Atik Munshi explained to Gulf News the rules for creating tax groups in the UAE

Under the UAE corporate tax rules, businesses that can show a shareholder having 95 per cent or more equity in them can be clubbed under a tax group. Where this helps is with these companies can present a unified tax filing with the FTA (Federal Tax Authority) for each tax year.

It doesn’t matter whether the group is made up of 5 companies, 10 or more - as long as the 95 per cent shareholding is adhered to. And they can present a unified tax returns filing.

"Certain aspects of tax groups are still being analyzed and some more clarifications are expected from FTA," Managing Partner at FinExpertiza UAE Atik Munshi told Gulf News.

Recently, the tax authorities gave a detailed outline on how businesses can go about applying for tax groups.

"There are three significant aspects to be complied to form a tax group - (a) legal shareholding (b) voting rights (control) and (c) profit/assets of the entity," said Atik Munshi.

As long as the business group’s owner can show the 95 per cent of more equity in each of the subsidiaries, it’s pretty straight forward. But what if one of the companies has a local sponsor?

"In the scenario where UAE National is a sponsor, which in most cases is 51 per cent, the aspect of ‘legal shareholding’ is not complied with. One can argue that an UBO (Ultimate Beneficial Ownership) declaration, side agreements with the local sponsor, a proxy voting arrangement, or a full power of attorney would be enough to be compliant with the tax group status. However, when registration of the individual entity is done, the FTA insists on receiving legal documents like the trade license, articles of association, etc. It is obvious that the legal shareholding shown in these documents will be different. It remains to be seen whether FTA considers such additional documents to be in adherence with Article 40," said Atik Munshi.

This is the crux of the issue that businesses - especially family-owned ones - in the UAE will need to check out. Ideally, they would wait for the tax authorities to set the precedent on who can or can’t be part of a tax group under such circumstances.

"In most scenarios, even existing LLCs can opt for a 100 per cent foreign ownership," told Munshi. "This however has other implications as they would need to convince the local sponsor to transfer the shares."

But first, ‘to register for a tax group, the individual entities within the group must first register independently," said Munshi. "Only at the second stage they can apply to be registered as a tax group. They qualify to be a tax group only where there is a parent subsidiary relationship with 95 per cent common shareholding."

5 February 2024

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