Tax Grouping in the UAE: Benefits and Eligibility Criteria
For businesses in the UAE that operate as part of a larger corporate group, the introduction of Corporate Tax has created a new layer of administrative complexity. Each legal entity within the group is, by default, a separate taxpayer, required to file its own tax return and manage its own compliance. This can be a significant burden, especially for large groups with numerous subsidiaries. To alleviate this, the UAE Corporate Tax law provides a powerful simplification tool: the ability to form a Tax Group.
Tax Grouping allows a group of related resident companies to be treated as a single entity for Corporate Tax purposes. This means the group files one consolidated tax return and pays one tax liability, dramatically simplifying compliance. More importantly, it offers significant strategic advantages, such as the ability to offset losses from one group company against the profits of another. However, this benefit comes with strict eligibility criteria that must be met and maintained.
This guide will provide a clear and comprehensive overview of the Tax Grouping regime in the UAE. We will explore the key benefits, break down the stringent eligibility conditions set by the Federal Tax Authority (FTA), and explain how it works in practice, helping you to determine if forming a Tax Group is the right strategic move for your business.
Key Takeaways
- One Group, One Tax Return: A Tax Group allows multiple related companies to be treated as a single taxpayer, filing one consolidated tax return.
- Offset Profits and Losses: The primary benefit is the ability to use the tax losses of one group company to offset the taxable profits of another, reducing the group’s overall tax bill.
- Strict 95% Ownership Test: To be eligible, a parent company must own at least 95% of the shares and voting rights in each subsidiary.
- All Members Must be UAE Residents: Only UAE resident companies can be part of a Tax Group. Branches of foreign companies are generally excluded.
- Joint and Several Liability: All members of a Tax Group are jointly and severally liable for the group’s entire Corporate Tax debt.
What is a Tax Group?
A Tax Group is a mechanism that allows two or more resident juridical persons (companies) that are part of the same corporate group to be treated as a single taxable person for Corporate Tax purposes. One company is designated as the “Parent Company,” and the others are its “Subsidiaries.”
Once the FTA approves the application to form a Tax Group, the following happens:
- The group is issued a single Tax Registration Number (TRN).
- The Parent Company becomes responsible for all administrative duties, including filing the consolidated tax return and paying the tax liability on behalf of the entire group.
- Transactions between members of the Tax Group (intra-group transactions) are eliminated and disregarded for tax purposes.
Forming a Tax Group effectively tells the FTA: “For tax purposes, please treat all of these separate legal companies as if they were just one single entity.”
The Key Benefits of Forming a Tax Group
The advantages of forming a Tax Group are both administrative and financial.
1. Consolidation of Profits and Losses
This is the most significant financial benefit. In a Tax Group, the taxable income is calculated on a consolidated basis.
Example:
- Company A (Parent) has a taxable profit of AED 1,000,000.
- Company B (Subsidiary) has a tax loss of AED 400,000.
If they file separately, Company A pays tax on its full profit, while Company B carries its loss forward. If they form a Tax Group, the loss from Company B is immediately offset against the profit of Company A. The group’s consolidated taxable income is AED 600,000 (1,000,000 – 400,000), resulting in a lower immediate tax payment.
2. Simplified Compliance and Administration
Instead of preparing and filing multiple tax returns, the group only has to prepare and file one. This reduces the administrative burden, saves time, and lowers compliance costs.
3. Elimination of Intra-Group Transactions
Transactions between members of the same Tax Group are disregarded. This means you do not need to worry about applying the complex Transfer Pricing rules for sales of goods, services, or financing between group members. This is a major simplification benefit.
The Strict Eligibility Criteria
The FTA has set out very specific and strict conditions that must be met by all members of a proposed Tax Group. All of the following conditions must be satisfied:
- All members must be juridical persons (companies). Natural persons cannot be part of a Tax Group.
- All members must be resident in the UAE. This can include companies incorporated in a Free Zone.
- The Parent Company must own at least 95% of the shares in each subsidiary.
- The Parent Company must hold at least 95% of the voting rights in each subsidiary.
- The Parent Company must be entitled to at least 95% of the profits and net assets of each subsidiary.
- Neither the Parent nor the Subsidiaries can be an Exempt Person or a Qualifying Free Zone Person.
- All members of the group must have the same financial year end.
These conditions must be met on a continuous basis. If any member ceases to meet a condition, it must leave the Tax Group.
Expert Guidance on Tax Group Formation with EAS
Deciding whether to form a Tax Group and navigating the application process requires careful analysis and planning. The expert Corporate Tax advisors at Excellence Accounting Services (EAS) can guide you through every step.
Our Services Include:
- Eligibility Assessment: We conduct a thorough review of your corporate structure to determine if your group meets all the stringent eligibility criteria for forming a Tax Group.
- Strategic Analysis: We can model the financial impact of forming a Tax Group, helping you to make an informed decision based on the potential tax savings.
- Application and Compliance: We can manage the entire application process with the FTA and provide ongoing support for the preparation and filing of the consolidated tax return.
Frequently Asked Questions (FAQs)
It means that every single member of the Tax Group is 100% responsible for the entire tax debt of the group. If the Parent Company fails to pay the tax, the FTA can pursue any of the subsidiaries for the full amount, not just their share.
A Free Zone company can be part of a Tax Group, but only if it is NOT a “Qualifying Free Zone Person” (QFZP). A QFZP is a company that benefits from the 0% Corporate Tax rate on its qualifying income. Since a QFZP is already benefiting from a 0% rate, it cannot be used to form a Tax Group with mainland companies.
You cannot form a Tax Group. To become eligible, all the subsidiaries would first need to change their financial year end to align with that of the Parent Company. This requires a formal process with the relevant authorities.
The Parent Company must hold the 95% stake either directly or indirectly through other subsidiaries that are also part of the Tax Group. For example, if Parent A owns 100% of Subsidiary B, and Subsidiary B owns 100% of Subsidiary C, then A, B, and C can form a Tax Group.
That subsidiary must immediately leave the Tax Group from the date it ceased to meet the condition. The Parent Company must notify the FTA. The departing company will then need to register for Corporate Tax on a standalone basis.
Yes. A holding company can act as the Parent Company of a Tax Group, provided it meets all the other eligibility criteria.
Tax losses that a company incurred *before* joining a Tax Group can generally be carried forward, but they can only be used to offset the future profits of the Tax Group that are attributable to that specific company. They cannot be used to offset the profits of other group members.
No. The Parent Company can apply to the FTA to have the Tax Group cease, or the group may be terminated if it no longer meets the conditions. However, once a company leaves a Tax Group, there may be restrictions on it rejoining for a certain period.
No. Corporate Tax grouping and VAT grouping are completely separate. A group of companies can be a VAT group, a Corporate Tax group, both, or neither. The eligibility criteria and rules are different for each.
The main alternative is “Tax Loss Transfer.” The UAE Corporate Tax law allows for a tax loss to be transferred from one group company to another to offset profits, provided certain conditions are met (such as 75% common ownership). This can achieve a similar outcome to tax grouping for a specific year but does not offer the same administrative simplification.
Conclusion: A Strategic Choice for Corporate Groups
Tax Grouping is a powerful provision in the UAE Corporate Tax law that offers significant benefits in terms of tax efficiency and administrative simplicity. However, the eligibility criteria are strict and the principle of joint and several liability means that the decision to form a group must be taken with careful consideration.
By thoroughly assessing your corporate structure against the eligibility criteria and weighing the benefits against the responsibilities, you can make a strategic decision that streamlines your compliance and optimizes the tax position of your entire group.
Is a Tax Group Right for Your Business?
Our expert tax advisors can assess your eligibility and guide you through the process of forming a Tax Group in the UAE.
