Corporate Tax in the UAE: Recognition as ‘Tax Groups’

After the official start date of June 1st, 2023, Corporate Tax (CT) in the United Arab Emirates (UAE) has come into effect. For companies starting their financial year after this date and ending on May 31st, 2024, their first tax return filing will be at the end of this year; for those starting on January 1st, 2023, CT will be levied from the next year, 2024, and the filing halfway through 2025.

The UAE Ministry of Finance has introduced the lowest Corporate Tax among the members of the GCC with a rate of 9% for companies whose taxable income is over AED 375,000 (about 102,000 USD).

While the UAE tax authorities are gradually providing updates on corporate tax regulations, many business owners are eagerly awaiting information on the establishment of 'Tax Groups'.

A tax group involves several companies operating under a dominant shareholder or a group of shareholders coming together to form a consolidated tax group. The main advantage of this arrangement is the significant reduction in administrative burdens when filing for corporate tax under a single consolidated return provided by the parent company.

For example, a mid-sized developer might have property and facilities management companies operating under its parent company. Similarly, a family-owned business could have multiple entities linked by a common shareholding, making them eligible for tax group recognition (Tax groups are also allowed under VAT).

However, before such groups can be recognized, they need approval from the UAE tax authorities. While the online corporate tax registration process for certain entities is already enabled, such tax group registration remains pending. Individual entities within the group should first register themselves before applying for tax group status.

There are three main factors for businesses to consider when forming a tax group:

1. Elimination of intra-group transactions, leading to reduced transfer pricing compliance.

2. Ability to offset losses between entities within the tax group.

3. Reduction of administrative burdens due to the filing of a single consolidated return by the parent company.

Industry sources predict that the first tax group under the corporate tax regime could be registered quite soon, as the UAE's corporate tax regime became effective on June 1st.

Establishing a parent company structure is common among large corporate entities in the UAE, as well as companies with multiple subsidiaries. Forming a tax group is an option but not mandatory, provided the entities fulfill the conditions stated under clause 1 of Article 40 of the Corporate Tax Law, and the application for forming or joining a tax group must be submitted to the FTA before the end of the relevant tax period.

In conclusion

Establishing a tax group in the UAE is an attractive option for companies seeking to streamline their tax reporting processes and leverage benefits such as loss offsetting and simplified transfer pricing compliance. Although the establishment of a tax group is not mandatory, it can still be a recommended choice for companies to reduce their costs and their administrative burdens.

At PHC Advisory we are constantly updated on the relevant news on business matters in the UAE. Feel free to follow our channel and contact us at info@phcadvisory.com if you have any inquiries or if you need accounting services in Dubai.

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