UAE Ministerial Decision introduces changes for Tax Groups

Introduction

The Ministry of Finance (MOF) of the United Arab Emirates (UAE) has recently released Ministerial Decision No. 301 of 2024 on Tax Groups for the purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses. This Decision repeals Ministerial Decision No. 125 of 2023 (released in May 2023) with effect for tax periods commencing on or after 1 January 2025. For tax periods prior to such date, Ministerial Decision No. 125 of 2023 remains in force.

The new Ministerial Decision introduces certain modifications which we have summarized below.

Main modifications

Requirements for certain juridical persons to demonstrate their tax residence

With regards to the requirement of being a "Resident Person" to form part of a Tax Group for Corporate Income Tax (CIT) purposes, article 3 in its paragraphs 3 and 4 of the previous Ministerial Decision established a requirement for foreign taxpayers deemed residents in the UAE under the Place of Effective Management (POEM) rule and UAE incorporated entities with their POEM in a foreign jurisdiction to maintain certain documentation to justify their tax residence status. This included a confirmation issued by the relevant authorities of the other jurisdiction, confirming they were not tax residents in their jurisdiction.

The new Ministerial Decision abolishes this requirement by eliminating the two mentioned paragraphs, simplifying the administrative burden for these types of entities.

Situations in which a Tax Group needs to calculate the Taxable Income attributable to one or more of its members

The new Ministerial Decision introduces certain changes to the situations in which the Tax Group needs to calculate the Taxable Income attributable to one or more of the members of the Group (article 8 in both Ministerial Decisions), as per the below detail:

• Article 8.1 paragraph a, which under the previous Ministerial Decision referred to situations where "a member of the Tax Group has unutilized pre-Grouping Tax Losses", has now been modified to cover only situations where "a member of the Tax Group has unutilized pre-Grouping Tax Losses and the Tax Group opts to use the pre-Grouping Tax Losses to offset the Taxable Income of the Tax Group for the relevant period". Based on the above, whilst under the previous regulations, the mere fact of having unutilized pre-Grouping Tax Losses would draw a Tax Group into the obligation to calculate the Taxable Income attributable to the different members, this obligation has now been reduced to situations where those pre-Grouping Tax Losses are effectively being used by the Group. This gives Tax Groups the option to forfeit those pre-Grouping Tax Losses and reduce the burden of calculating the Taxable Income attributable to each member.
• Tax Groups of which a member has earned income for which the Tax Group could claim a foreign tax credit are no longer required to calculate the Taxable Income attributable to each member of the Group, as Article 8.1 paragraph b of the previous Ministerial Decision has now been eliminated. This paragraph has been substituted with a new paragraph, which brings into scope Tax Groups in which a new member joins an existing Tax Group which has unutilized Tax Losses.
• Finally, Tax Groups of which a member had unutilized carried forward pre-Grouping net interest expenditure were previously required to calculate the Taxable Income attributable to each member. Under the new Ministerial Decision, this rule only applies to Tax Groups where the pre-Grouping net interest expenditure is effectively used by the Tax Group for calculating its Taxable Income.

Introduction of provisions regarding pre-Grouping Tax Losses

The new Ministerial Decision introduces two new paragraphs (paragraphs 3 and 4) to Article 8 regarding pre-Grouping Tax Losses (i.e., tax losses generated by the individual members of the Tax Group before becoming part of a Tax Group), which stipulate the following:

• Pre-Grouping Tax Losses must be used to offset Taxable Income to the fullest extent possible (i.e., the lesser of 75% of the Taxable Income of the Group and the Taxable Income attributable to the subsidiary which generated the tax losses) before any remainder can be carried forward to future periods. This was already anticipated in the Tax Groups Guide (CTGTGR1) released in January 2024.
• Pre-Grouping Tax Losses of a member of the Tax Group will be forfeited if (i) the Tax Group does not calculate the Taxable Income attributable to each member in accordance with the comments above, and (ii) the amount of pre-Grouping Tax Losses utilized by the Group is less than the maximum amount which could have been used by virtue of the Law.

Introduction of provisions regarding pre-Grouping Net Interest Expenditure

In addition to the above, the new Ministerial Decision has also included two new paragraphs (paragraphs 5 and 6) to Article 8, which regulate the use of pre-Grouping Net Interest Expenditure, as per the following detail:

• Pre-Grouping Net Interest Expenditure must be used to the fullest extent possible (i.e., the lesser between up to 30% of the Group's EBITDA or AED 12m and (ii) Taxable Income attributable to the subsidiary which generated the Net Interest Expenditure) before any remainder can be carried forward to future periods.
• Pre-Grouping Tax Losses of a member of the Tax Group will be forfeited if (i) the Tax Group does not calculate the Taxable Income attributable to each member in accordance with the comments above, and (ii) the amount of pre-Grouping Net Interest Expenditure utilized by the Group is less than the maximum amount which could have been used by virtue of the Law.

Conclusion

The recent changes introduced by Ministerial Decision No. 301 of 2024 reaffirms the UAE's commitment towards easing tax compliance and creating a tax environment which is friendly for foreign investors.

At the same time, the increasingly complex regulations regarding Tax Groups make it difficult to assess at first sight whether constituting a Tax Group will be a beneficial option for certain groups. Groups operating within the UAE are encouraged to seek tax advice in order to properly assess whether operating under a Tax Group will bring significant benefits or else will be excessively burdensome.

Reference

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