What is Group Relief?
Group relief is a relief from Corporation Tax. Businesses are able to create tax groups under the UAE corporate tax framework, which will go into force in June 2023.
The basic idea of group relief is to tax the economic unit – i.e a company, that gives rise to profits over a corresponding period. Similar to how an individual with various sources of income can be taxed, the income of a business’s various revenue streams can be grouped together and taxed. Companies create tax groups to restrict or fence responsibilities, which optimizes the expense of their total tax compliance. This offset would be subject to the group loss utilisation rules.
For example, a company with profits of AED 1,000 wholly owns a subsidiary which has losses of AED 100. In economic terms, there is one profit-making unit (the group) and it has profits of AED 900. Group relief is designed to ensure that the group pays tax on AED 900.
Scope of Group Relief
Group relief allows the transfer of losses between companies. It does not go as far as treating a group of companies as if they were a single company for tax purposes. The companies are still treated as separate legal entities for tax, and the framework operates on that basis.
The company which claims the losses of its internal companies is called a ‘Claimant Company’. The companies that ‘surrender’ their losses to the Claimant Company are called ‘Surrendering Companies’.
Criteria for Group Relief
Businesses that are liable to UAE corporate tax must determine if they are properly qualified to form a tax group. A business must meet specific conditions set out by the UAE Ministry of Finance (MoF) in order to establish a corporate tax group.
- The tax group’s members should all follow the same fiscal year.
- The parent organisation must own at least 95% of the voting rights and share capital of its subsidiaries.
- Especially when all of the group members are UAE residents, companies can create a tax group.
- A free zone business that enjoys the 0% corporate tax rate or an exempt person can be a part of a tax group.
- If a subsidiary is indirectly held by the parent firm and other subsidiaries possess at least 95% of its shares, the subsidiary could join a tax group or if it is a UAE branch of the parent firm or one of its subsidiaries.
Requirements for Group Relief
- At least 75% of UAE group enterprises are held collectively.
- No loss transfers from businesses that are immune or gain access to the 0% Free Zone CT system are permitted.
The overall tax loss offset may not exceed 75% of the applicable period’s taxable income of the entity obtaining the transferred losses. Balance tax losses can be carried forward indefinitely, provided certain conditions are met.
UAE tax groups would be able to file a single return for the entire group.
Key Highlights on UAE Corporation Tax
- UAE Corporation tax rate one of the lowest within the GCC region and along major economies
- Tax applicable on profits above AED 375,000 and not below that
- Standard Corporate Tax Rate is 9%
- CT effective from 1 July 2023 from financial year 2023 ending on 30 June 2024
- The financial year for businesses starting 1 January 2023 and ending 31 December 2023 will become subject to the tax beginning from 1 January 2024
- Tax incentives offered to freezone businesses complying with all regulatory requirements will remain
- Capital gains and dividends received by the companies in UAE from their qualifying shareholdings are also exempt from paying CT.
Corporation Tax - FAQ
Corporate Tax (CT) is a direct tax levied on the net income or profit of corporations and other businesses.
Corporate Tax is sometimes also referred to as “Corporate Income Tax” or “Business Profits Tax” in other jurisdictions. Most countries have a comprehensive CT regime, including most of the GCC Member States.
0% for taxable income up to AED 375,000
9% for taxable income above AED 375,000
There is also a different tax rate for large multinationals that meet specific criteria set with reference to ‘Pillar Two’ of the OECD’s (Organisation for Economic Cooperation and Development’s) Base Erosion and Profit Shifting project.
Corporation tax is effective from 1st of June 2023 and it is expected that filing and payment deadlines will be 9 months after the financial year end.
Companies operating in Free Zones will be subject to UAE Corporation Tax, but the UAE Corporation Tax regime will continue to apply incentives offered to free zone businesses (providing they comply with the regulatory requirements and do not conduct business with mainland UAE).
Entities operating in Free Zones will be subject to a 0% CT rate on their taxable income. If an entity located in a Free Zone derives non-passive income from mainland UAE all its income will be subject to the general CT regime.
Under the upcoming UAE Corporation Tax regime, foreign companies will be subject to the corporate tax rate of 9% on annual taxable income exceeding AED 375,000.
To qualify for the 9% annual tax rate a foreign company operating in UAE has
Their Permanent Establishment (PE); or
Their Place of Effective Management; or
Their source of income.
On the 1st of June 2023, the corporate tax rate will be 9% of the net profit made by businesses in the AUE. In order to support small businesses and start-ups, the corporate tax rate will be ‘0’ % if the net profit is up to 3,75,000 AED.
The best way to prepare for the new Corporation Tax is to have accounting software which covers all the necessary requirements. The best accounting software for businesses currently is QuickBooks Accounting software.
On the 1st of June 2023, the corporate tax rate will be 9% of the net profit made by businesses in the UAE. In order to support small businesses and start-ups, the corporate tax rate will be ‘0’ % if the net profit is up to AED 375,000.