Insights

Guide on Qualifying Group Relief

15 April 2024 – On 3 April 2024, the Federal Tax Authority (‘FTA’) published a Corporate Tax Guide on “Qualifying Group Relief” (‘Relief’), aiming to provide general guidance on the Relief available under the Corporate Tax Law (‘CT Law’). Although the guidance is not legally binding, it aims to assist in understanding the provisions of the Relief under the CT Law.

The objective of the “Qualifying Group Relief” provisions is to facilitate the transfer of capital assets or liabilities between two Taxable Persons within a Qualifying Group, ensuring no gain or loss for Corporate Tax purposes (transfer is considered at book value). This enables tax-neutral restructuring, preserving the overall ownership structure of assets or liabilities within the group.

This alert outlines some of the important points, covering the eligibility, scope, consequences, claw-back situations, compliance, and interactions with UAE CT Law regarding the Relief as presented in the aforesaid guide.

The guide elaborates on the conditions applicable for availing the ‘Qualifying Group Relief’ as under:

Sr. No.

Conditions

Clarifications included in the Guide

1

Transferor and transferee are Juridical Persons
  • A juridical person having a separate legal entity can be a member of a
    Qualifying Group such as private or public joint stock companies or limited
    liability companies and incorporated partnerships.
  • Natural persons or unincorporated partnerships
    which do not have separate distinct legal personality do not qualify for the
    Relief.
  • However, the Relief may be available to a
    juridical person who is a partner in an Unincorporated Partnership or to a
    juridical person who is held by an Unincorporated Partnership.

2

Transferor and transferee are Taxable Persons

The juridical person must be a Taxable Person under the CT Law which inter alia includes:

  • Resident Persons: Entities incorporated, established, or recognized under UAE legislation or entities incorporated outside the UAE but effectively managed and controlled within the UAE.
  • Non-Resident Persons: Entities that have a Permanent Establishment in the UAE through which they conduct business.

Exception: Non-Resident Persons which derive UAE sourced income or have nexus in the UAE cannot be member of Qualifying Group even though they are considered as Taxable Persons as per the CT Law.

3

Direct, indirect or common ownership of at least 75%
  • A Taxable Person must have control over the ownership interest and should be entitled to its economic benefits as per the applied Accounting Standards.
  • The ownership interest shall be determined based on paid-up capital and shall be aggregated in case held in different types of instruments.
  • The third person (common shareholder) holding 75% common shareholding in two taxable persons need not be a taxable person.
  • The direct and indirect ownership interests held by members of the same Tax Group shall be determined by aggregating the ownership interests of the Parent Company and each Subsidiary that is a member of the Tax Group.
  • The ownership condition is satisfied if the required indirect holding is through an Exempt Person or a QFZP. 

4

Exempt Person and Qualifying Free Zone Person (‘QFZP’) 
  • Relief applies to Taxable Persons, excluding Exempt Persons and QFZP. 
  • Free Zone entities not qualifying as such can still be part of a Qualifying Group. 

Additionally, Resident Persons opting for Small Business Relief cannot claim the Relief.

5

Financial Year and Accounting Standard
  • The Financial Year of all entities within the Qualifying Group must end on the same date, ensuring that the group operates under a uniform financial timeline.
  • A Taxable Person has an option to apply to the FTA to change the financial year to align the end date of its financial year with other members of the Qualifying Group subject to certain conditions.  
  • Different accounting policies are permitted to be followed by the members if they follow the same accounting standards. 


Some of the related key implications covered and clarified by the guide are summarized as below:
 

Particulars 

Transferor

Transferee

Transfer of assets and liabilities at net book value on the date of transfer

No gain or loss recognized because of the transfer

In cases other than realization – adjust taxable income to exclude depreciation, amortization or change in value of asset / liability to the extent of the amount not previously recognized for CT.

In cases upon realization – include any amount not previously recognized for CT*.




Exchange of asset or liabilities
  • Transactions will be treated as two separate transfers.
  • Relief available if at least one of the Taxable Person has made an election.
  • Relief will not apply in case asset or liability not held on capital account is received as exchange.

Any difference in the net book values of exchanged assets is disregarded in computing Taxable Income.

Transfer of losses

Tax losses cannot be transferred to the transferee under Article 26 of the CT Law rather it would be governed under Article 38 of the CT Law.

Consequences of Claw back

The gain or loss (market value minus book value) on transfer of the asset or liability shall be included in the Taxable Income of the Transferor for the Tax Period in which the circumstance triggering claw back occurs.

Reversal of any depreciation, amortization or other change in the value of the assets and liabilities that has previously been adjusted.


* In case there have been several transfers on a no gain or loss basis, all the gains and losses in relation to those transfers would need to be included upon realization, unless these amounts had already been adjusted or included in the Taxable Income as a result of a claw back.

Other Relevant Points: 

  1. Claw back provisions – The Relief shall not apply if within two years from the date of transfer:
    • there is subsequent transfer of the asset or liability outside the Qualifying Group; or 
    • the transferor or the transferee cease to be member of the same Qualifying Group.  This includes scenarios such as ownership changes, cessation of Taxable Person status, becoming an Exempt Person or QFZP, or financial year does not align with other group members.  

However, the claw back is not triggered if the subsequent transfer of the asset or liability is within the Qualifying Group or if the new Transferee joins the Qualifying Group before the transfer of the asset or liability. 

  1. Nexus with Business Restructuring relief: A transaction can qualify for the ‘Qualifying Group Relief’ as well as the ‘Business Restructuring Relief’ subject to satisfaction of specified conditions.
  2. Transitional Relief: Transitional relief in respect of gains recognized on assets owned prior to the Taxable Person’s first Tax Period could be available on the final taxable disposal of the relevant capital asset, subject to certain conditions. 

Key Takeaways

The guide clarifies various aspects relating to the Relief conditions.  Specifically, the clarification on common ownership by a third Person not required to be a Taxable Person clears the ambiguity on the ownership condition. However, while Exempt Persons and QFZP cannot be members of Qualifying Group, it is worth evaluating whether a common ownership of 75% by such Persons in a transferor and a transferee would allow the transferor and transferee to be members of a Qualifying Group.    

At the group level, there could be practical challenges such as keeping a track of subsequent transfers, claw backs, implications thereon for the transferor and the transferee and interplay with elections made and relief claimed under other provisions of the CT Law.  

Contacts

We have a dedicated Corporate 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.

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