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Tax planning and optimization are crucial considerations for companies operating in the United Arab Emirates (UAE). One option available to UAE companies is to form a Tax Group, allowing them to be treated as a single taxable entity. This article explores the process of forming a Tax Group, its benefits, and the administrative responsibilities associated with it.
Eligibility for Forming a Tax Group
To form a Tax Group in the UAE, the parent company (either directly or indirectly) must hold at least 95% of the share capital and voting rights of each subsidiary company involved. Let’s take an example to understand this better:
- Company A owns 20% of Company B and 100% of Company C.
- Company C, in turn, owns 80% of the shares of Company B.
In this scenario, Company A indirectly owns 100% of the shares of Company B (80% via Company C), making it eligible to form a Tax Group that includes both Company B and Company C.
It’s important to note that for a Tax Group formation, neither the parent company nor any of the subsidiaries can be an exempt person or a Free Zone entity enjoying the 0% corporate tax rate. Additionally, all companies within the Tax Group must use the same financial year and prepare financial statements using the same accounting standards.
Considerations for Foreign Entities
UAE subsidiaries owned by a foreign parent company can also form a Tax Group. However, in such cases, an intermediary UAE parent company must hold the UAE subsidiaries and act as the “parent” for tax purposes. The foreign parent company’s ultimate ownership does not hinder the formation of a Tax Group, as long as the UAE subsidiaries are controlled and managed within the UAE and deemed UAE resident entities for tax purposes.
Foreign entities themselves cannot be included in a Tax Group, as only UAE resident juridical persons can form or be part of a Tax Group.
Tax Treatment and Administration
Once a Tax Group is formed, it is treated as a single taxable entity. The parent company assumes the responsibility for administering and paying corporate tax on behalf of the entire group.
The 0% tax threshold of AED 375,000 applies to the Tax Group as a single taxpayer, regardless of the number of entities comprising the group.
During their membership in the Tax Group, both the parent company and each subsidiary have joint and several liability for the UAE Corporate tax obligations of the Tax Group. However, with approval from the Federal Tax Authority, this joint and several liability can be limited to specific named members of the Tax Group.
To determine the taxable income of the Tax Group, the parent company must consolidate the financial accounts of each subsidiary for the relevant tax period. This consolidation involves eliminating transactions between the parent company and each subsidiary within the group.
Forming a Tax Group can simplify tax compliance and streamline administration for UAE companies, providing potential tax benefits and optimizing overall tax planning strategies.
Please note: that the information provided in this article is for general informational purposes only and should not be considered as legal, financial, or tax advice. It’s advisable to consult with qualified professionals or seek guidance from relevant government authorities for specific guidance related to tax group formation and taxation matters.
Registered Tax Agency and Agents
Tax Agency Registration Name: PARKER RUSSELL OBAID AUDITING
Tax Agency Registration Number: 30000269
Tax Agent Registration Name: Mansour Abdulwahab Mohamed Ahmed
Tax Agent Registration Number: 20037867
To speak with our corporate tax expert kindly email us at: infodubai@pr-uae.com or sales@pr-uae.com