Business Restructuring Relief

3 May 2024 - On 17 April 2024, Federal Tax Authority (FTA) published a Corporate Tax Guide on the Business Restructuring Relief (Relief), aiming to provide guidance on how the provisions of the United Arab Emirates (UAE) Corporate Tax (CT) Law apply to transactions covered in scope of the Relief. 

The Guide states that it is not a legally binding document but is intended to provide assistance in understanding the tax implications for the Relief relating to the CT Law. 

The objective of the Business Restructuring Relief is to eliminate the CT impact of certain transactions such as mergers, demergers, etc. undertaken as part of business restructuring or reorganization, allowing these actions to occur in a tax-neutral manner.

This alert aims to summarize key aspects of the Business Restructuring Relief, including the transactions covered by the Relief, conditions for eligibility, consequences of electing the Relief, circumstances when the Relief will be clawed back, consequences of such clawback, compliance requirements, and interactions with other provisions of the UAE CT law, as explained in the guide.

Key aspects

Transactions covered within the scope of the Relief

The Relief applies to two categories of transactions:

• Where there is a transfer of an entire business or an independent part of the business from one Taxable Person to another.
• Where there is a transfer of an entire business from one or more Taxable Persons to another, and the Transferor then ceases to exist.

Conditions to comply for electing the Relief

For Business Restructuring Relief to apply, all the following conditions need to be met and the transferor elects for the Relief to apply: 

• the transfer is undertaken in accordance with, and meets all the conditions imposed by the applicable legislation of the UAE;
• the transferor and the transferee are Resident Persons, or Non-Resident Persons that have a Permanent Establishment (PE) in the UAE;
• neither the transferor nor the transferee is an Exempt Person or a Qualifying Free Zone Person (QFZP) in the tax period in which the business restructuring transaction takes place;
• the Financial Year (FY) of transferor and transferee ends on the same date. This condition requires the Transferor and Transferee's FY to end on the same date. This does not necessarily require them to have the same FY/Tax Period;
• the transferor and transferee prepare their Financial Statements using the same Accounting Standards; and
• the transfer is undertaken for valid commercial or other non-fiscal reasons which reflect economic reality.

The Guide provides additional guidance/clarification on various aspects of this relief, some key ones are as under:

• Relief covers business restructuring transactions where a Business is transferred from one Related Party to another and where the Business restructuring is between third parties.
• An independent part of a Business refers to a part of the Business that may be operated independently and separately from the other Business of the Taxable Person. In this regard, the Guide provides certain indicative factors to assess the same.
• To benefit from the Relief, the business restructuring transaction must comply with all the applicable other legislation in the UAE that is any UAE Federal and/or Emirate laws and regulations. Relief can also apply on a transfer that is completed under a foreign law, subject to being compliant with UAE law also. 

Further, the Guide provides following transactions as examples that are covered and not covered under the Business Restructuring Relief:

The Guide elaborates as under and provides clarifications with regard to consequences of electing for Business Restructuring Relief and related clawback provisions: 

Consequences of electing for Business Restructuring Relief

Clawback of Business Restructuring Relief 

The Guide provides additional guidance/clarification on various aspects of clawback provisions, some key ones are as under:

• Clawback shall apply only in respect of transfer of those shares or ownership interests that were issued by the Transferor or the Transferee as part of the Relief. Where it is practically not possible to identify which shares are transferred, then first in first out basis to be applied. 
• Clawback applies on a transfer “in whole or part” meaning a transfer of even a single share which was previously issued as part of the Relief could trigger the clawback.
• Relevant Qualifying Group should include the shareholder that transfers the shares in the Transferee and the Person who receives the shares in the Transferee. In these situations, there is no requirement that the Transferor or Transferee are in a Qualifying Group with the Person who is transferring or receiving the shares.
• Clawback also applies in case of transfers of only certain assets and liabilities belonging to the Business which transferee has received in certain circumstances.
• Merely becoming an Exempt Person or QFZP in a subsequent Tax Period does not trigger a clawback of Relief claimed in the earlier tax period.

Compliance requirements

• Unlike the election for Qualifying Group Relief under Article 26 of the CT Law, which applies to all of a Transferor’s subsequent transfers, an election for Business Restructuring Relief is required by the Transferor for each applicable Business Restructuring transaction meeting the conditions for Relief. This election does not apply to any future restructuring transactions performed by the Transferor or Transferee.
• Both the Transferor and the Transferee are required to maintain a record of the agreement to transfer the asset or liability at the value prescribed under Article 27 of the CT Law and document the requirements necessary for making prescribed adjustments.

Other key aspects:

• Unutilised tax losses incurred by the transferor in tax periods before the restructuring transaction can be carried forward and are considered tax losses of the transferee subject to the satisfaction of specified conditions. However, unutilised Net Interest Expenditure cannot be transferred to the Transferee where Business Restructuring Relief applies. 
• Nexus with Qualifying Group Relief: A transaction can qualify for the ‘Qualifying Group Relief’ as well as the ‘Business Restructuring Relief’, however, the same shall be subject to satisfaction of prescribed conditions under both the relief provisions including clawback provisions.
• Where a Resident Person elects for Small Business Relief, it is not entitled to elect for the Relief.

Key takeaways 

The guide clarifies various aspects relating to the Relief conditions, including the consequences of electing the Relief and provisions regarding the clawback. While the transferor may be eligible for the Relief subject to the conditions, the transferee may not be able to claim the depreciation to the extent of the gain not recognised for the CT purposes by the transferor. 

At the group level, there could be practical challenges such as keeping a track of subsequent transfers, clawbacks, implications thereon for the transferor and the transferee and interplay with elections made and Relief claimed under other provisions of the CT Law. Keeping track of such transactions / assets and liabilities will become crucial for monitoring the correct tax treatment in the hands of taxpayers.

Contacts

We have a dedicated Business Tax team based in the UAE who have in-depth experience and can support you throughout your readiness journey. Please get in touch with one of our tax experts listed on the following page.

You can also contact us and submit all your queries on this email cituae@deloitte.com.