The primary query for businesses preparing for corporate tax compliance is whether a group comprising multiple entities can establish a Tax Group for the year 2023 or if they need to consider this option for 2024. The UAE has significantly improved its corporate tax framework, allowing groups with multiple entities to form Tax Groups, a streamlined structure designed to enhance tax management and compliance efficiency.
To clarify, if all prerequisites for forming a tax group are met at the beginning of the tax period, the group can be formed for that period. However, if there are any structural adjustments made or planned during the current tax period to fulfill these conditions, the formation of the tax group must be deferred to the next year.
Establishing a corporate tax group in the UAE offers several advantages, such as simplified compliance through a single registration and consolidated return filing. It also limits transfer pricing compliance for transactions within the group and allows for intra-group loss offsetting, providing financial benefits. However, businesses must weigh these benefits against potential implications, including a single exemption limit, mandatory consolidated financial statements, joint and several liabilities, and complexities in mergers and acquisitions.
Before forming a Tax Group, management should conduct a comprehensive evaluation of the pros and cons, including potential cash savings, additional costs, and the overall impact on the company's tax strategy. This informed decision-making process ensures that the benefits align with the company’s strategic financial goals and operational needs.
To establish a UAE Tax Group, the Parent Company must apply to the Federal Tax Authority (FTA) to include itself and its subsidiaries. Eligibility criteria include all member companies being juridical entities under UAE law, sharing the same financial year and accounting standards, and not including exempt persons or Qualifying Free Zone Persons. The Parent Company must hold at least 95 percent of the share capital, voting rights, and profits of the subsidiary, and neither entity can be a tax resident in another country under a Double Taxation Agreement.
The Tax Group's formation becomes effective from the specified Tax Period in the FTA application, unless the FTA specifies a different date. The group may be dissolved with FTA approval or if the Parent Company no longer meets the eligibility criteria. The FTA may also mandate dissolution or changes to the Parent Company based on available information.
In this structure, the Parent Company is responsible for representing the Tax Group and ensuring compliance with Corporate Tax obligations. Both the Parent Company and its subsidiaries share joint and several liabilities for Corporate Tax during their tenure in the group. The decision to form a tax group varies by entity, and a detailed evaluation is crucial for making an informed choice. Understanding the intricacies of tax grouping provisions can enhance compliance efficiency and strengthen a business's position in the competitive UAE tax environment.
