Federal Tax Authority publishes corporate tax guide on Qualifying Group Relief
Background
On 3 April 2024, the UAE Federal Tax Authority (FTA) released a Corporate Income Tax (CIT) Guide on the Qualifying Group Relief introduced by the Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses (CIT Law) as part of the CIT regime governing in the UAE.
The CIT Law allows assets or liabilities to be transferred between two Taxable Persons that are members of the same Qualifying Group without creating a gain or loss for CIT purposes1. Qualifying Group Relief allows tax neutral restructuring of assets and liabilities where there is no change in the overall ownership of the assets or liabilities from a group perspective. Qualifying Group Relief is distinct from Business Restructuring Relief2 and transfers within a Tax Group3.
Consequences of electing for Qualifying Group Relief
Where the transferor elects for Qualifying Group Relief, an asset or can be transferred on a no gain or loss basis. This entails that the asset or liability will be treated as transferred at its net book value at the date when the transfer transaction takes place. Accordingly, no taxable gain or loss would be recognized by the transferor on the transfer of the asset or liability.
Where an asset or liability is transferred on a no gain or loss basis under application of Qualifying Group Relief, the transferor shall treat the consideration received as being equal to the net book value. To the extent consideration paid differs from the net book value of the asset or liability, the difference is ignored for the calculation of both the transferor’s and transferee’s Taxable Income.
Conditions to form a ‘Qualifying Group’
The transferor and transferee shall be treated as members of the same Qualifying Group where all of the following conditions are met:
- The transferor and transferee are juridical persons4;
- The transferor and transferee are taxable persons4;
- Either transferor or transferee has a direct or indirect ownership interest of at least 75% in the other person, or a third person has a direct or indirect ownership interest of at least 75% in both the transferor and the transferee6;
- Neither the transferor nor the transferee are an exempt person;
- Neither the transferor nor the transferee are a qualifying free zone person;
- The transferor and the transferee must have financial years ending on the same date7; and
- The transferor and the transferee must prepare their financial statements using the same accounting standards8.
It should be noted that the conditions to be treated as a Qualifying Group are different from those to form a Tax Group.
Conditions to apply Qualifying Group Relief
The relief is only available where the following conditions are met:
- The transfer concerns an asset or liability held on capital account and recorded on the balance sheet of the transferor;
- Both the transferor and transferee are members of the same Qualifying Group (see above);
- The transferor has elected for the relief9; and
- Within two (2) years from the date of transfer there are no circumstances which would trigger a clawback (see below).
Clawback
Qualifying Group Relief does not apply where, within two (2) years from the date of transfer:
- there is a subsequent transfer of the asset or liability outside of the Qualifying Group; or
- the transferor or transferee cease to be members of the same Qualifying Group.
Where any of the above circumstances occur, the transfer of the asset or liability which was previously deemed to be at no gain or loss shall be treated instead as having taken place at market value at the date of the original transfer. As a result, any gain or loss on transfer of an asset or liability not previously taken into account shall be taken into account for the purposes of calculating the taxable income of the transferor and included in the tax return of the transferor (or the transferee, where the transferor has ceased to be a taxable person) for the tax period in which the above circumstances occur.
Conclusion
The Corporate Tax Guide on Qualifying Group Relief released by the FTA provides essential clarity and guidance on navigating the provisions set forth by Federal Decree-Law No. (47) of 2022.
This guide includes extensive commentary and detailed examples for businesses on how to effectively implement.
Reference
1 Article 26 CIT Law, see also Ministerial Decision No. (132) of 2023 on Transfers Within a Qualifying Group for Corporate Tax Purposes.
2 Article 27 CIT Law.
3 Article 40 CIT Law.
4 A natural person and unincorporated partnership cannot be a transferor or transferee for the purposes of Qualifying Group Relief.
5 This includes both resident and non-resident taxpayers. Accordingly, if a Non-Resident Person with a Permanent Establishment in the UAE transfers or is transferred assets or liabilities attributable to its Permanent Establishment to or from another Taxable Person within its Qualifying Group, this transfer could benefit from Qualifying Group Relief if the relevant conditions are met.
6 The Guide contains detailed guidance on how to calculate the ownership percentage.
7 The Guide clarifies that If a Taxable Person meets all the conditions to be a member of a Qualifying Group except for the Financial Year condition, that Person may choose to change its Financial Year to align the end date of its Financial Year with other members of the Qualifying Group by making an application to the FTA, subject to meeting certain conditions.
8 The Guide stipulates that if a Taxable Person meets all the conditions to be a member of a Qualifying Group except the Accounting Standards condition because it prepares its Financial Statements under IFRS for SMEs whereas other members apply (full) IFRS. In such a case, the Taxable Person may choose to prepare its Financial Statements under (full) IFRS to align with other members of the Qualifying Group. This does not require any application to be made to the FTA.
9 The election should be made in the tax return for the tax period in which the transfer, to which the taxable person wishes to apply qualifying group relief for the first time, takes place. The election is irrevocable.
