By joining a tax group, companies in the United Arab Emirates can take advantage of the provisions of the Corporate Tax Law. Among these advantages are the chance to offset group income and losses and the option to pay taxes jointly. But qualifying for tax grouping calls on meeting exacting ownership criteria. This paper will provide a thorough analysis of the most current business situation on the creation of tax groups following the law.
What are the Majors Ownership Requirements Regarding the Formation of a Tax Group?
Should a parent company want to create a tax group under the United Arab Emirates Corporate Tax Law, it must meet certain ownership requirements. Apart from enabling financial management and organizational integration, these cutoff points help to unify the teams as well.
The Bare Minimum Requirement of Ownership is 95%
At least 95% of stock, voting rights, and profit claims in its subsidiaries must be owned by the parent company. Direct or indirect ownership has a major influence on the subsidiary’s financial and operational decisions.
Equity Ownership: The parent firm should ideally own at least 95% of the share capital of every single subsidiary business.
Voting Rights: The parent company must control at least 95% of the voting shares contained within each division if it is to be able to make major decisions.
Claims for profit: The parent firm must maintain at least 95% of the net assets and revenue produced by the subsidiaries to guarantee that the financial interests of the group are in line.
A high level of ownership helps to unify management and raises the probability that every group unit will operate effectively.
Regular adherence to ownership policies
Every tax quarter, it is absolutely necessary to meet the minimum ownership criterion of 95%. Should a subsidiary’s income drop below this threshold at any time during the tax term, it is considered to have separated from the tax group at the start of that period. This legislation highlights the need to follow ownership rules.
Entity’s legal standing
The UAE’s legislation deems every tax group member a legal person or company. Among the many various kinds of organizations that might qualify for this program are limited liability companies, corporations, trusts, and public joint stock companies (PJSCs). Establishments, civil enterprises, and unincorporated partnerships are not considered taxable entities.
Residency Criteria
To follow the business tax rules, every member of a tax group must be a resident of the United Arab Emirates. This apartment may be arranged in two distinct ways as
- the main office is in charge of making major management decisions.
- A consistent site offering the tools and personnel required for the running of the company.
Exempt entities, including government agencies or nonprofit organizations, are not permitted to organize or join tax associations; qualified free zone residents (QFZPs) are also not permitted to do so.
Uniform fiscal years and widely recognized accounting standards
Using the same accounting standards, either IFRS or IFRS for SMEs, every tax group member must submit a report on the same day at the end of the fiscal year. This approach ensures that the reporting will be open and honest.
Effects of Ownership-Related Policies
Total Control of the Subsidiary
According to the 95% ownership standard, parent firms should use operational management to properly monitor their subordinates. When this degree of control exists, one may decide in a centralized way and properly run the organization.
Problems with the Ownership Organizational Structure
Companies with particularly complex ownership arrangements may find it challenging to qualify for the 95% cap. For example, companies owned by a minority of the population or those with local sponsors would have to change their operations to follow these requirements. Tax groups exclude free zone enterprises, so their eligibility is restricted.
Risk of conformity
Particularly during mergers, acquisitions, and other forms of corporate restructuring activities, maintaining ownership criteria throughout business restructuring procedures might be challenging. Should any of these criteria remain unmet throughout the tax period, one runs the risk of being expelled from the tax group.
Advantages of Meeting Ownership Requirements
A variety of advantages are offered to firms that fulfill the ownership criterion:
- The administrative load is lessened as all group members are covered by one company tax return.
- Regarding the allocation of profits and losses, those in the Tax Loss Offset category are exempt from extra tax obligations.
- Consistent accounting principles and fiscal years help to clarify reporting obligations.
Final idea.
Though strict ownership restrictions are necessary, forming a tax group in the United Arab Emirates has some significant advantages. Should a business choose to join a tax group, it first has to look closely at its ownership and operations to make sure they meet the requirements. Dealing with difficult issues like restructuring or worries about exclusions linked to activities running in free zones calls for knowledge of corporate tax consultants. These rules say tax grouping enables United Arab Emirates companies to get the most feasible tax revenue.
