UAE issues corporate tax decisions on restructuring, group transfers and taxable income

Ministry of Finance clarifies conditions for business mergers without triggering liability

The UAE will apply the federal corporate tax with a standard statutory rate of 9 per cent starting from the financial year beginning on June 1. Antonie Robertson / The National

The UAE Ministry of Finance has issued three new decisions on corporate tax ahead of its introduction on June 1, covering details on restructuring, taxable income and intra-group transfers.

One of the decisions “provides details on how to claim corporate tax relief on transfer of assets and liabilities between members of a qualifying group”, the ministry said in a statement on Wednesday.

The conditions under which business mergers and other restructuring transactions can be undertaken without triggering a corporate tax liability is clarified by the second decision.

Meanwhile, the third decision outlines the general rules for determining taxable income to streamline the process for UAE businesses.

The new decisions “aim to simplify the process of determining taxable income in addition to providing tax relief for intra-group transfer of assets or liabilities between members of the same qualifying group or when carrying out specific organisational restructuring”, said Younis Al Khoori, undersecretary of the Ministry of Finance.

“This reflects the Ministry of Finance's commitment to ease the burden of compliance on taxpayers based on international best practice to maintain the UAE's favourable business environment and drive economic growth.”

The UAE will apply the federal corporate tax with a standard statutory rate of 9 per cent starting from the financial year beginning on or after June 1, 2023.

Companies with an income exceeding Dh375,000 ($102,110) are in the taxable bracket. Taxable profits below that threshold will be subject to a 0 per cent rate.

There will be no tax on personal incomes from employment, real estate and other investments, or on any other income earned by individuals that does not arise from a business or other form of commercial activity.

In April, the ministry also clarified that small businesses in the UAE with revenue of Dh3 million or less can benefit from a new corporate tax relief programme.

Transfers within a qualifying group

The decision clarifies that an entity must make an election in their tax return to apply the relief and comply with the associated record-keeping requirements.

The election “is irrevocable and will apply to all future tax periods”, the ministry said.

The decision also clarifies the tax implications of simultaneous asset or liability exchanges if the relief needs to be revoked because the relevant assets and liabilities or group companies leave within two years of the original transfer.

Business restructuring relief

Business restructuring relief is available when a business or an independent part of a business is transferred or merged with another legal entity in exchange for shares or other ownership interests.

Where the transferor decides to apply the relief, no gain or loss needs to be included in the calculation of their taxable income.

The relief can also be applied if the business is exchanged for shares and a limited amount of other consideration such as cash, the ministry said.

It also applies when shares are received or issued by someone other than the transferor or the transferee as long as they are received or issued by an entity which owns the transferor or transferee, respectively.

The decision also details the mechanism for revoking the relief if the business or ownership interests are subsequently transferred within two years of the date of the original restructuring.

Determining taxable income

The decision sets out adjustments needed for the taxable income calculation, including the recognition of realised and unrealised gains or losses reported in the financial statements.

It also provides guidelines for adjusting changes in the values on assets and liabilities derived from transfers involving related parties, qualifying groups or business restructuring relief.

Businesses preparing financial statements on an accrual basis of accounting can choose to recognise gains and losses on a realisation basis for certain assets and liabilities.

Accrual accounting allows a company to recognise the entirety of an event, whether or not all elements have occurred. So a company can record revenue and expenses as and when they happen, before payment is made.

“This election must be made during the first tax period and is irrevocable, except under exceptional circumstances approved by the Federal Tax Authority,” the ministry said.