The Ultimate Guide to Tax Losses and Group Relief in the UAE
The United Arab Emirates (UAE) has a complex tax system, but understanding the rules and regulations surrounding tax losses and group relief can be beneficial for businesses operating in the region. The UAE’s Corporate Tax (CT) Law provides guidelines for businesses to offset tax losses against their taxable income in subsequent tax periods. This can help reduce the tax burden for a company, but there are restrictions and conditions that must be met.
Tax Losses
The CT Law provides that a business can offset tax losses against taxable income in subsequent tax periods. However, the set-off during any tax period cannot exceed 75% of the taxable income for the tax period, unless prescribed in a Cabinet Decision. Any remaining tax loss can be carried forward to another subsequent tax period.
Taxable Persons cannot claim tax loss relief for losses incurred before the date of commencement of the UAE CT regime, losses incurred before becoming a Taxable Person under the CT Law, or losses incurred from an exempt asset or activity. Transfer of tax losses between group entities is allowed if they have 75% or more common ownership and meet other conditions, such as having the same financial year and using the same accounting standards. Exempt Persons and Qualifying Free Zone Persons are not eligible for tax loss transfer.
Tax groups and Group Relief
UAE group entities may form a Tax Group if they meet certain conditions, such as the parent entity holding at least 95% of share capital, voting rights, and entitlement to profits and net assets. The parent entity will be responsible for the administration of the tax group, such as submitting a single tax return and settling the tax liability. Forming a Tax Group can be more efficient from a tax standpoint, as it allows for reduced administration costs, offsetting tax losses and profits within the group, and reducing transfer pricing compliance obligations.
Interesting to note, the parent and each subsidiary will still be responsible for their own withholding tax compliance obligations. There are also specific rules for joining, leaving, and discontinuing a Tax Group.
Available withholding tax credits, foreign tax credits, or other forms of relief can be deducted from the calculated corporate tax payable in a specified order. The UAE has a 0% withholding tax rate for certain types of income derived by non-residents, and there is no registration or filing obligation for taxpayers.
A credit is available for withholding tax suffered by a taxable person and foreign taxes paid on their income. The withholding tax credit is limited to the lower of the amount deducted and the corporate tax due under the UAE CT Law. Any excess credit will be refunded to the taxable person. A foreign tax credit is also available and limited to the amount of corporate tax due on the relevant income. Necessary records to support the foreign tax credit must be maintained, showing the amount of tax due in the foreign jurisdiction, payment thereof, and the fact that the foreign tax is not refundable. Any unutilised foreign tax credit cannot be carried forward and will ultimately be lost.
In conclusion, businesses operating in the UAE must understand the rules and regulations surrounding tax losses and group relief to make informed decisions and reduce their tax burden. By following the guidelines provided in the CT Law, companies can ensure they are compliant with local tax regulations while also taking advantage of the benefits offered by the tax system.
It is also worth noting The CT Law in the UAE includes General Anti Abuse Rules (GAAR) to address transactions that result in tax advantages with no valid commercial reason and where the tax advantage was the main or one of the main purposes of the transaction. If the GAAR applies, the Authority can counteract or adjust the CT advantage and issue an assessment with compensating adjustments to the UAE CT liability of any other person affected by the determination. In order to determine if the GAAR applies, the specific facts and circumstances of the transaction must be analyzed, including its form, substance, timing, and arm’s length nature. Taxpayers should ensure that their transactions have a legitimate business purpose and are properly documented to avoid any issues under the GAAR.
