Resident Person under the Corporate Tax Law and under Double Taxation Agreements

The Parent Company and each Subsidiary of a Tax Group must be a Resident Person. ^[23] Under the Corporate Tax Law, a juridical person is a Resident Person where:

• It is incorporated or otherwise established or recognised under the applicable legislation of the UAE; ^[24] or

• It is incorporated or otherwise established or recognised under the applicable legislation of a foreign jurisdiction but is effectively managed and controlled in the UAE. ^[25]

In addition, juridical persons can be members of a Tax Group only if they are regarded both as a Resident Person under the Corporate Tax Law as well as a tax resident of the UAE for the purposes of an applicable Double Taxation Agreement. ^[26] In other words, a juridical person cannot be a member of a Tax Group if they are considered tax resident in a foreign jurisdiction under a Double Taxation Agreement in force in the UAE.

Double Taxation Agreements are bilateral agreements between the UAE and another jurisdiction for the elimination of double taxation with respect to taxes on income and capital and the prevention of tax evasion and avoidance. Such agreements aim, inter alia, at resolving double taxation in instances where a person is a dual resident in the UAE and in another jurisdiction. For this purpose, Double Taxation Agreements generally provide rules for determining in which jurisdiction a Person is regarded as tax resident for the purposes of the agreement (see Section 4.2.2.1 in relation to the “tie-breaker rule”).

Dual resident persons

If a Resident Person is also liable to an income tax or any other tax that is similar to Corporate Tax in a foreign jurisdiction by virtue of residence, place of management or any other criterion of a similar nature, the Resident Person is considered a dual resident person. Whether a dual resident person can be a member of a Tax Group will depend on the relevant facts and circumstances, as explained below.

Documentation to prove tax residence

For Tax Group purposes, the following Resident Persons are required to maintain the requisite documentation to support that they are not tax resident in a foreign jurisdiction in which they are incorporated or effectively managed and controlled: ^[31]

• Juridical persons incorporated or otherwise established or recognised under the applicable legislation of a foreign jurisdiction but that are effectively managed and controlled in the UAE; and

• Juridical persons incorporated or otherwise established or recognised under applicable legislation of UAE but that are effectively managed and controlled in a foreign jurisdiction.

The documentation to be maintained includes either of the following:

• A confirmation issued by the relevant tax authority of that foreign jurisdiction to support that they are not tax resident under domestic law of that foreign jurisdiction. ^[32]

• A confirmation issued by the relevant competent authorities for the purposes of the application of the relevant Double Taxation Agreement. ^[33]

Failure of a dual resident person to maintain documentation can mean that the Resident Person is unable to prove it is not tax resident in a foreign jurisdiction. In those circumstances, the FTA may treat the dual resident as if the conditions for being part of a Tax Group were not met for Tax Periods for which insufficient documentation is available.

Parent Company held by a non-resident person

A foreign company, that is not a Resident Person, cannot qualify to be a member of a Tax Group. However, it is possible that a foreign company directly or indirectly holds shares or interests of several juridical Resident Persons including a Parent Company. In such a case, the juridical Resident Persons (Subsidiaries of the foreign company) can form a Tax Group provided that such companies are held by a Parent Company which is a juridical Resident Person and meets all of the conditions under Article 40(1) of the Corporate Tax Law such that it qualifies as the Parent Company of the Tax Group.

Example 1: Resident Subsidiaries of a foreign parent forming a Tax Group

Company F (incorporated in and tax resident of a foreign country) holds 100% of the share capital of Company E, which in turn holds 100% of the share capital of Company A, Company B and Company C. Company A, Company B, Company C and Company E are all incorporated and resident in the UAE for Corporate Tax purposes.

Assuming all other conditions to form a Tax Group are met, Company E, as a Parent Company, can make an application together with Company A, Company B and Company C to the FTA to form a Tax Group.

What is share capital?

Share capital is defined as the nominal issued and paid-up share capital, or Membership or Partnership Capital, as applicable. ^[35]

The term “share” refers to a unit of ownership in a company which entitles the holder to a number of rights. These may include the right to vote, the right to participate in distributions of company profits, and the right to a return on the company's capital. The particular rights attached to a share will depend on the constitutional documents of the company. The term includes all types of shares issued by a company which carry a right to participate in the company's profits and liquidation proceeds, such as Ordinary Shares, Preferred Shares, Redeemable Shares etc. The term should be interpreted consistently with the term “shares or capital” and other usage of the term “share capital” in the Corporate Tax Law ^[36] and implementing decisions. ^[37] Any related guidance on those terms can also be applied. For instance, an ownership interest shall qualify as “share or capital” if it is classified as an equity interest under the Accounting Standards as applied by the Person holding the ownership interest. ^[38]

Share capital consists of share capital that has been issued and paid-up and does not include share capital that has been authorised but not yet issued and/or paid up. Rights of shareholders (such as voting rights and rights to receive profit distributions) are usually determined by reference to the nominal or par value (for example the “unit value”) of the shares, in which case the share capital condition requires the Parent Company to own at least 95% of the nominal value of the share capital. Usually, the nominal value is determined separately from any share premium (i.e. amounts contributed on shares in excess of their nominal value).

If the share capital of a company does not have nominal value, the rights of shareholders would usually be determined by reference to a different metric, such as a capital account allocated to a shareholder. In such a case, the share capital condition requires the Parent Company to own at least 95% of such a metric.

Share capital also includes capital invested in other forms of juridical persons (other than companies) such as Membership or Partnership Capital (which is the total amount of capital held by such juridical person that can be allocated to specific owners). Capital in an incorporated partnership or units of a trust also qualify as share capital where such entities are treated as juridical persons according to the law under which they are incorporated.

A Parent Company must hold at least 95% of voting rights and entitlement to profits and net assets in the capital of the Subsidiaries i.e. the “voting rights condition” and the “profits and net assets condition” (see Sections 4.4 and 4.5). ^[39]

Ownership of share capital

The share capital ownership condition under Article 40(1)(b) of the Corporate Tax Law refers to the legal owner of the shares, that is the Person who holds the legal title to the shares or interest. Where the shares do not have a legal title, this will be the Person who is otherwise recognised as the owner of the share capital from a legal perspective.

Where the Parent Company legally owns directly or indirectly at least 95% of the share capital of the Subsidiary, the share capital ownership condition should be met. However, whether this is the case should be determined based on the particular facts and circumstances on a case-by-case basis and after considering the specific legal arrangements that are in place.

The share capital ownership is not met if a Person transfers the legal title in shares or ownership interest to another Person while retaining the voting rights and entitlement to other benefits from such shares or interest.

Further, even if the share capital ownership condition is met, it should be assessed separately whether the voting rights condition and the profits and asset condition are also met (see Sections 4.4 and 4.5).

Example 2: Legal ownership of shares

Company A owns 80% of the shares in Company B. Company C holds the remaining 20% of the shares in Company B. Company A, Company B and Company C are incorporated and tax resident in the UAE.

Company C and Company A enter into an agreement for the transfer of economic ownership under which Company C will continue to legally own 20% of the shares in Company B but will do so on behalf of Company A.

Company C will transfer all rights relating to the 20% to Company A and grant Company A the right to request the transfer of legal title to the 20% at any time. In return for the transfer of economic ownership, Company A pays a consideration equal to the Market Value of the 20% of shares held in Company B to Company C.

After the transfer, Company A owns 80% of the shares in Company B outright and 20% as an economic owner. However, the share capital ownership condition is determined based on legal ownership of the shares and not based on effective ownership. As Company A legally only owns 80% of the shares in Company B, the share capital ownership condition is not met. Therefore, Company A and Company B cannot form a Tax Group.

Determining the 95% share capital ownership threshold

Whether the condition to hold at least 95% of share capital is met should be assessed by reference to the nominal issued or paid-up share capital. ^[40] . As explained in Section 4.3.1, the nominal issued or paid-up share capital represents the metric used by the juridical person to determine the proportionate rights of shareholders.

This is computed as: X Y * 100% where,

• X is the portion of nominal issued and paid-up share capital of the Subsidiary that is owned by the Parent Company directly or indirectly through one or more Subsidiaries.

• Y is the total nominal issued and paid-up share capital of the Subsidiary.

It is possible that the Subsidiary issues shares with different nominal values through the use of different share classes. In such a case, testing the 95% ownership condition only on the basis of the number of shares held can lead to an inaccurate representation. Instead, the number of shares should be weighted by the nominal value of each share when computing X and Y to provide an accurate representation of the shareholding.

It is also possible that the share capital of a Subsidiary consists of different types of shares, for example Ordinary Shares, Preferred Shares, etc. All types of shares held by the Parent Company in the Subsidiary directly or indirectly should be considered when computing X and Y.

Any instruments issued that are not share capital (such as convertible loans, warrants, options over shares that have not been issued) should not be considered in determining whether the share capital ownership condition has been met.

Certain juridical persons do not have capital divided into shares with a nominal value, but instead determine the entitlement of their owners by reference to Membership or Partnership Capital. In such cases, the share capital condition should be tested by reference to such Membership or Partnership Capital. This means capital paid to a partnership or trust (that is a juridical person) by a Parent Company (directly or indirectly) or capital held in a capital account for the benefit of the Parent Company should be considered as X and the total capital account of the partnership or trust should be considered as Y.

Indirect ownership

The Parent Company must own at least 95% of the share capital in the Subsidiaries, either directly or indirectly through one or more intermediate Subsidiaries of the Parent Company. The condition is also met if the combination of direct and indirect ownership adds up to at least 95%. ^[41]

Example 4: Indirect ownership

Company A, Company B and Company C are all juridical Resident Persons. Company A owns 90% of the share capital of Company B and 80% of the share capital of Company C. The remaining 10% of the share capital of Company B is owned by Company C. The remaining 20% of the share capital of Company C is owned by third parties.

As Company A owns less than 95% of the share capital in Company C, Company A does not meet the share capital condition in respect of Company C. Therefore, Company C is not a Subsidiary of Company A, and the two cannot form a Tax Group.

Company A directly owns 90% of the share capital in Company B. The indirect ownership of share capital in Company B can only be considered if held through one or more Subsidiaries. As Company C is not a Subsidiary of Company A, the shares owned by Company C cannot be considered in determining whether the share capital condition is met by Company A in relation to Company B. Therefore, the condition is not met in case of Company B as well. Company A cannot form a Tax Group with either Company C or Company B.

If a Parent Company indirectly owns the share capital of a juridical Resident Person through non-wholly owned Subsidiaries, the holding of the Parent Company in that juridical Resident Person should be counted proportionately i.e. in proportion to the Parent Company's holding in the intermediate non-wholly owned Subsidiary.

Example 5: Entities held through non-wholly owned Subsidiaries

Company A, Company B and Company C are all juridical Resident Persons. Company A holds 95% of the shares in Company B and Company B holds 95% of the shares in Company C.

Assuming all other conditions of Article 40(1) of the Corporate Tax Law are met, Company A can form a Tax Group with Company B. However, Company C cannot be a member of this Tax Group since Company A's indirect shareholding in Company C is less than 95% (i.e. 95% × 95% = 90.25%).

Alternatively, Company B holds 95% of shares in Company C. Assuming the other conditions of Article 40(1) are met, Company B can form a Tax Group with Company C.

However, a juridical Resident Person can only be part of one Tax Group at any given time. Hence, during any Tax Period, Company B can only be part of one Tax Group and not both the Tax Groups, i.e. Tax Group with Company A or Tax Group with Company C.

To determine the share capital ownership threshold, a direct ownership held by the Parent Company can be combined with any indirect shareholding or equivalent ownership interest held by a Subsidiary. The share capital ownership condition is met if total ownership (i.e. direct and indirect ownership) is 95% or more.

Example 6: Direct and indirect shareholding in a Subsidiary

Company A, Company B and Company C are all juridical Resident Persons. Company A wishes to form a Tax Group with Company B and Company C.

Company A holds 95% shares in Company B. Assuming all other conditions of Article 40(1) of the Corporate Tax Law are met, Company B qualifies as a Subsidiary. Company A can form a Tax Group with Company B.

Company A holds a 50% direct stake in Company C. The remaining 50% is held by Company B. Accordingly, Company A holds 47.5% (i.e. 95% of 50%) of the share capital of Company C indirectly through Company B (which is considered a Subsidiary of Company A). As a result, the total of Company A's direct (50%) and indirect (47.5%) ownership of the share capital of Company C is 97.5%. This means Company A meets the share capital ownership condition in respect of Company C. Assuming all other conditions of Article 40(1) of the Corporate Tax Law are met, Company C can also be a member of the Tax Group with Company A and Company B.

Transfer of shares between members of a Tax Group

The transfer of shares of a Subsidiary held by one member of a Tax Group to another member of the same Tax Group will not impact the share capital ownership condition provided the Parent Company continues to hold at least 95% share capital of that Subsidiary directly or indirectly through one or more Subsidiaries.

Example 7: Transfer of shares between members of a Tax Group

Company A, Company B, Company C and Company D are all juridical Resident Persons. Company A holds 100% of the shares in Company B and 100% of the shares in Company C. Company B holds 95% of the shares in Company D. All four companies have formed a Tax Group for the Tax Period beginning 1 January 2024.

On 1 December 2024, Company B transfers its 95% shares in Company D to Company C.

The share capital ownership condition requires that Company A continuously holds at least 95% of the share capital of Company D, either directly or indirectly. Company A's direct or indirect shareholding of Company D during the Tax Period beginning 1 January 2024 is as follows:

• Before the transfer, Company A's indirect ownership of Company D was 95% (i.e. 100% of 95%).

• After the transfer on 1 December 2024, Company A's indirect ownership remains at 95% (i.e. 100% of 95%).

As Company A has held an indirect ownership of at least 95% in Company D at all times throughout 2024, the share capital ownership condition has been met continuously for 2024. This means it is possible for Company D to remain a member of the Tax Group, provided all the other conditions continue to be met as well.

Transfer of shares outside the Tax Group

Transactions for the sale of shares between independent parties can be subject to a long negotiation process, usually resulting in the parties entering into a share purchase agreement (“signing”) and a transfer of the shares (“closing”). Signing and closing can occur on the same date or there can be a time gap between signing and closing.

In the case of a time gap, questions can arise on whether the buyer or seller of the shares can continuously meet the share capital ownership condition between signing and closing of a share purchase agreement. As discussed in Section 4.3.2, the owner for the purposes of the share capital ownership condition is the legal owner of the share capital. Whether the legal ownership is transferred from buyer to seller depends on the specifics of the share purchase agreement. As a principle, until such time as the legal title in the shares is transferred to the buyer, the seller should be considered as the legal owner of the shares. As a result, it is possible for the seller to meet the share capital ownership condition after signing. Once the legal title of shares is transferred to the buyer, the buyer will be the legal owner of the shares. After that date, it is possible for the buyer to meet the share capital ownership condition.

If a sale of all the shares in a Subsidiary happens within a Tax Period, neither the seller nor the purchaser of the shares can meet the share capital ownership condition for the entire Tax Period, except in a scenario where a new Parent Company can make an application to replace the existing Parent Company without a discontinuation of the Tax Group. ^[42]

Therefore, the Subsidiary is considered to leave the Tax Group as of the start of the Tax Period in which the share capital ownership condition was no longer met. ^[43] In addition, the purchaser would not be able to form a Tax Group for that Tax Period, as it has not met the share capital ownership condition continuously for the entire Tax Period.

If the other conditions are met, the purchaser may form a Tax Group with the Subsidiary from the next Tax Period.

General

The voting rights condition requires the Parent Company to hold at least 95% of the voting rights in the Subsidiary, either directly or indirectly through one or more Subsidiaries. ^[44] The condition is also met if the combination of direct and indirect entitlement to voting rights adds up to at least 95%. An indirect entitlement to voting rights is only considered if held through one or more intermediate Subsidiaries of the Parent Company.

Although the voting rights condition will often be met if the share capital ownership condition is met, voting rights need to be assessed independently and can produce different results if there are restrictions on voting rights or if voting rights do not fully align with nominal share capital ownership.

To determine this, voting rights on matters that require shareholder approval are relevant. Voting rights on matters that only require board approval are not relevant. What qualifies as a matter requiring shareholder approval would usually depend on the constitutive documents of the entity and any shareholder's agreement that sets out the rights, responsibilities, and obligations of the shareholders of the entity. Usually, matters such as appointment of directors, Dividends and the decision to wind up a juridical person require shareholder approval.

The voting rights condition is determined by whether the Parent Company and/or a relevant intermediary Subsidiary legally holds voting rights on shareholder matters.

A contractual agreement to vote in a certain way would not generally limit the legal right of a shareholder to vote. Similarly, appointing another person to vote on behalf of the shareholder through a proxy arrangement does not generally result in the shareholder losing its right to vote, as the proxyholder exercises the voting right on behalf of the shareholder. It is irrelevant for the voting rights condition whether the Parent Company and/or a relevant intermediary Subsidiary has exercised or regularly exercises its voting rights attached to the shares of the Subsidiary it owns.

Generally, voting rights are tied to the nominal value of share capital. Therefore, the voting rights condition will usually be met if the share capital ownership condition is met. However, some shares may not carry voting rights (non-voting shares) or carry extraordinary voting rights (see Section 4.4.2).

Where a Subsidiary has issued shares with voting rights as well as shares without voting rights, the latter should be excluded when determining whether the voting right condition has been met. This means that it is possible that the share capital ownership condition is met but the voting rights condition is not met.

Alternatively, where the Parent Company or a relevant intermediary Subsidiary transfers legal title to the shares in or interest to another Person while retaining the voting rights and entitlement to other benefits from such shares or interest, those voting rights would still count for the purposes of the voting right condition (even though the shares would not be counted for the share capital ownership condition (see Section 4.3.2)).

Extraordinary voting rights

Sometimes a juridical person issues shares which carry extraordinary voting rights to significant shareholders such as founders as compared to other shareholders. For instance, holders of these shares can have the right to appoint one board member or the right to veto certain important business decisions such as mergers, significant acquisitions and disposals or liquidation of the company.

If such shares are held by a minority shareholder holding a small stake of 5% or less, such shares do not automatically prevent the formation of a Tax Group. For instance, the right of a minority shareholder to appoint a board member does not jeopardise the voting rights condition, provided that the Parent Company and/or a relevant intermediary Subsidiary still has the ability to appoint a majority of the board members.

In addition, veto rights attached to certain shares do not prevent meeting the voting rights condition, provided that the Parent Company and/or a relevant intermediary Subsidiary continues to hold 95% of the voting rights on shareholder decisions. In other words, different classes of shares with different voting rights should generally not affect the voting right condition if the Parent Company can demonstrate that it directly or indirectly holds 95% or more of the total/overall statutory voting rights of the Subsidiary.

However, the above would need to be considered on a case-by-case basis depending on all the facts and circumstances.

Indirect holding of voting rights

The same principle as discussed above in relation to share capital ownership applies to determine the percentage of voting rights held directly or indirectly. In this regard, see Section 4.3.3 for situations where the Parent Company holds voting rights indirectly through Subsidiaries and how to determine the percentage of voting rights held by the Parent Company.

Profits condition

The profits condition requires that the Parent Company is, directly or indirectly, entitled to receive at least 95% of profits from the Subsidiary. This consists of distributable profits and profits that are not distributable. Distributable profits of a juridical person are determined by the corporate law and applicable legislation of the UAE or a foreign jurisdiction which governs the formation or existence of the Subsidiary.

Often distributable profits will be the accumulated realised net profits based on the applicable Accounting Standards. If certain profits are not available for distribution, such as those allocated to a (non-distributable) legal reserve, the shareholders can generally be considered to hold a right to such profits and the profits condition can be met if the Parent Company (whether directly, or indirectly through one or more Subsidiaries) holds at least 95% of the rights to such profits if they were to be distributed.

Any portion of share capital that is not held by the Parent Company or a relevant intermediary Subsidiary should be taken into account when assessing who would have the right to receive profit distributions.

Profit allocation can be determined by various factors, such as shareholder agreements, company bylaws, or specific arrangements made among the shareholders. Moreover, different classes of shares with different economic entitlement (e.g. Preferred Shares) may impact the actual entitlement of the Parent Company and/or a relevant intermediary Subsidiary. These factors can allow for different profit-sharing ratios from the shareholding/ownership percentages. Irrespective of the percentage of the legal ownership interest held by the Parent Company (whether directly, or indirectly through one or more Subsidiaries), the profits condition requires that the Parent Company is directly or indirectly entitled to at least 95% of the profits of the Subsidiary.

If a juridical person contractually agrees to share a portion of operational results with a third party, this would not necessarily reduce a shareholder's right to the profits, provided that the contractual entitlement is not an equity relationship. However, this would need to be determined based on the facts and circumstances in each case.

Entitlement to at least 95% of the Subsidiary's net assets

The net assets condition is tested as the direct or indirect entitlement to at least 95% of the net assets of the Subsidiary upon winding-up of the Subsidiary. ^[46] The net assets are defined by the value of the Subsidiary's total assets minus its total liabilities. In other words, the net assets of the Subsidiary upon liquidation after all creditors have been settled. The total amount of net assets equals the equity of the shareholders in the Subsidiary.

Impact of different share classes

If a company has several share classes with different economic entitlements, situations can occur where meeting the profits and net assets condition is not immediately obvious. This is illustrated in the example below.

Transfer of shares outside the Tax Group

In circumstances where a shareholder has entered into an agreement to sell its shares, it depends on the specifics of the share purchase agreement whether the economic entitlement is transferred from seller to buyer and from which date such a transfer is effective. As a general principle, the buyer will be considered entitled to the profits and net assets relating to the shares once the share purchase agreement has become unconditional. As of that moment, the buyer can meet the profits and net assets condition (assuming the shares transferred represent at least 95% entitlement to profits and net assets). That also means the seller no longer meets the profits and net assets condition as of that moment.

However, depending on the relevant facts and circumstances, if there are material conditions to be met that are not within the control of the buyer (for example, a regulatory approval or other approval by third parties), the buyer may not be effectively entitled to the profits and net assets relating to the shares transferred until such time that the material conditions are met. In each case, this will depend on the particular facts and circumstances.

Indirect holding of rights to profits or net assets

The same principles as discussed above in relation to share capital ownership and voting rights apply to determine the percentage of rights to profits and net assets held directly or indirectly. In this regard, see Section Error! Reference source not found. for situations where the Parent Company holds rights to profits or net assets indirectly through Subsidiaries and how to determine the percentage of rights to profits or net assets held directly or indirectly by the Parent Company.

General

A Tax Group is intended to allow for the grouping of entities which are subject to Corporate Tax in the same manner. In line with this principle, an Exempt Person or a Qualifying Free Zone Person cannot form or join a Tax Group. ^[49]

By contrast, a juridical Resident Person that is a Free Zone Person but not a Qualifying Free Zone Person can be a member of a Tax Group, whether as a Parent Company or as a Subsidiary, if the other conditions for forming or joining a Tax Group are met. The mere fact that a juridical person is incorporated or established in a Free Zone is not, in itself, a barrier to being a member of a Tax Group.

A branch of a Non-Resident Person could also fall within the definition of a Free Zone Person, if it is registered in a Free Zone. ^[50] However, a branch of a Non-Resident Person registered in a Free Zone cannot be a member of a Tax Group since it would not meet the juridical person condition, as the branch does not have a separate legal personality from its head office. The Non-Resident Person of which the branch is a part would also not meet the Resident Person condition. ^[51]

Where a member of a Tax Group becomes an Exempt Person during the relevant Tax Period, or is a Qualifying Free Zone Person for a Tax Period and does not elect to be subject to tax under Article 19 of the Corporate Tax Law, the Exempt Person condition or Qualifying Free Zone Person condition will no longer be met. As a result, the relevant member of the Tax Group shall be treated as leaving the Tax Group from the beginning of the Tax Period in which the event took place. ^[52]

In case the Parent Company becomes an Exempt Person, the Tax Group ceases to exist from the beginning of the Tax Period in which it becomes an Exempt Person, ^[53] and all members of the Tax Group will be subject to Corporate Tax on a standalone basis (also see Section 7), unless the Parent Company is replaced by another Parent Company that meets the conditions to form a Tax Group (see Section 6.4). ^[54]

Exception for Government Entities

There are scenarios where a Government Entity, is the shareholder of juridical Resident Persons. Because Government Entities are Exempt Persons, they cannot form or join a Tax Group as per the Exempt Person condition under the Tax Group regime.

However, taxable Subsidiaries of a Government Entity can form or join a Tax Group without the Government Entity, subject to meeting certain conditions. ^[55]

Small Business Relief

A Resident Person with Revenue below or equal to AED 3 million in a relevant Tax Period and all previous Tax Periods can elect for Small Business Relief. ^[56] As a Tax Group will be treated as a single Taxable Person, Small Business Relief applies to the Tax Group rather than to the individual members of the Tax Group. This means the Revenue threshold for Small Business Relief applies to the consolidated Revenue of the Tax Group, and not to each member individually.

If a juridical Resident Person that is eligible for Small Business Relief during the relevant Tax Period joins a Tax Group, it will no longer be eligible for Small Business Relief on a standalone basis as the Tax Group is treated as a single Taxable Person. The Small Business Relief would be applicable at the level of that single Taxable Person (i.e. the Tax Group) if the relevant conditions are met. Therefore, the Tax Group can only benefit from the Small Business Relief if on a consolidated basis:

• The Tax Group has a Revenue below or equal to AED 3 million in a relevant Tax Period and all previous Tax Periods; ^[57] and

• None of the members of the Tax Group is a Constituent Company of a Multinational Enterprises Group that is required to prepare a Country-by-Country Report under the UAE's Country-by-Country Reporting legislation. ^[58]

General

A key aim of the Tax Groups regime is to reduce the number and overall burden of tax filings. For example, Taxable Persons might have different Financial Years which would require the apportionment of results and thus add a layer of complexity. Therefore, a Tax Group requires all members to have the same Financial Year ^[59] and have the same Tax Period. ^[60]

In the UAE Corporate Tax Law, the Financial Year is defined as either the Gregorian calendar year (beginning on 1 January and ending on 31 December) or a 12-month period for which Financial Statements according to the applicable Accounting Standards are prepared. ^[61]

If the Parent Company of a Tax Group wants to change its Financial Year, all members of the Tax Group would need to change their Financial Year simultaneously as well for the Tax Group to continue existing. If some but not all of the Tax Group members change their Financial Year, the Financial Year condition will no longer be met in relation to those members that have a different Financial Year from the Parent Company. Accordingly, the members will leave the Tax Group.

Newly established juridical person joining a Tax Group

A newly established juridical person can join an existing Tax Group from the date of incorporation if the conditions of Article 40(1) of the Corporate Tax Law are met from the date of incorporation onwards. ^[62] The Financial Year condition can be met provided the end date of the Financial Year of the newly established juridical person joining the Tax Group is aligned with that of the existing members of the Tax Group. This means that if the other conditions are met, a newly established juridical person can join a Tax Group from the date of its incorporation, and it does not have to wait until the start of the Tax Group's next Tax Period. However, if the Financial Year of the newly incorporated juridical person differs from the Financial Year of the Tax Group upon incorporation, it cannot join the Tax Group as of the date of incorporation. It will need to first change its Financial Year to align with the existing Tax Group members.

Change of Tax Period in order to form or join a Tax Group

If a juridical Resident Person meets all the conditions for forming or joining a Tax Group except for the Financial Year condition, that person can make an application to the FTA to change the start and end date of its Tax Period, or use a different Tax Period ^[63] and align their Financial Year (i.e. the start and end date of a financial reporting period) so that a Tax Group can then be formed or that person can join an existing Tax Group.

The FTA shall allow that Person to change its Tax Period to align Financial Years for the purpose of forming a Tax Group or joining an existing Tax Group ^[64] provided the Tax Period is not extended to more than 18 months or reduced to less than 6 months. ^[65] However, Taxable Persons cannot change their Tax Period end date to a date that none of the intended Tax Group members apply, if forming a Tax Group is the sole purpose for the change in Tax Period. For instance, if the conditions for forming a Tax Group are first met on 1 March of a given year, and the entities have a Financial Year ending on 31 December each year, it will ordinarily not be possible to form a Tax Group until 1 January of the following year as the conditions were not met continuously throughout the relevant Tax Period. Unless there are valid commercial, economic or legal reasons to change the Tax Period, the companies involved cannot change their Financial Year to start a new Tax Period as per an earlier date.

Subsidiary joins a Tax Group

A Subsidiary can join an existing Tax Group following submission of an application to the FTA by the Parent Company and the relevant Subsidiary if the conditions of Article 40(1) of the Corporate Tax Law are met. ^[100] The application should specify the Tax Period for which the Subsidiary is intended to join the Tax Group. The application must be submitted to the FTA before the end of the Tax Period within which the joining of a Tax Group is requested. ^[101] Upon approval by the FTA, the relevant Subsidiary shall join the Tax Group from the beginning of the Tax Period specified in the application or such other Tax Period determined by the FTA. ^[102]

Newly incorporated entity joins a Tax Group

A newly established juridical person may join an existing Tax Group from the date of incorporation only where it is:

• A newly established Subsidiary; ^[103] or

• A newly established Parent Company replacing the existing Parent Company of the Tax Group. ^[104]

General

A Subsidiary shall leave the Tax Group in the following circumstances:

• Following approval by the FTA of an application made by the Parent Company and the relevant Subsidiary. ^[105] In such a case, the Subsidiary leaves the Tax Group from the beginning of the Tax Period specified in the application or such other Tax Period determined by the FTA. ^[106]

• Where the relevant Subsidiary no longer meets the conditions to be a member of the Tax Group, the Subsidiary leaves the Tax Group from the beginning of the Tax Period in which the conditions are no longer met. ^[107] Further, the Parent Company is required to notify the FTA within 20 business days from the date the conditions are no longer met. ^[108]

Subsidiary ceases to exist upon transfer of Business

If a Subsidiary transfers all of its Business to another member of the Tax Group and ceases to exist as a result of this transfer (for example due to a legal merger), the Subsidiary shall remain a member of the Tax Group until the date it ceases to exist and the Tax Group shall continue to exist. ^[109] The Subsidiary shall be considered to leave the Tax Group on the date it ceases to exist. ^[110]

However, if the Tax Group only comprises two members and one member transfers its entire Business to the other member and the first mentioned member ceases to exist as a result of that transfer, the Tax Group shall be considered to cease to exist on the date that the transfer is effective. ^[111]

Since the Subsidiary (which ceases to exist) leaves the Tax Group on the transfer of its Business, a gain or loss on the assets and liabilities transferred as part of the transfer of the Business may be taken into account while determining the Taxable Income of the Tax Group, except if such a gain or loss would not have been taken into account had the Subsidiary elected for Business Restructuring Relief or Qualifying Group Relief. ^[112]

The exception does not require the former Subsidiary to elect for Business Restructuring Relief ^[113] or Qualifying Group Relief, but instead the exception applies if: ^[114]

• Such an election would have been possible if the Tax Group had not existed; and

• No clawback would have applied under Article 26(4) or Article 27(6) of the Corporate Tax Law.

If the former Subsidiary was not eligible to claim the relief or a clawback would have applied under Article 26(4) or Article 27(6) of the Corporate Tax Law, the gain or loss which was not taken into account on the transfer shall be included as Taxable Income on the date when the former Subsidiary left the Tax Group. ^[115]

Tax Deregistration

A Subsidiary leaving the Tax Group but which does not cease to exist is not required to deregister for Corporate Tax purposes. The Subsidiary's own Tax Registration Number shall be used for its standalone Tax Returns, paying Corporate Tax and any other compliance obligations.

If a Subsidiary of a Tax Group ceases to exist in a Tax Period (for example, through dissolution or liquidation), the relevant Subsidiary is deemed to leave that Tax Group from the start of that Tax Period, ^[128] except if it ceases to exist as part of a Business restructuring taking place within the Tax Group. ^[129]

If the Subsidiary leaves the Tax Group from the start of the Tax Period, it would generally be required to settle its Corporate Tax and Administrative Penalties due and file any Tax Returns for the period between its date of leaving the Tax Group (i.e. the beginning of the relevant Tax Period) and its date of cessation. The former Subsidiary that ceases to exist is required to file an application with the FTA for Tax Deregistration within 3 months of the date when it ceases to exist. ^[130]

The Tax Group itself has a separate Tax Registration Number which is not affected if a Subsidiary leaves the Tax Group, unless the Tax Group itself ceases to exist due to the Subsidiary leaving the Tax Group (see Section 7).

Financial Statements

If a member of a Tax Group leaves the Tax Group or the Tax Group ceases to exist, the Parent Company and each Subsidiary leaving the Tax Group shall prepare standalone Financial Statements using the same accounting basis applied by the Tax Group.

The opening values of the assets and liabilities in the standalone Financial Statements will be the value of those assets and liabilities recorded by the Tax Group at the moment that member left the Tax Group or the Tax Group ceased to exist. ^[131]

If any assets or liabilities are eliminated on consolidation as they are recognised in standalone Financial Statements only as a result of a transfer within the Tax Group, such assets or liabilities will not have a value recorded by the Tax Group. This can apply to internally created goodwill or customer lists that are recognised in the standalone Financial Statements after a transfer within the Tax Group. In such case, if within two years from the date of transfer, the transferee member of the Tax Group leaves the Tax Group or the Tax Group ceases to exist, the gain or loss on transfer of such an asset or liability may be recognised at Market Value, unless the associated income would have been exempt from Corporate Tax Law or not taken into account under any other provision of the Corporate Tax Law (see Section 8.2). ^[132]

Within the Tax Group, any loans between members of the Tax Group will be eliminated on consolidation, meaning they will not have a value recorded by the Tax Group. In such case, such assets and liabilities will have an opening value consistent with the applicable Accounting Standards, determined as if these transactions had occurred without a Tax Group being in existence.

Elimination of intra-group transactions

The requirement to eliminate intra-group transactions within the Tax Group applies to transactions between the Subsidiaries in the same way as it applies to transactions between the Parent Company and any Subsidiary. ^[154] This is consistent with the principle that Taxable Income is determined as if the Tax Group is a single Taxable Person. One exception to this is where a member has recognised a deductible loss in a Tax Period in respect of those transactions prior to joining or forming the Tax Group (as described in Section 8.1.2 below). ^[155]

The requirement to eliminate intra-group transactions within the Tax Group also applies to valuation adjustments and provisions in relation to transactions within the Tax Group ^[156] and changes in the accounting value of assets and liabilities, where they arise as a result of a gain or loss from a transaction within a Tax Group. ^[157]

The above principle similarly applies to income and expenditure. For instance, if one member of a Tax Group (Company A) provides a service to another member of the Tax Group (Company B), this results in an expense and corresponding income that is eliminated on consolidation of the Financial Statements of the Tax Group.

The requirement to eliminate transactions within the Tax Group only applies to periods where the transacting parties are members of the same Tax Group. For instance, if Company A paid AED 100,000 of Interest to Company B in a Tax Period, and Company A and Company B form a Tax Group effective from the beginning of that Tax Period, all of the Interest paid in that Tax Period in which the Tax Group is formed is eliminated. ^[158]

Exception to elimination of intra-group transactions

As an exception to Section 8.1.1, the requirement to eliminate intra-group transactions does not apply to transactions where a member has recognised a deductible loss in a Tax Period in respect of those transactions prior to joining or forming the Tax Group, until the deductible loss is reversed in full. ^[159] In such cases, the transaction is not eliminated and income is included in the Taxable Income of the Tax Group up to the amount that was previously deducted prior to joining or forming the Tax Group. ^[160]

This can occur if, for instance, one member of the Tax Group has recognised a deductible loss by impairing a loan receivable due from another member of the Tax Group prior to the joining or the formation of the Tax Group. In that case, the relevant transaction shall not be eliminated. Any income in relation to the transaction, for example reversal of the impairment, shall be included in the Taxable income of the Tax Group up to the same amount as the deductible loss previously deducted. After the reversal of the impairment has been taken into account up to the same amount as the deductible loss, the exception will no longer apply, i.e. the loan will be eliminated as an intra-group transaction. This prevents the non-taxation of income on an intra- group transaction where that income reverses a loss that had already been deducted prior to forming or joining a Tax Group.

This exception to elimination only applies on transactions that resulted in both a 'deductible loss' before the joining or formation of the Tax Group and a reversal of such loss after the joining or formation of the Tax Group. The exception requires the inclusion of income in relation to such a transaction, but would not allow a Tax Group to claim an additional deductible loss on such a transaction. ^[161] For example, if one member of the Tax Group has recognised a deductible loss by partially impairing a loan due from another member of the Tax Group prior to the joining or the formation of the Tax Group, the exception does not apply to any further impairments of such a loan. As a result, any further impairment (after the lender and borrower form part of a Tax Group) will be eliminated and, therefore, not be deductible. However, the exception to elimination would apply to a reversal of the impairment, as this would generate income that could wholly or partially reverse the deductible loss. ^[162]

In addition, the exception only applies on income that represents a reversal of the deductible loss on the same transaction. ^[163] For instance, if a company (Company A) has provided an Interest-bearing loan to another company (Company B), the Interest would generally result in a deductible loss for the borrower (Company B). If Company A and Company B are included in a Tax Group in a later Tax Period, a reversal of the Interest payable that was previously deducted (such as in the form of release or waiver) is not eliminated on consolidation. However, if the Interest was paid (whether in cash or in kind) and Company A or Company B realises income in relation to that loan on another basis (such as the receipt of interest for Company A or the release of principal amount for Company B), this is not a reversal of the deductible loss.

Similarly, if a company (Company C) incurs a foreign exchange loss on a loan provided to or from another company (Company D), that foreign exchange loss would generally be a deductible loss. If Company C and Company D are included in a Tax Group in a later Tax Period, a reversal of the foreign exchange loss within the Tax Group is not eliminated on consolidation.

Application of reduced Corporate Tax rate and Small Business Relief

The portion of the Taxable Income that is subject to the 0% Corporate Tax rate will be limited to AED 375,000, ^[176] regardless of the number of entities that are included in the Tax Group.

Similarly, as discussed in Section 4.6.3, whether Small Business Relief is available shall be determined by reference to the consolidated Revenue of the entire Tax Group. ^[177]

Application of ownership conditions at the level of Tax Group

For the purposes of the Participation Exemption ^[178] , whether the Tax Group holds a 5% or greater ownership interest in the shares or capital is determined by combining ownership interests held by all members of the Tax Group as well as ownership interests held by other entities that are not part of the Tax Group but that belong to the same Qualifying Group with any of the members of that Tax Group. ^[179]

Also, for the purposes of the Participation Exemption, the acquisition cost of ownership interests held by all members of the Tax Group as well as entities who are not part of the Tax Group but are a member of a Qualifying Group with any of the members of the Tax Group, should be combined to determine whether the aggregated acquisition cost is equal to or exceeds AED 4 million. ^[180]

For the purposes of the ownership requirements for Qualifying Group Relief ^[181] and the transfer of Tax Losses, ^[182] the direct and indirect ownership interest held by members of the same Tax Group shall be determined on the basis of the aggregation of the ownership interests of the Parent Company and each Subsidiary that is a member of the Tax Group. ^[183]

Application of Qualifying Group Relief

A Taxable Person can elect to not take into account gains or losses in relation to transfers within a Qualifying Group. ^[184] The election should be made when filing the Tax Return for the Tax Period in which the transfer within a Qualifying Group takes place. ^[185] Such an election is irrevocable. ^[186] If a Tax Group makes such an election for Qualifying Group Relief, it shall apply to all members of the Tax Group and the election would continue to apply to the members even after such members leave the Tax Group or after the Tax Group ceases to exist.

A Taxable Person that has not made an election for Qualifying Group Relief is treated as making such an election if it forms a Tax Group or joins a Tax Group that includes one or more members that have made such an election. Similarly, a Tax Group that has not made such an election, is treated as making the election if a new Subsidiary joins the Tax Group and such Subsidiary has made such an election.

If a member of a Tax Group transfers an asset or liability to or from a member of its Qualifying Group (not being part of the Tax Group), no gain or loss needs to be taken into account in relation to this transfer. ^[187] However, a gain or loss may need to be taken into account if, within 2 years from the date of the transfer, the transferor and the transferee cease to be members of the same Qualifying Group or there is a subsequent transfer of the asset or liability outside the Qualifying Group. ^[188]

Two Taxable Persons can be members of a Qualifying Group when certain conditions are satisfied. ^[189] One of the conditions is that a Taxable Person has a direct or indirect ownership interest of at least 75% in another Taxable Person or a common owner that holds at least 75% in both Taxable Persons. ^[190] As the ownership interests held by members of the Tax Group are aggregated (see Section 8.3.2), ^[191] it is possible that two Taxable Persons are in a Qualifying Group while one of them is in a Tax Group, but would no longer be in a Qualifying Group once such Tax Group ceases to exist. Therefore, it is possible that the Qualifying Group Relief may need to be clawed back if a Subsidiary leaves a Tax Group or if a Tax Group ceases to exist within two years of the transfer in respect of which Qualifying Group Relief was applied. ^[192]

Application of limitation of Tax Losses carried forward

A Tax Loss can be carried forward by a Taxable Person provided any of the following applies:

• The owners of the Taxable Person continuously hold at least 50% ownership from the start of the period in which the Tax Loss is incurred to the end of the Tax Period in which the Tax Loss is used to offset against Taxable Income (the “ownership condition”), ^[193] or

• There is a change in ownership of more than 50%, Tax Losses can still be carried forward provided the same or similar Business is carried on following the change in ownership (the “Business continuity condition”). ^[194]

For the limitation of Tax Losses carried forward rule (under Article 39(1)(a) of the Corporate Tax Law, i.e. the requirement to have continuous 50% ownership); when applying the ownership condition, only the ownership interest in the Parent Company of the Tax Group is relevant.

The conditions in Articles 39(1)(b) and 39(2) of the Corporate Tax Law (i.e. the requirement to conduct the same or similar business if there is a greater than 50% change in ownership), are to be determined by reference to Business Activities of the Tax Group as a whole. In other words, if a substantial part of the Business of the Tax Group is operated by a particular Subsidiary, it is possible that the Business continuity condition in Article 39(1)(b) is not met in respect of a Tax Loss of the Tax Group after that Subsidiary leaves the Tax Group, which would prevent the carry forward and use of the loss, if there had been a change of ownership of more than 50% in the Parent Company.

This means that if a substantial part of the Business of the Tax Group was carried out by one or more Subsidiaries, it is possible that the Business continuity condition is not met for the Parent Company after the Tax Group has ceased to exist if there is a change of ownership of more than 50% in the Parent Company.

When applying the ownership condition to pre-Grouping Tax Losses (see Section 10), only the ownership interest in the relevant Subsidiary is relevant. The Business continuity condition is determined by reference to Business Activities of that Subsidiary. In other words, if the Subsidiary transfers a substantial part of its Business within the Tax Group, it is possible that its remaining Business is no longer the same or similar to the Business it was when its pre-Grouping Tax Losses were incurred. That means that the Business continuity condition may not be met in respect of the pre- Grouping Tax Losses of that Subsidiary.

Application of election for realisation basis

Deduction of expenditure

Expenditure incurred wholly and exclusively for the purposes of the Taxable Person's Business that is not capital in nature shall be deductible. ^[205] In the case of a Tax Group, whether expenditure is incurred wholly and exclusively for the purposes of a Taxable Person's Business should be assessed on the basis of the whole Tax Group. Therefore, expenditure may be deductible if it is incurred wholly and exclusively for the Business of another member of the Tax Group (or the Business of several members of the Tax Group). Expenditure incurred for the purposes of a non-Tax Group member's business, (for instance a foreign parent that is not a Resident Person) is not deductible.

Application of transitional rules

A Taxable Person's opening balance sheet for Corporate Tax purposes is the closing balance sheet prepared for financial reporting purposes under applicable Accounting Standards on the last day of the Financial Year that ends immediately before their first Tax Period commences. ^[206] The transitional rules in the Corporate Tax Law aim to limit the taxable gain to the gain which arises after the start of the first Tax Period, in relation to certain categories of assets that are owned by the Taxable Person prior to the first Tax Period. ^[207]

In the case of Tax Groups formed in the first Tax Period following the introduction of Corporate Tax, the opening balance sheet of a Tax Group is the consolidated (aggregated) balance sheet of each member of the Tax Group on the last day of the Financial Year that ends immediately before the beginning of the Tax Group's first Tax Period. Any election in respect of transitional rules needs to be made by the Tax Group and will continue to apply to any members of the Tax Group after they leave the Tax Group or the Tax Group ceases to exist.

Further, adjustments can be made to the Taxable Income of a Taxable Person in respect of gains recognised on Immovable Property, Intangible Assets and Financial Assets and Financial Liabilities owned prior to the Taxable Person's first Tax Period. ^[208]

In the case of Tax Groups, when determining whether these assets were owned prior to the first Tax Period, ^[209] ownership of the asset by all members of the Tax Group should be considered. ^[210]

When calculating the apportionment of gains under the transitional rules, ^[211] any period in which a member of the Tax Group held the relevant asset should be considered. ^[212] This means that if an asset, within the scope of the transitional rules has been transferred between members of a Tax Group, the ownership period is determined by combining all ownership periods, provided that the Tax Group was formed as of the start of the first Tax Period.

The transitional rules apply to certain assets and liabilities owned prior to a Taxable Person's first Tax Period. ^[215] If a new Tax Group is formed in subsequent Tax Periods, it is not possible for the Tax Group to elect for the transitional rules if the members of the Tax Group had one or more Tax Periods before forming the Tax Group.

It is possible that a Taxable Person has elected to apply the transitional rules on such assets or liabilities and enters into a Tax Group in a later Tax Period. If so, the transitional relief will continue to apply in relation to such assets and liabilities that were held at the start of the first Tax Period by any Taxable Person that has made the election.

Limits on utilisation

A Tax Group is treated as a single Taxable Person. ^[239] This means that the Tax Group has a single, combined Taxable Income. In case one member of the Tax Group would have incurred a Tax Loss on a standalone basis and another member of the Tax Group realises positive Taxable Income, these results are offset automatically within the Tax Group through the process of consolidation. If the calculation of the Taxable Income of the Tax Group results in a Tax Loss, this is a Tax Loss of the Tax Group and not a Tax Loss of any member of the Tax Group.

If a Subsidiary subsequently leaves the Tax Group, such a Tax Loss will remain with the Tax Group. ^[240] If a Tax Group ceases to exist, such Tax Loss shall remain with the Parent Company. ^[241]

Where the calculation of the Taxable Income of a Tax Group results in a Tax Loss in a Tax Period and becomes a carried forward Tax Loss for a subsequent Tax Period, any pre-Grouping Tax Losses available to be utilised in a subsequent Tax Period must be offset against the Taxable Income of the Tax Group in that subsequent Tax Period, before the other carried forward Tax Losses of the Tax Group can be utilised in that same Tax Period. ^[242]

Thus, pre-Grouping Tax Losses can only be offset where the Tax Group has Taxable Income and only insofar as Taxable Income is attributable to the relevant member of the Tax Group. ^[243] Therefore, utilisation of pre-Grouping Tax Losses requires both: ^[244]

• The Tax Group to have Taxable Income (before taking into account a Tax Loss brought forward from a prior year); and

• Taxable Income that can be attributed to the relevant member of the Tax Group.

Utilisation of carried forward Tax Losses is limited up to 75% of the Taxable Income. ^[245] That restriction only applies at Tax Group level. ^[246] In other words, the utilisation of pre- Grouping Tax Losses is not limited to 75% of the Taxable Income attributable to the relevant member of the Tax Group.

Order of utilisation where there are several Tax Losses

Several clauses in the Corporate Tax Law and its implementing decisions place restrictions on the order in which different types of Tax Losses can be utilised. As a result of these restrictions, the utilisation of Tax Losses by Tax Groups is in the following order:

• Pre-Grouping Tax Losses have to be utilised before Tax Losses of the Tax Group can be utilised. ^[248]

• Where there are several pre-Grouping Tax Losses that could be utilised, the Parent Company shall determine the order in which they are utilised. ^[249]

• After utilisation of pre-Grouping Tax Losses, Tax Groups can utilise Tax Losses of the Tax Group.

• The Tax Losses of the Tax Group should be utilised in the order they were incurred.

• As restricted Tax Group Tax Losses are Tax Losses which predate certain Subsidiaries joining the Tax Group, ^[250] restricted Tax Group Tax Losses necessarily relate to earlier Tax Periods and are required to be utilised (if the conditions for utilisation are met) before utilisation of later Tax Losses of the Tax Group.

• After utilisation of pre-Grouping Tax Losses and Tax Losses of the Tax Group, the Tax Group can utilise any Tax Losses that were transferred to it under Article 38 of the Corporate Tax Law. ^[251]

Utilisation of restricted Tax Group Tax Losses

Restricted Tax Group Tax Losses cannot be utilised against Taxable Income attributable to Subsidiaries which joined the Tax Group after the Tax Losses arose. ^[253] If there are several Subsidiaries to which this applies, it is possible to limit this restriction to the net amount of Taxable Income attributable to such Subsidiaries.

Interaction with Business Restructuring Relief

If a Business has been transferred to a Taxable Person under Article 27 (Business Restructuring Relief) and the transferor had unutilised Tax Losses, such Tax Losses can become Tax Losses of the transferee if the conditions are met. ^[254] In such a case, the Tax Losses are treated the same as any other Tax Losses of the transferee and all the guidance and examples in this guide should be equally applicable to such a Tax Loss.

If the transferee subsequently joins a Tax Group after receiving losses on a transfer to which Business Restructuring Relief applied, the Tax Loss (if unutilised) would become a pre-Grouping Tax Loss.

If the transferee is already in a Tax Group (whether as Parent Company or Subsidiary), the Tax Losses become Tax Losses of the Tax Group. If another Subsidiary subsequently joins the Tax Group, the Tax Losses could become restricted Tax Group Tax Losses.

If the Parent Company or a Subsidiary transfers its entire Business to another member of the Tax Group and the transferor ceases to exist as a result of that transfer, it would remain a member of the Tax Group until such date it ceases to exist. ^[255] In case a Subsidiary ceases to exist in this way, any pre-Grouping Tax Losses would be foregone. ^[256] In case a Parent Company ceases to exist in this way, the Tax Losses of the Tax Group would remain with the Tax Group, provided the Tax Group continues to exist. ^[257] If the Tax Group ceases to exist as a result of such transfer, ^[258] any Tax Losses of the Tax Group would be foregone. ^[259]

General

If the General Interest Deduction Limitation Rule applies to a Tax Group, the resulting disallowed Net Interest Expenditure carried forward may be utilised in the subsequent 10 Tax Periods of the Tax Group. This Net Interest Expenditure carried forward is an attribute of the Tax Group as represented by the Parent Company and not an attribute of any member of the Tax Group. If a Subsidiary subsequently leaves the Tax Group the unutilised Net Interest Expenditure shall remain with the Tax Group, with the exception of any pre-Grouping Net Interest Expenditure of that Subsidiary. ^[277] If a Tax Group ceases to exist and the Parent Company continues to be a Taxable Person, any unutilised Net Interest Expenditure of the Tax Group shall remain with the Parent Company as the representative of the Tax Group. ^[278] If the Parent Company ceases to exist without a universal successor or ceases to be a Taxable Person, any unutilised Net Interest Expenditure of the Tax Group will be foregone. ^[279]

However, if the Parent Company merges with another Taxable Person and ceases to exist as a result, any unutilised Net Interest Expenditure of the Tax Group would continue to be available where the legal successor is the new Parent Company of the Tax Group that continues to exist. ^[280]

Attribution of Taxable Income (see Section 9) is required where a member of the Tax Group has unutilised pre-Grouping Net Interest Expenditure carried forward. ^[281] Similar to the restriction of pre-Grouping Tax Losses ^[282] (see Section 10.2), pre-Grouping Net Interest Expenditure can only be utilised against the Taxable Income that is attributable to that Subsidiary. ^[283]

This means utilisation of pre-Grouping Net Interest Expenditure would be possible to the extent both: ^[284]

• Current Net Interest Expenditure of the Tax Group is less than 30% of the Tax Group's EBITDA (or AED 12 million, if higher); and

• Based on attribution of the Taxable Income, the relevant Subsidiary has sufficient Taxable Income.

Where a new Subsidiary joins an existing Tax Group, the restrictions on utilisation of Tax Losses under Article 42(4) of the Corporate Tax Law do not apply to Net Interest Expenditure. Hence, carried forward Net Interest Expenditure of the existing Tax Group can be utilised against future Tax Group EBITDA after the utilisation of current year Net Interest Expense of that Tax Group. Similarly, carried forward Net Interest Expenditure of a Taxable Person that subsequently becomes a Parent Company of a Tax Group can be utilised against future Taxable Income of the Tax Group after the utilisation of current year Net Interest Expense of that Tax Group. ^[285]

Order of utilisation of unutilised Net Interest Expenditure

If a Tax Group has unutilised Net Interest Expenditure and it also has members with pre-Grouping unutilized Net Interest Expenditure, the Net Interest Expenditure should be utilised in the order in which the amount was incurred. ^[286] Where several unutilised Net Interest Expenditures qualify for utilisation and they arose from Tax Periods with the same end date, there is no requirement to follow when the underlying Interest was incurred and the Taxable Person can choose the order in which Net Interest Expenditure is utilised. This is because the Net Interest Expenditure is treated as being incurred at the end of the Tax Period for the purpose of Article 30(4) of the Corporate Tax Law.

Interaction with Business Restructuring Relief

If a Business has been transferred to a Taxable Person and the conditions of Article 27 of the Corporate Tax Law are met, the transferor can elect for Business Restructuring Relief to apply in respect of gains or losses that arise from the transfer of Business. The relief does not extend to unutilised Net Interest Expenditure. Therefore, the utilisation of Net Interest Expenditure is unaffected by the application of Business Restructuring Relief, meaning that unutilised Net Interest Expenditure will remain with the Taxable Person that incurred it, which may be able to utilise it if it continues to exist. As a result, the other comments in this Section would apply equally to Taxable Persons that were subject to Business Restructuring Relief.

If the Parent Company or a Subsidiary ceases to exist as a result of a Business restructuring under which it transfers all its assets and liabilities to another member of the Tax Group, it would remain a member of the Tax Group until such date as it ceases to exist. ^[287] In case a Subsidiary ceases to exist in this way, any unutilised pre- Grouping Net Interest Expenditure tied to the Subsidiary would be foregone. In case a Parent Company ceases to exist in this way, any unutilised Net Interest Expenditure of the Parent Company and the Tax Group would be foregone, unless the Tax Group continues to exist without discontinuation. ^[288]

Impact of Tax Group on Foreign Tax Credit

Where a Taxable Person's foreign source income is subject to UAE Corporate Tax, such Person can claim a Foreign Tax Credit by deducting taxes paid under the tax laws of a foreign jurisdiction from the Corporate Tax due in the UAE on the same income. ^[291]

The Foreign Tax Credit cannot exceed the amount of UAE Corporate Tax due on the relevant foreign income. ^[292] Hence, the amount of Foreign Tax Credit is the lower of:

• The actual amount of tax paid on foreign source income in the foreign jurisdiction and

• The amount of Corporate Tax due on the foreign source income as determined for the purposes of UAE Corporate Tax Law after deducting economically linked expenditure from the relevant income.

The unutilised foreign taxes (if any) cannot be carried forward or carried back and shall be forfeited. ^[293]

Where a member of a Tax Group has foreign source income for which a Foreign Tax Credit can be claimed, the Taxable Income attributable to that member of the Tax Group shall be calculated separately on a standalone basis. ^[294] Accordingly, the amount of Foreign Tax Credit should be calculated at the level of the member of the Tax Group that has received the relevant foreign source income. The amount of Foreign Tax Credit due to a member of a Tax Group reduces the Corporate Tax due for the Tax Group.

In determining the economically linked costs in respect of the foreign income earned by the member of the Tax Group, any economically linked costs resulting from transactions with other members of the Tax Group should generally also be taken into account.

Application of Foreign Permanent Establishment exemption to Tax Groups

A Taxable Person may elect to exclude the net income of its Foreign Permanent Establishments from its Taxable Income. ^[295] In the case of a Tax Group, the Parent Company is responsible for making an election and if an election is made, it is applicable to all Foreign Permanent Establishments held by the Tax Group. ^[296] If a new Subsidiary joins the Tax Group after an election is made, the election also applies to any Foreign Permanent Establishments held by such Subsidiary (regardless of whether such Subsidiary had made an election). If no election is made by the Parent Company, the exemption does not apply to any of the Tax Group's Foreign Permanent Establishments. If a new Subsidiary joins a Tax Group which has not made an election, no election applies to the Foreign Permanent Establishments held by that Subsidiary (even if the new Subsidiary had made an election in previous years).

Calculation of Taxable Income of Foreign Permanent Establishment

The loss or income attributable to Foreign Permanent Establishments is calculated as if the Foreign Permanent Establishments were Resident Persons. ^[297] As the Foreign Permanent Establishment is legally the same person as its head office, all income and expenditure of the entity will need to be allocated between head office and Permanent Establishment. The attribution of income and expenditure to a Foreign Permanent Establishment must be performed in accordance with internationally accepted profit attribution methods such as the Authorised OECD Approach and the relevant provisions of the Corporate Tax Law for the determination of Taxable Income. This requires the application of the arm's length standard with regards to any transactions between the Taxable Person and its Foreign Permanent Establishment as if the Permanent Establishment was a separate and independent Person. ^[298]

If the head office is included in a Tax Group, transactions between the Foreign Permanent Establishment and other members of the Tax Group are not included in the overall result of the Tax Group. ^[299] However, the profits of Foreign Permanent Establishments should be determined as if the Tax Group did not exist, meaning that the transactions between a Foreign Permanent Establishment and other members of the Tax Group are taken into account to the extent consistent with the arm's length standard.

If several members of a Tax Group have a Foreign Permanent Establishment in the same country, the income or loss of these Foreign Permanent Establishments is calculated separately before being aggregated with all Foreign Permanent Establishments. ^[300] This approach avoids the need to eliminate and then reintroduce transactions between Foreign Permanent Establishments and head offices of other Foreign Permanent Establishments.