terms of the transaction shall apply. This means that even if the conditions for alternative relief were met and no clawback happened, the relief would still be clawed back if a clawback was triggered.

1.1. Tax Treatment Reversal in Corporate Restructuring:

When an owner chooses to apply both qualified group relief and business restructuring relief during a restructuring procedure and either relief results in a clawback scenario, the original tax treatment—which does not recognize a gain or loss—is reversed.

• Leaving the Qualified Group:

  The original and new owners must leave an approved group within two years after applying for qualifying group relief; even if the company restructuring relief is not reimbursed, the original no-gain or loss tax status would be lost.

• Gain/Loss Treatment:-

  If the Transferee transfers any business or independent portion of the business within two years of a restructuring that resulted in Business Restructuring Relief, no gain or loss treatment will apply, even if no clawback for Qualifying Group Relief is triggered. Following an incident that results in a clawback, no further clawbacks will occur because the no gain or loss treatment is no longer in place.

Example1.2: Transfer of Business to a Member of a Qualifying Group

2. Qualifying Group Relief On Realization Basis

If the relevant conditions are met, a taxable business that prepares financial statements using the accrual method may choose to account for earnings and losses using the realization method. Elections could be conducted for either:

• (a) Unrealized gains and losses in accounting
• (b) Only unrealized profits and losses from the assets and liabilities held in the taxable individual's capital account.

Upon election in the first tax period, financial statements revision is important to ensure that the determination of taxable income is as per the realization basis. Once made, there is no going back unless the FTA agrees or there are unusual circumstances. A transfer of assets or obligations that results in no gain or loss is not considered a realization under Qualifying Group Relief. When a transferee acquires assets and liabilities under Qualifying Group Relief with no gain or loss, the adjustments in Ministerial Decision No. 134 of 2023 are applied to the transferee's taxable income

2.1. Consideration of Previously Unaccounted Gains or Losses:- If the new owner (Transferee) opts for the realization basis under Article 20(3) of the Corporate Tax Law, then any gains or losses that were not taken into account as a result of Qualifying Group Relief must be considered upon realization. This includes any depreciation, amortization, or other value changes made in previous tax years. 

• Concerning transitional relief:

  Financial reporting will be based on the initial balance sheet. It should follow the necessary accounting requirements. It is dated shortly before the taxable person's first tax period begins on the last day of the fiscal year.

• Transitional Relief and Reporting:-

  Increases recorded on real estate, intangible assets, and debts incurred before the taxable person's first tax year may also change the taxable person's taxable income.

3. Ownership of Qualifying Group Members:-

To apply the transitional rules, ownership of the relevant assets by a taxable person must include ownership by any other member of the qualified cohort. 

• • According to Corporate Tax Law Article 26(1), an asset or obligation ownership period never ends. includes, if transferred within a qualified group, the time the new owner (Transferee) has had it. Transitional relief prevents the transfer from being viewed as a disposal.
  • Clawback provisions under Article 26(4): The asset or liability is deemed disposed of at the time of the initial transfer if it is triggered. As a result, the Qualifying Group Relief is void. Relief from Transition: Must be requested within the tax period in which the clawback happens. The gain or loss is subsequently factored into the period's taxable income.It is unnecessary to reopen the previous tax period in which the initial transfer happened.

4. Techniques for Estimating Excluded Gains on Real Estate

Real estate non-taxable gains can be computed in two ways: 

• The valuation technique:- It is used to determine the gain by dividing the sale price of the property by its fair market value at the start of the first tax period.
•  The Time Apportionment method:- This method accounts for the duration of time between the acquisition of the property and the beginning of the first tax period for calculating the untaxed gain."

5. Methods for Calculating Intangible Asset Excluded Gains

Intangible assets can only be evaluated using the time apportionment method. When calculating gains on property and intangible assets that are exempt from tax using the time apportionment technique, don't forget to factor in the time that each group member who is a member of the taxpayer's qualified group owned the assets. This applies if they obtained the assets through Qualifying Group Relief, and the ownership term for these calculations includes everything. Any ownership term that occurred before the last non-qualifying transfer is ignored. Any transfer that does not qualify for Qualifying Group Relief is deemed non-qualifying and would not have qualified under corporate tax laws.

6. Exclusion  From Financial  Liabilities/Assets:-

A single method is used to calculate the non-taxable gain or loss for financial assets and obligations. 

• Ignore Imaginary Profit or Loss: In the first tax period, the taxpayer excludes any gain or loss that would have been recognised at the time. This imaginary scenario presupposes that the debts or assets were sold at their full market value. An assumption about net book value It is assumed that the net book value of these financial assets is equal to their cost. Consider 
• Group Membership: Include the period in which a group member from the same qualifying group has been a member of the group. 

7. Application of Transitional Relief:-

To qualify for transitional relief, a taxpayer must decide to change their taxable income during the first tax period. This adjustment eliminates gains and losses from the sale of real estate, intangible assets, or debts paid off before the start of their tax journey. The beneficiary is qualified if a taxpayer who selects transitional relief during their first tax period transfers an asset or debt under qualifying group relief, even if they did not select it themselves. This is also true for upcoming debt or asset sales.

Seek the expert services of top Tax Consultants in the UAE

For Restructured Businesses to avail Tax Relief in compliance with the Corporate Tax Law in UAE, it is advisable to seek the services of top Tax Consultants in UAE. Thus, contact us today and we shall be glad to assist you.