United Arab Emirates (UAE) issued the Ministerial Decision No. 301 of 2024, thus setting a milestone in the tax legislation 2024. This regulation, framed under Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (“Corporate Income Tax Law”), introduces specific guidelines to form and regulate tax groups in the country.
What Is a Tax Group Under the New Regulations?
A tax group allows several legal entities that meet specific criteria to consolidate and be treated as a single entity for corporate income 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.
Formation Criteria for a Tax Group
The Ministerial Decision establishes specific requirements for entities to form a tax group, according to Article 40, clause (1) of the Corporate Income Tax Law.
- Shareholding: A parent entity must directly or indirectly own at least 95% of the shares or voting rights of the subsidiaries to be included in the group.
- Residency and Structure: All entities must be resident in the UAE and subject to Corporate Income Tax under Federal Decree-Law No. 47 of 2022.
- Fiscal Year Uniformity: Entities must share the same accounting period or fiscal year.
- Type of Entity: Certain entities, such as those operating in free zones and enjoying a special tax regime, may be excluded from belonging to a tax group.
Benefits of Forming a Tax Group
The formation of a tax group offers several advantages:
- Offsetting Losses: The tax losses can offset the profits of another within the same group, reducing the consolidated tax base.
- Administrative Simplification: A single reported consolidated income reduces administrative burdens and simplifies tax compliance.
Transfer Pricing Considerations
Although Ministerial Decision No. 301 focuses on forming tax groups, multinational companies in the UAE must focus on Transfer Pricing regulations. These regulations ensure that related party transactions are conducted at market values, preventing mispricing for tax avoidance purposes. Companies should maintain adequate documentation to support their Transfer Pricing policies and ensure compliance with local regulations, according to Article (8) of the Ministerial Decision, which regulates the Arm’s Length Principle and documentation requirements on Transfer Pricing and the tax base calculation in a tax group.
Conclusion
Ministerial Decision No. 301 of 2024 is a significant development in the UAE tax framework, offering corporations the optimization of their tax burden by forming tax groups. Corporations must evaluate their current structure and consider the potential benefits of this regulation while ensuring compliance with Transfer Pricing regulations.
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Sources: Ministerial Decision No. 301 of 2024 on Tax Group, UAE Ministry of Finance / Tax Groups Guide, UAE Federal Tax Authority