The year 2024 marked a milestone in the tax legislation of the United Arab Emirates (UAE) with the issuance of Ministerial Decision No. 301. This regulation, framed within Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (“Corporate Income Tax Law”), introduces specific guidelines for the formation and regulation of tax groups in the country.
What is a Tax Group according to the new regulations?
A tax group allows several legal entities, which meet certain criteria, to be consolidated and treated as a single entity for corporate tax purposes. This consolidation facilitates the offsetting of losses of one entity against the profits of another within the same group, thus optimizing the overall tax burden.
Criteria for the Formation of a Tax Group
The Ministerial Decision establishes specific requirements for entities to form a tax group, in accordance with clause (1) of Article 40 of the Corporate Income Tax Law.
- Shareholding: A parent entity must directly or indirectly hold at least 95% of the shares or voting rights of the subsidiaries to be included in the group.
- Residence and Structure: All entities must be resident in the UAE and subject to corporate tax under Federal Decree-Law No. 47 of 2022.
- Uniformity in the Fiscal Year: Entities must share the same accounting period or fiscal year.
- Type of Entity: Certain entities, such as those operating in free trade zones and benefiting from a special tax regime, may be excluded from forming part of a tax group.
Benefits of Forming a Tax Group
Forming a tax group offers several advantages:
- Offsetting Losses: The tax losses of one entity can be used to offset the profits of another within the same group, reducing the consolidated tax base·
- Administrative Simplification: By filing a single consolidated tax return, administrative burdens are reduced and tax compliance is simplified.
Transfer Pricing Considerations
Although Ministerial Decision No. 301 focuses on the formation of tax groups, it is essential that multinational companies in the UAE pay attention to transfer pricing regulations. These regulations ensure that transactions between related entities are carried out at market values, avoiding the manipulation of prices for tax evasion purposes. Companies must maintain adequate documentation to support their transfer pricing policies and ensure compliance with local regulations, in accordance with Article (8) of the Ministerial Decision, which regulates the Arm’s Length Principle and documentation requirements on transfer pricing and calculation of the tax base in a tax group.
Conclusion
Ministerial Decision No. 301 of 2024 represents a significant development in the UAE’s tax framework, offering companies the opportunity to optimize their tax burden through the formation of tax groups. It is crucial that corporations evaluate their current structure and consider the potential benefits of this regulation, while ensuring compliance with transfer pricing regulations.
How can TPC Group help you?
At TPC Group, we have a team of experts in transfer pricing.
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