The Federal Tax Authority (FTA) has published a Corporate Tax (CT) Guide on Qualifying Group (QG) Relief. This guide provides clarifications and information on many important points in relation to entities transactions covered within the scope of the relief.
Article 26 of the Corporate Tax Law allows neutral transfer/restructuring assets or liabilities to transfer between two Taxable Persons within the same Qualifying Group without making any gain or loss subject to satisfaction of certain conditions.
Conditions:
- Transferor and Transferee, both must be part of the same Qualifying Group.
- The Transferor must be elected for the relief.
- The relief is subject to being recovered if within two years the Transferee ultimately disposes of the asset or liability outside of the Qualifying Group, or the Transferor or Transferee leave the Qualifying Group.
Key Aspects of Qualifying Group Relief are as follows:
- Qualifying Group Relief applies only to the transfer of assets or liabilities held on capital account and recorded on the Transferor’s balance sheet. Inventory or any other assets not held on capital account are not covered. Assets on capital account which are not included for trade or classified as long-term assets and long-term liabilities on capital account that do not create deductible expenses under accounting standards (IFRS or IFRS for SMEs) are eligible for transfer.
- A transfer refers to an act where the legal and economic ownership of an asset or liability is moved from one person to another. Examples of a transfer include sale, exchange, relinquishment, sale-and-lease back arrangements, exercise of options to sell or acquire an asset or liability, and transfer under universal title. Transfers resulting from liquidation, dissolution, or merger (that is, an entity ceasing to have legal existence) do not qualify for this relief.
- Qualifying Group Relief does not require any consideration to be paid. Any consideration paid does not affect the relief, if it agrees to the net book value or market value or is paid by a Person other than the Transferee. Further, the consideration can be in cash or cash equivalent.
- A qualifying juridical person can be a taxable Resident Person (incorporated in the state, or even foreign incorporated with place of effective management and control in the state) or Non-Resident Person with a Permanent Establishment (PE) in the state. The relief is not available for transfers between a PE in the state and its head office outside the UAE. Partnerships that are not incorporated cannot be a Transferor or Transferee for the purposes of the relief as it is not a juridical person unlike Incorporated Partnership.
- The Transferor and Transferee can also be members of the same Qualifying Group with certain conditions. If a third party (i.e. a common shareholder) holds an ownership interest (with control and economic right over the ownership interest) of at least 75% in both the entities. The third party does not need to be a UAE taxable person and can be a natural person or a foreign company.
- All members of a Qualifying Group must follow the same Accounting Standards when preparing the financial statements. Each member may follow different accounting policies, as long as if the Qualifying Group use the same Accounting Standards.
- An asset or liability can be considered as transferred at its net book value at the date of transfer. Any accounting gain/loss must disregard for CT purposes and there should not recognize any taxable gain or loss on transfer of the asset or liability. Depreciation and amortization charged by the Transferor up to the date of transfer can be deducted against their Taxable Income, even if no gain or loss triggered.
- When assets or liabilities are exchanged between the entities within a Qualifying Group, each transfer is treated separately for tax purposes. The transaction would be treated as two separate transfer transactions and the relief would be applied separately to each transfer.
- No gain or loss treatment within the QG is available if the transferor made an election in the tax return. It is irrevocable and cannot be reversed without the FTA approval once the election is made by the transferor. Such election will apply to all transfers of assets and liabilities held on capital account within a QG for the current reporting tax period and subsequent tax periods.
- Transferor and the Transferee are required to maintain a written agreement to transfer the asset or liability and evidence of the value mentioned under Article 26 of the CT Law. Further, the Transferee should document the necessary requirements for making any adjustments specified under Ministerial Discission #134 of 2023.
The guide provides useful guidance and clarity on Qualifying Group Relief. Careful consideration and application of these guidelines are necessary for taxpayers.
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