A tax group consists of two or more resident persons who voluntarily elect to be treated as a single taxable person. The person initiating the application shall be referred to as the parent company, while the other person(s) joining the parent company to form the tax group shall be referred to as the subsidiary.
A tax group may only be formed when:
- All members of the tax group are legal entities, for example, limited liability companies (including non-qualifying free zone persons) and private or public sector joint stock, but on the opposite, natural persons carrying business as a sole establishment are not juridical persons and cannot qualify to be a member of a tax group.
- The parent company and each subsidiary are resident persons under the corporate tax law. A juridical person is a resident when it is incorporated, established or recognised under the applicable legislation of the UAE or is effectively managed and controlled in the UAE, it is regarded as a resident person under the corporate tax law, it is regarded as a tax resident of the UAE for the purposes of an applicable double taxation agreement.
- The parent company owns at least 95% of the share capital of the subsidiary, and holds at least
- (i) 95% of the voting rights in the subsidiary and
- (ii) 95% of the subsidiary’s profits and net assets, either directly or indirectly through one or more subsidiaries.
- Neither the parent company nor the subsidiary is an exempt person. 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 cannot form or join a tax group.
- Neither the parent company nor the subsidiary is a qualifying free zone person. A free zone person is a juridical person incorporated, established, or otherwise registered in a free zone, including a branch of a non-resident person registered in a free zone.
- The parent company and the subsidiary have the same financial year and have the same tax period.
- Both the parent company and the subsidiary prepare their financial statements using the same accounting standards.
To calculate the taxable income, multiple steps must be followed, including:
- Consolidation: a parent company consolidates the financial results, assets, and liabilities of each of its subsidiaries within the tax group for the relevant tax period.
- Elimination of transactions: Transactions between a parent company and each of its subsidiaries within the tax group are eliminated.
- Pre-grouping tax losses: If a subsidiary joins a tax group, any unutilised tax losses it had before joining (pre-grouping tax losses) become carried forward tax losses of the tax group. These losses can be used to offset the taxable income of the tax group, but only to the extent that the income is attributable to the relevant subsidiary.
- New subsidiary: When a new subsidiary joins an existing tax group, the unutilised tax losses of the existing tax group cannot be used to offset the taxable income attributable to the new subsidiary.
- Subsidiary leaving the tax group: If a subsidiary leaves a tax group, the tax losses of the tax group remain with the group, except for any unutilised pre-grouping tax losses of the departing subsidiary.
- Cessation of tax group: If the tax group ceases to exist, unutilised tax losses of the tax group are allocated as follows:
- a) If the parent company continues to be a taxable person, all tax losses remain with the parent company.
- b) If the parent company ceases to be a taxable person, tax losses of the tax group cannot be offset against future taxable income of individual subsidiaries, except for any unutilised pre-grouping tax losses of such subsidiaries.
- Exception to point 1: the consolidation does not apply in the case where an asset or liability has been transferred between members of the tax group, and either the transferor or transferee leaves the tax group within two years from the date of the transfer. However, this exception does not apply if the associated income would have been exempt from corporate tax or not taken into account under any other provisions of the corporate tax law.
- Adjustment for transfers: Any income that was not initially taken into account for a transfer should be taken into account on the date the transferor or transferee leaves the tax group. This will result in a corresponding adjustment of the cost base for corporate tax purposes of the relevant asset or liability.
