Are you operating a business in Abu Dhabi and interested in simplifying your tax obligations? A corporate tax group could be the solution. By consolidating your tax liabilities, you can minimize administrative burdens while enhancing compliance. But, like any financial strategy, it comes with both pros and cons.
To help you make wise business decisions, we’ll explore the different aspects of tax groups like its benefits, drawbacks, criteria, procedures, and
Key Takeaways
- Forming a tax group in Abu Dhabi requires meeting specific business and legal criteria, establishing control relationships, and following a structured application process with the FTA.
- Tax groups offer advantages like lower compliance costs and income offsetting, but also present disadvantages such as structural limitations and potential administrative challenges.
- Additional factors include the calculation of taxable earnings, procedures for removing members, and FTA restrictions, underscoring the need for professional assistance.
What is a tax group?
A tax group is a collection of businesses formed by a parent company and its subsidiaries with the intention of forming a group and keeping consolidated financial records and documents for the purposes of submitting taxes and other tax obligations. Hence it will be regarded as a single taxable entity in Abu Dhabi.
What criteria have to be followed to form a tax group?
Companies must fulfill certain requirements established by the UAE Federal Tax Authority (FTA) in order to qualify for a Tax Group:
Business Requirements
Every member of a tax group is required to actively operate an authorized business, which can be located anywhere and operate independently of its workforce.
Legal Entity Criteria
Every member of a tax group needs to be acknowledged as separate legal entities with an independent legal identity, capable of making contracts and agreements under their respective names.
Establishment criteria
Each member has to be a citizen in the UAE, either by way of having its primary company establishment or as a consequence of having a fixed establishment in the UAE.
A company establishment is generally the place where key leadership decisions impacting a company are made. A fixed establishment is a location that has the technological and human resources required to operate a business.
A foreign-owned subsidiary that has been founded in the UAE can, under these conditions, be eligible to be included in a tax group. A branch of a foreign-owned business can also be eligible under the fixed establishment condition.
Related parties and control criteria
Every member needs to be sufficiently related to every other member. “Related” in this sense refers to having similar organizational, financial, and economic relationships (either in terms of voting rights, shareholding, or the law). The members must be under the control of one individual.
In a tax group, one member must exercise control over the others. Control may apply in the following scenarios:
When at least one of the following applies to one or more legal partners in a formal partnership:
- A combined ownership of at least 50% voting interest across all companies by the legal entities within the partnership.
- A combined ownership of at least 50% market value interest across all companies by the legal entities within the partnership.
- Control established through other means.
This applies when two or more legal entities within a partnership are connected to another legal entity from the same partnership.
Process for forming a Tax Group in Abu Dhabi
Group Formation Agreement
Create a thorough group formation agreement that outlines the group’s rules and regulations.
This agreement should include:
- Control mechanisms
- Structure of ownership
- Profit and loss sharing
- Decision-making procedure
- Conflict settlement
This agreement can be drafted with the help of a qualified accountant.
Hire a Tax Representative
A person appointed as the tax responsive is repairable to manage the tax group’s interactions with the FTA. The accountant you hire can act as your tax representative.
Get Tax Registration Numbers
Verify that each member of the group owns a current Tax Registration Number (TRN).
Complete the Tax Group Application
Fill out the tax group application form provided by the FTA, including comprehensive details on the group’s members, structure of ownership, and control relationships. An accountant can assist in preparing the application.
Supporting Documentation
Collect the required supporting documentation, such as:
- Shareholding certificates
- Organizational charts
- Group members’ financial statements
- Group formation agreement
Submit the Application
Send the filled-out application and any necessary supporting documentation to the FTA.
FTA Approval
Await the FTA’s approval, which could take a while.
Consolidated Tax Return
Upon receiving approval, proceed to prepare and submit a unified tax return on behalf of the entire group.
Benefits of forming Tax Group in Abu Dhabi
Lower compliance burden:
According to UAE corporate tax law, a tax group can only submit one application for one corporate tax registration on behalf of all of its member firms. Additionally, the tax group must file a single consolidated return rather than individual returns for each member company. This lowers the cost of compliance and streamlines the tax group’s overall administration process.
Income and Loss Offsetting
Losses incurred by a single group member can be utilized to offset the earnings of other members in the same fiscal year. This enables profitable businesses to balance their taxable income with the losses of underperforming entities, possibly lowering the total tax liability and producing immediate cash flow benefits.
Cash Flow Optimization
Effective tax preparation through a tax group can assist with maximizing cash flow by deferring tax payments or utilizing tax refunds.
Intra-Group Transaction Treatment
Typically, transfers of financial assets and liabilities and other trades between group members are disregarded when determining taxable income for the group.
Potential Drawbacks of Tax Group
Structural Restrictions
Tax groups can only be formed between parent firms and subsidiaries; they cannot be formed horizontally, such as between sister companies.
Shared Tax Threshold
Regardless of the number of firms involved, the AED 375,000 threshold for the 0% corporation tax rate is applied once to the entire Tax Group.
Administrative Challenges and Penalties
Securing the necessary data to complete a single return takes time; as a result, a group may miss deadlines and be penalized.
What is the calculation of taxable earnings for UAE tax groups?
As per the guidelines established by the Free Trade Agreement (FTA), firms are required to follow particular guidelines for determining the tax group’s taxable revenue. This includes the parent company removing all financial agreements and activities between itself and any subsidiary member of the group.
Additionally, during the applicable tax period, all subordinates’ financial records must be consolidated. To ensure precise calculations, every transaction made by the subordinate individuals must also be stopped during this period.
How can participants be removed from a tax group?
The representative member can submit in a tax group amendment application to the FTA requesting the removal of a member from the tax group. The removed member might have to complete out a VAT registration application if they are eligible and must register but have not registered before.
Within 20 days of the member’s eligibility changing, the representative member is required to notify the FTA if the member is to be removed due to their loss of tax grouping eligibility.
When can a tax group’s formation be prohibited under the FTA?
The Federal Tax Authority (FTA) can restrict tax grouping if:
The interactions between group members are minimal, with little to no significant transactions occurring within the tax group.
Permitting the group to form will challenge the FTA’s ability to audit them due to the lack of common auditing characteristics.
If the group is permitted to form, there will only be one benefit—a financial offset benefit.
Permitting the group to form would increase the FTA’s workload, which includes the previously listed points as well as others.
Final thoughts
Tax groups in Abu Dhabi have a lot of benefits. They facilitate tax compliance. You can combine your tax filings to maximize the use of any incurred losses effectively. Although there are a number of benefits to forming a tax group, there are also some drawbacks. It’s crucial to evaluate the possible pros against the cons while taking your individual group structure, financial status, and future goals into account.
