An In-depth Look at Tax Groups and Tax Losses In Corporate Tax UAE 2023

The United Arab Emirates (UAE) recently embarked on a new fiscal journey with the enactment of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses.

As we know this landmark legislation introduces corporate taxation into the UAE for the first time, altering the country’s fiscal landscape.

Through regular updates, the Ministry of Finance has been gradually introducing new concepts and mechanisms, making it vital for businesses to understand and adapt to these changes.

This detailed analysis aims to offer insights into the complexities and intricacies of tax groups and tax losses, two fundamental elements of this new corporate tax law.

What is a Tax Group according to Corporate Tax UAE 2023 Regulations?

Chapter Twelve (Articles 40 – 42) of the new Corporate Tax Law presents a new fiscal structure – ‘Tax Groups.’ This is a collective of corporations interconnected by capital, management, or control. The law provides for the formation, cessation, and income taxation of such groups, marking a significant departure from the previous tax regime.

What is a Tax Group?

A Tax Group is a group of companies that are treated as a single entity for tax purposes. This means that the profits and losses of all the companies in the group are aggregated and taxed as a single amount.

The requirements to be considered a ‘Tax Group,’ as outlined in Article 40, include sharing the same financial year and submitting a single tax return that encapsulates all corporations within the group. There are additional conditions, highlighting the need for businesses to thoroughly understand the specifics of these provisions.

The necessary criteria for establishing a CT Group include: Only individuals with residency can comprise a CT Group. Permanent Establishments (PE) or branches of overseas firms within the UAE are not eligible to become members of a CT Group;

CT Group membership is restricted to legal resident entities. Natural individuals and unincorporated JVs are not qualified. The CT group formation is exclusive to parent-child corporate relationships, provided all the following conditions are fulfilled:

1. The parent company holds a minimum of 95% of the subsidiary’s shares;
2. The parent company controls at least 95% of the subsidiary’s voting rights; and
3. The parent company is entitled to a minimum of 95% of the subsidiary’s earnings and net assets.

NOTE:
Neither the parent entity nor the subsidiary is CT-exempt;
Neither the parent entity nor the subsidiary is a recognized Free Zone Person, especially, in a case where one of the subsidiaries is a Free Zone entity;

Both the parent company and its subsidiaries need to operate in the same fiscal year and adhere to the same accounting standards when preparing financial documents.

The idea of Tax Groups holds substantial financial implications.
One of the most significant benefits is the possibility of loss offsetting within the group. If one corporation within the group incurs losses while another generates a profit, these can be balanced at the group level.

This advantage could result in sizable tax savings, boosting cash flow management across the group. However, it’s crucial for businesses to realise that maximising these benefits hinges on proper understanding and correct application of the law.

On the flip side, there is taxation and loss of exemption for Free Zone and other Tax Free entities as a part of the Tax Group. It’s not a black and white picture, and so it becomes crucial to have a tax consultant like those at Horizon Biz Consultancy evaluate the actual advantages both choices could have for you.

A Closer Look at What Tax Losses Can Mean for Your Business

The Corporate Tax Law pays considerable attention to tax losses (Chapter Eleven, Articles 37-39), a key component in any corporate tax structure. These provisions outline how businesses can carry forward, utilise, and transfer tax losses, creating opportunities for strategic tax planning.

What are Tax Losses?

Tax losses are losses that a company incurs in a particular year. These losses can be carried forward and used to offset profits in future years.

Under the new corporate tax regime, companies will be able to carry forward tax losses for a period of 10 years. This means that a company that incurs a tax loss in 2023 will be able to use that loss to offset profits up to and including 2033.

The current corporate tax law in the UAE considers companies and other juridical persons that have specifically been incorporated, formed or recognized through UAE laws as a Resident Person. In fact, this even covers juridical persons incorporated in the UAE under either mainland legislation or applicable Free Zone regulations.

There are a number of restrictions on the carry forward of tax losses.

Article 37 specifies that businesses can seek tax loss relief, allowing losses to be carried forward to future periods. However, this provision comes with caveats. As defined in Article 39, restrictions are placed on the quantity of losses that can be carried forward, tied to the taxable income.

Further, Article 38 provides a detailed framework for the transfer of tax losses. This provision enables businesses to offset losses in one area against profits in another, thereby optimizing their taxable income. Yet, businesses must exercise caution, as the rules governing tax losses are intricate and must be applied correctly to avoid compliance issues.

What are the Broader Implications of this on Businesses in the UAE?

There is restriction of 75% of income need to adjusted against carried forward losses
Beyond tax groups and tax losses, the Corporate Tax Law brings a host of other changes that will impact businesses operating in the UAE.

For instance, corporations will need to ensure they are adequately prepared to comply with new tax reporting and record-keeping obligations (Chapter Seventeen, Articles 53-59). This includes the timely preparation and submission of tax returns, the maintenance of accurate financial statements, and the adoption of appropriate transfer pricing documentation.

Moreover, the introduction of the new corporate tax regime may also influence decisions related to business structure, financing, and investment.

For example, businesses may need to reevaluate their capital structures in light of the new rules surrounding the deductibility of interest expenditure (Chapter Nine, Articles 28-33). Furthermore, foreign businesses considering investment in the UAE will need to take into account the potential tax implications of their chosen investment structures.

How do we Chart the Way Forward?

The introduction of the new corporate tax regime in the UAE signifies a profound shift in the nation’s fiscal policy. As businesses grapple with these changes, understanding the nuances of provisions like tax groups and tax losses will be paramount.

If you desire to optimally navigate this new tax landscape, as a business owner, we encourage you to seek professional tax advice tailored to your unique circumstances from expert tax consultants based on UAE soil, itself, like us at Horizon Biz Consultancy. This will be crucial in not only ensuring compliance but also strategically leveraging the new laws to enhance financial performance and growth.

For a quick free 30 minutes’ consultation, get in touch with us on call at +971 50 841 3395 contact us at info@horizonbizco.com.