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 |
|
2 |
Transferor and transferee are Taxable Persons |
The juridical person must be a Taxable Person under the CT Law which inter alia includes:
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% |
|
4 |
Exempt Person and Qualifying Free Zone Person (‘QFZP’) |
Additionally, Resident Persons opting for Small Business Relief cannot claim the Relief. |
5 |
Financial Year and Accounting Standard |
|
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*. |
|
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:
- 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.
- 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.
- 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.
