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what are the Conditions to be a member of a Qualifying Group

The Federal Tax Authority published the Qualifying Group Relief Guide on April 3rd, 2024, UAE Corporate Tax Law to facilitate the taxable entities by streamlining and making it easy to understand the existing relief as per  UAE Corporate Tax. The term “Qualifying Group” refers to a group of Taxable Persons that can transfer assets and obligations among themselves without compromising their Taxable Income. In contrast, a “Tax Group” consists of Taxable Persons who have been approved as a single Taxable Person by the Federal Tax Authority after completing an application and approval process.

The objective of the “Qualifying Group Relief”

The purpose of the provisions known as “Qualifying Group Relief” is to make it easier for two Taxable Persons within a Qualifying Group to transfer capital assets or liabilities while guaranteeing that there would be no gain or loss for corporate tax purposes (the transfer is valued at book value). By maintaining the general ownership structure of the group’s assets or obligations, this permits tax-neutral reorganization.

Key provisions of “Qualifying Group Relief:-

key elements related to Qualifying Group Relief as described in the guides:

Businesses can divide unutilized capital allowances, losses, and gifts amongst themselves using a technique called group relief. Tax losses, contributions, and capital allowances are all covered. The claimant experiences a reduction in tax liability, whereas the transferor experiences an effect on both parties’ tax positions. Any future use of the losses by the transferor is forfeited.

 

The transferor and Transferee are Juridical entities

  • A juridical person with separate lawful identification such as Public Joint Stock Company, Limited Liability Company and other incorporated partnerships 
  • Natural Person or unincorporated partnerships 
  • Member/Partner of unincorporated partnerships 

The transferor and Transferee are taxable entities

According to the Corporate Tax Law, the legal entity must be a Taxable Person, which includes, among other things:

  • Persons who are considered residents include entities that are created, recognized, or incorporated under UAE law as well as foreign entities that are successfully managed and controlled inside the country.
  • Non-resident Individuals: Companies operating a Permanent Establishment in the United Arab Emirates are obligated to pay taxes on the revenue generated by the establishment.

Exclusion: Although they are regarded as Taxable Persons under the CT Law, Non-Resident Persons who have income originating from the UAE or a connection to the UAE are not eligible to join a qualifying group.

  • Direct Ownership:
    • Direct ownership of shares in a corporation is defined as the ownership of such shares by an individual or entity.  A direct ownership stake would exist, for instance, if Person A owned thirty percent of Company X’s shares.
    • A legal body (such as a parent corporation) may directly own shares in a subsidiary; direct ownership is not always possessed by an individual.
  • Indirect Ownership:
    • When someone acquires shares in a firm through other entities, it’s known as indirect ownership. In this instance, ownership is transferred through other businesses rather than being owned directly by the person or entity.
    • Assume that Company Y owns 40% of Company Z and Person B owns 50% of Company Y. Person B’s indirect ownership in Company Z would be calculated as 50% × 40% = 20%2.
    • Particularly when there are several tiers of ownership within a corporate organization, indirect ownership can be complicated.
  • Minimum Requirement of 75% Ownership:
    • Minimum 75% ownership is a requirement including corporate governance and tax laws.
    • For example, a parent firm (Business P) meets the minimum ownership criterion if it holds 75% or more of the shares in a subsidiary (Business S). Either direct or indirect ownership is possible here.
    • In addition, the total direct and indirect ownership held by the members of a group of firms (such as a tax group) should satisfy the 75% requirement if the companies combine their ownership interests.
  • Factors that qualify:
    • Indirect holdings through Qualified Financial Zone Persons (QFZPs) or Exempt Persons can satisfy the ownership requirement.
    • QFZPs are organizations that are accepted as legitimate for the purposes of indirect ownership and satisfy certain requirements.
    • For the purposes of calculating indirect ownership, exempt individuals are also accepted.

Qualifying Free Zone Persons(QFZP) and Exempt Persons:-

  • Except for Qualifying Free Zone Persons(QFZP) and Exempt Persons, Relief is applicable to Taxable Persons. 
  • Even if they don’t meet the requirements, Free Zone entities can nevertheless join a qualifying group. 
  • Furthermore, residents who choose the Small Business Relief option are not eligible to claim the Relief.

Financial Standard and Financial Year:-

  • To guarantee that the group follows a consistent financial schedule, the Financial Year of each entity in the Qualifying Group must conclude on the same day.
  • Subject to specific requirements, a Taxable Person may request to the FTA to modify its financial year so that it ends on the same day as other members of the Qualifying Group. 
  • As long as all members adhere to the same accounting rules, they are free to use different accounting policies. 
  • Transfer of Liabilities and Assets:

      • A corporation may assign its assets and liabilities to another entity in the course of a business restructuring, merger, acquisition, or other noteworthy event.
      • The precise day that this transfer takes place is known as the transfer date.
  • Value of Net Books:

      • On the balance sheet of the business, the carrying amount of an asset or obligation is represented by its net book value.
      • It is computed by deducting the initial cost from the cumulative depreciation (for tangible assets) or amortization (for intangible assets).
      • In essence, it represents an asset’s residual worth after deducting usage or wear and tear over time.
  • No loss or profit was noted:-

      • In a perfect world, no gain or loss would be recorded when assets and liabilities are transferred at their net book value.
      • This indicates that the assets and liabilities are transferred at a value that corresponds to their current book value.
  • Modifying Income Subject to Taxation:

    • The taxable income is adjusted for tax purposes to take into account specific items pertaining to assets and liabilities.
    • These changes include:
      • Amortization and Depreciation: The amount of taxable income is reduced by any depreciation or amortization that was previously recognised for tax purposes.
      • Value Changes for Assets and Liabilities: Any adjustments are made if there have been changes in the values of assets or liabilities that were not previously recognised for tax purposes.
      • Realization: Upon realization (when the asset is sold or the liability is settled), any amount that was not previously recognised for tax purposes (such as deferred gains or losses) is included.

key implications covered under the guide “Qualifying Group Relief”are as below:

Particulars TransferorTransferee
Liabilities & Assets transfer at net book value on transfer date The transfer will result in neither profit nor loss.Change your income that is taxable.In addition, adjustments to taxable income should be made for changes in the value of an asset or liability that were not previously reported for CT under circumstances other than realization.


Liabilities & assets Exchange 
All transactions are individual and distinct.

  • At Least one taxable person may be entitled for relief as to who makes a choice.
  • Relief will not apply if an asset or obligation not held in the capital account is obtained in exchange.

To determine taxable income, any variation in the net book values of exchanged assets is ignored.

Loss transfer Article 26 of the CT Law prohibits transferring tax losses to the transferee; instead, Article 38 of the CT Law governs such transfers.
Clawbacks impactThe taxable income of the transferor for the tax period in which the clawback event takes place includes any gains or losses (market value less book value) arising from the transfer of an asset or liability.subtracting from the asset and liability values any effects of past amortization, depreciation, or other adjustments.

* If there have been many transfers with no gain or loss basis, all profits and losses associated with those transfers would have to be realized, unless these sums were clawed back and modified or included in the taxable income.

Read More: Exempt businesses under corporate tax in UAE

 

Other important clauses of the guide “Qualifying Group Relief”:-

Clawback clauses: The relief won’t be applicable if, within two years of the transfer date:

  • The transferor and transferee must no longer be members of the same qualified group for any relief to be awarded in the event that the obligation or asset is subsequently transferred outside of the qualifying group that covers situations like ownership changes, the end of one’s status as a taxable person, becoming an exempt person or QFZP, or a financial year that does not correspond with another group member. 

Rebound and Eligibility Group:

The term “clawback” describes a circumstance in which some reliefs or benefits are revoked or canceled as a result of later actions.

After that, the obligation or asset is transferred outside the qualifying group, or one or both of the transferors and transferees cease to be members of the same qualifying group.

Put another way, the clawback does not apply if the transfer stays inside a particular group of related organizations.

Nexus with Relief from Business Restructuring:

  • If certain requirements are satisfied, transactions may be eligible for both business restructuring relief and qualifying group relief.
  • Certain requirements must be met for these reliefs to be granted, and doing so enables advantageous treatment during corporate restructuring.

Interim Relief:

  • Gains recognized on assets owned before the first tax period of the taxable person are subject to transitional relief.
  • Certain conditions are required to be satisfied at the final disposal of the capital assets 

 Ownership Condition:

  • It is made clear in the guide that common ownership by a third party (who need not be a taxable person) has no bearing on the ownership condition.
  • The ownership requirements are now clear, thanks to this clarification.

 QFZP and Exempt Persons:

  • Though they are not permitted to join the qualifying group, exempt persons and qualified financial zone persons (QFZPs) have an intriguing thing to consider:
  • If such persons possess 75% of both the transferor and the transferee, it’s important to determine whether or not they can still be regarded as members of a qualifying group.

Realistic Difficulties in Group Settings:

  • It can be difficult to handle follow-up transfers, clawbacks, and ramifications for both the transferor and the transferee.
  • Furthermore, significant thought must be given to how certain elements of the CT Law interact with other provisions (such as elections and relief claims).

Key Takeaways

The guide provides clarification on several issues regarding the Relief criteria.  To be more precise, the ownership criteria are made explicit by the explanation that a third party who shares common ownership is not necessary to be a Taxable Person. It is important to evaluate whether co-owning 75% of a property with Exempt Persons and QFZP in both the transferor and transferee would allow them to qualify as members of a specific group, even if these individuals are generally not eligible to be part of such groups. The agreement’s specifics must be thoroughly examined before proceeding with joint ownership because there could be financial and legal repercussions. Practical issues that may arise at the group level include monitoring subsequent transfers, clawbacks, the effects on the transferor and the transferee, and how these relate to elections held and relief requests submitted under other CT Law provisions. contact tax consultant in dubai for the best service in dubai.

 

Shayan Khan is an experienced Corporate Tax Consultant with over 4 years of expertise. He's skilled in negotiating and investigating taxes with government bodies like the Federal Tax Authority. Shayan excels in reviewing and drafting tax documents and offers strategic advice on complex tax matters. Clients trust his guidance in navigating tax procedures and minimizing liabilities. Read more