Conditions for Corporate Tax Grouping: What You Need to Know

As corporate tax takes effect in the UAE, more and more companies are looking to adopt tax optimisation strategies. Out of these, tax grouping emerges as one of the well-known strategies that can be beneficial for businesses. But what exactly is a tax group, and what conditions must be fulfilled to form one? Through this article, we will address these questions and give you better clarity on the aspect of corporate tax grouping.

What is a Corporate Tax Group?

A corporate tax group is a grouping of ‘taxable persons’ i.e. entities subject to the UAE Corporate Tax Law. It is necessary to note that the conditions to form tax groups for VAT are different from those for corporate tax. When grouped, these taxable persons can be considered as a single taxable person. As an example, a parent company and its subsidiaries can form a tax group. This means the group can file a single corporate tax registration as well as a single tax return, significantly reducing the compliance burden. Moreover, the income and losses of the members of the group can be offset against each other.

What are the Conditions to Form a Corporate Tax Group?

It is crucial to note that a tax group cannot simply be formed by any group of companies. There are numerous conditions laid down by the UAE’s Federal Tax Authority (FTA) and only once these are fulfilled by the members, a tax group will be recognized. Let’s explore what these conditions are and how they can be fulfilled:

Juridical Persons Condition

Firstly, a juridical person refers to an entity that holds a legal personality that is distinct from its owners and founders. A tax group can only be formed only when all members are juridical persons. Examples of entities that can be referred to as juridical persons include Limited Liability Companies (LLCs) and Joint-Stock Companies (JSCs) (both public and private). It is key to note that a natural person (an individual) conducting business cannot be a part of a tax group.

Resident Persons Condition

The parent company along with its subsidiaries must be resident persons under the UAE corporate tax laws. For example, a company that is set up in the UAE and subject to the UAE’s corporate tax law can be deemed as a resident taxable person. Also, a company that was incorporated outside the UAE can be deemed as a resident person if it is effectively managed and controlled in the UAE and is subject to the UAE’s corporate tax law. Besides being a resident person, the entity must be considered a tax resident in the UAE under a Double Taxation Agreement that is in effect.

Share Capital Ownership Condition

As per this condition, the parent company must own a minimum of 95% of the share capital in each of the subsidiary companies within a tax group. Share capital refers to the total fund value raised by a company by issuing shares to its shareholders. The share capital can be owned by the parent company either directly or indirectly through one or more subsidiaries.

Voting Rights Condition

As per this criteria, the parent company must be entitled to a minimum of 95% of the voting rights in each of the subsidiaries within the tax group. Similar to share capital, these voting rights can be either held directly or indirectly. Notably, only the voting rights on affairs necessitating shareholder approval are relevant.

Profits Condition

The profits condition says that at least 95% of the profits from each subsidiary must go to the parent company. The parent company can either be directly or indirectly entitled to these profits.

Exempt Person Condition & Qualifying Free Zone Person Condition

The parent company or any of the subsidiaries must not be considered as an ‘exempt person’ or a ‘qualifying free zone person’ under the UAE’s corporate tax law. An exempt person refers to an entity that does not come within the scope of UAE corporate tax laws. Such an entity is not required to register for corporate tax or file any tax returns.
A qualifying free zone person refers to a free zone company eligible for 0% corporate tax. This condition is laid down mainly because the key purpose of corporate tax grouping is to consolidate entities that are liable for corporate tax in the same way. There can be some exceptions to this condition. As an example, government entities are considered exempt persons and hence cannot form tax groups. However, it is possible for subsidiaries of a government entity to make tax groups without it.

Financial Year Condition

All members of a tax group must have the same financial year and tax period. As tax grouping aims to simplify the filing obligations, this condition has been maintained to ensure the same. If the parent company wishes to change its financial year, the subsidiaries must also make this change to maintain the tax group.

Accounting Standards Condition

All members of the tax group must follow the same accounting standard for financial statement preparation. IFRS is the standard to be followed for corporate tax purposes. The consolidated financial statements of the tax group are required to be audited if the total revenue of the tax group exceeds AED 50 million during the relevant tax period.

Hope we have provided you with enough insights on the conditions that are required to be met to form a corporate tax group. However, it is necessary to determine whether tax grouping is ideal for your corporate structure. Moreover, it is necessary to assess whether your business can form a tax group. Tax consultants at InZone can help you with these assessments, and help you with other aspects related to corporate tax such as registration, return filing, and so on.