Foremost question towards making the business corporate tax ready is whether a group with multiple entities can still form a Tax Group for the period 2023 or it needs to evaluate for 2024?
The UAE has introduced a significant enhancement to its corporate tax system with the option for groups with multiple entities to form Tax Groups, a structure. This new provision aims to streamline tax management for group companies, making compliance easier and increasing operational efficiency.
To address the primary question: if all conditions to form a tax group are satisfied from the start of the tax period, then the tax group can be formed for the current tax period. However, if any structural changes have been made or are to be made during the current tax period to meet the conditions, then the tax group cannot be formed for the current year and can only be formed for the following year.
Forming a corporate tax group in the UAE provides several benefits, including simplified compliance through a single registration and consolidated return filing. Additionally, transfer pricing compliance becomes limited for transactions within a tax group, and intra-group loss offsetting can offer financial advantages. However, businesses must carefully consider the implications, such as the single exemption limit, mandatory consolidated financial statements, joint and several liabilities and potential complexities in mergers and acquisitions (M&A).
Before deciding to form a Tax Group, management should conduct a thorough assessment of all associated pros and cons. This includes evaluating potential cash savings, additional costs, and the overall impact on the company’s tax strategy. A well-informed decision will ensure that the benefits of forming a Tax Group align with the company’s strategic financial goals and operational needs.
To discuss the procedural aspects, establish a UAE Tax Group, the Parent Company must submit an application to the Federal Tax Authority (FTA) to include both itself and its subsidiaries. For eligibility, all member companies must be juridical entities under UAE law, share the same financial year and accounting standards, and should not include exempt persons or Qualifying Free Zone Persons. The Parent Company is required to hold at least 95 percent of the share capital, voting rights, and profits of the subsidiary. Additionally, neither the Parent Company nor the subsidiary can be tax residents in another country under a Double Taxation Agreement.
The Tax Group’s formation is effective from the specified Tax Period in the FTA application, unless the FTA may set a different date. The Tax Group may be dissolved with FTA approval or if the Parent Company no longer meets the eligibility criteria. The FTA may also mandate dissolution or changes to the Parent Company based on the information available.
In this structure, the Parent Company is responsible for representing the Tax Group and ensuring compliance with Corporate Tax obligations. Both the Parent Company and its subsidiaries share joint and several liabilities for Corporate Tax during the periods they are part of the group.
The option to form a tax group will vary from entity to entity, and a detailed evaluation is essential for making an informed choice. By understanding the nuances of tax grouping provisions, businesses can enhance compliance efficiency and strengthen their position in the competitive UAE tax environment.
(Prateek Tosniwal, director MICS)