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UAE Ministerial Decision No. 125 of 2023 on Tax Group

UAE Ministerial Decision No. 125 of 2023 on Tax Group

The Ministry of Finance (MoF) has issued Ministerial Decision No. 125 of 2023 on Tax Group. With tax grouping, groups are treated as if they were one entity which eases the administration and compliance burden.

The decision on Tax Grouping further clarifies the conditions under which UAE resident entities that are 95% or more commonly owned can form or join a Tax Group and be treated as a single entity for Corporate Tax purposes. Some of the key highlights of the decision are as follows:

Ownership Requirement

The decision clarifies that the conditions based on which the Tax Group is formed must be met continuously throughout the relevant tax period by the Tax Group.

Residency Rules

Both the parent company and subsidiary must be resident persons, without tax residency in another country. Moreover, if a member becomes a resident elsewhere, it is considered to have left the Tax Group.

Further, the foreign juridical persons incorporated under foreign jurisdiction and effectively managed or controlled in the UAE, must maintain documentation proving its non-residency in the foreign state, which can be confirmed by either the foreign tax authority or relevant competent authorities under international agreements.

Rules related to Transactions before Forming or Joining a Tax Group

The transactions within a Tax Group are not eliminated if a member had recognized a deductible loss before joining the group, until the deductible loss is fully reversed.

As a result, the Tax Group must include the income related to those transactions in determining taxable income. This inclusion is limited to the amount of previously deducted deductible loss prior to joining or forming the Tax Group.

Date of Formation or Joining of Tax Group

The ministry clarifies that to form or join a Tax Group, the application must be submitted before the end of the relevant Tax Period. A newly established entities can join an existing Tax Group from the date of incorporation.

This decision also applies when a new Parent Company replaces the former one, and the new Parent Company must meet the conditions of Tax Group from the beginning of the Tax Period.

Moreover, when a Parent Company transfers its entire business to another member of the Tax Group and ceases to exist due to this transfer, it is replaced by the other member.

Assets, Liabilities and Financial Positions of Members of Tax Group

For calculating the Taxable Income of a Tax Group, the transactions between the Parent Company and each Subsidiary in a Tax Group are eliminated. These transactions include transactions between Subsidiaries, Valuation Adjustments, and Provisions.

Further, when gains or losses regarding transactions between members are eliminated, any change in the accounting value of related assets and liabilities resulting from those gains or losses is also eliminated.

Pre- Grouping Tax Losses Relief

The decision explains that the amount of pre-grouping Tax Losses of subsidiary which is allowed to offset against the Taxable Income of the Group, is lower of Taxable Income attributable to the subsidiary and the Tax Loss to the extent of 75% of Taxable Income as specified under Clause (2) of Article (37) of the Corporate Tax Law.

Moreover, if the calculation of Taxable Income results in a carried forward Tax Loss, any available pre-Grouping Tax Losses must be utilized first in a subsequent Tax Period before other carried forward Tax Losses of the Tax Group.

Rules for Calculation of Taxable Income of Group

The Tax Group must calculate the Taxable Income of any of its member considering the Arm’s Length Principle in respect of unutilized pre-grouping Tax Losses, Corporate Tax incentives, and income of member eligible for foreign tax credit and discloses relevant transaction information as required by the Authority.

Business Restructuring

If a member transfers its entire business to another member in the same Tax Group and ceases to exist due to such transfer, it remains a member until its cessation, and the Tax Group continues. Further, if a Tax Group has only two members and one transfers its entire business to the other, resulting in its cessation, the Tax Group will cease.

If a member transfers its business or part of it to a newly established juridical person, which joins the existing Tax Group, the transfer is considered to occur within the Tax Group.

Guidelines regarding parting of Subsidiary or Cessation of Tax Group

When a Subsidiary leaves a Tax Group or the Tax Group ceases to exist, the Authority must be notified within 20 business days from the date the conditions are no longer met.

Additionally, each departing Subsidiary and the former Parent must prepare standalone financial statements using the same accounting basis as the Tax Group thereby adopting values of assets and liabilities recorded by the Tax Group are adopted as the opening values in the standalone financial statements.

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