Business Restructuring Relief Guide

There are many instances where a business undergoes restructuring, like mergers, demergers, acquisitions, spinoffs, etc. Through this article, we are discussing the reliefs available for entities for business restructuring under UAE Corporate Tax Law. While restructuring the businesses, most gains or losses are recorded in the books of accounts, and the Corporate Tax implication on such gains or losses is covered in the business restructuring relief.

Article 27 of the Corporate Tax Law explained the business restructuring relief and outlined the conditions for availing of this relief.

Let us understand the common business restructurings that happen in the UAE.

• A sole establishment converts into a Limited Liability Company. With the amendment in Commercial Company Law, UAE, in the year 2021, the requirement that a UAE national holds 51% of shares in the Limited Liability Company has been removed. As an effect, many licenses that are issued as sole proprietorships or civil companies are converted to limited liability companies. This conversion is a classic example of business restructuring. The natural person (sole establishment) transfers assets and liabilities to a limited liability company and, as a consideration, the natural person gets shares of the LLC.
• An unincorporated partnership applies to the tax authority to be treated as a taxable person and change the default status from transparent to opaque.
• A company sells the full or part of the business to another company, which is either a taxable person or becomes a taxable person due to the purchase of the full or part of the business. These transactions are common in the UAE market, and the transferor gets the shares either in the company where they transfer business or in any of the subsidiaries or joint ventures of the transferee.

Always keep in mind that liquidation of the company is not considered under business restructuring reliefs.

Now let us understand what the conditions are to apply for the Business Restructuring Relief in UAE Corporate Tax Law. 

1. The transfer of business is complying with UAE regulations. 

2. The transferor and transferee are either;

a) UAE-resident company 

b) A foreign company that has a permanent establishment in the UAE. Example: Branch of a foreign company.

3. Both parties are neither exempt persons nor qualifying free zone persons.

4. Both parties are following the same accounting standards and the same financial year-end.

5. The transfer of business is happening for a valid commercial reason.

What is Business Restructuring Relief?

If the above-mentioned conditions are satisfied, at the time of the transfer of business, all the assets and liabilities of the transferring business are transferred at net book value (NBV) to the buying business. This means, there is no gain or loss recorded at the time of the business transfer. 

Let us understand this through an example:-

Company A, a resident company in the UAE, decided to sell its business to Company B. In the financial statement of Company A, the value of assets is AED 1 million, and the liabilities are recorded at AED 500,000. Company B is providing 20% of shares to the owner of Company A as a consideration against the sale of the business. This transfer of business can be brought under the Business Restructuring Relief, assuming that all the conditions are satisfied. Thus, all the assets and liabilities are transferred to Company B at net book value, and no gain or loss is recorded for corporate tax purposes. 

Another example is Mr. A, who has a sole establishment and decided to convert the establishment into a limited liability company. Mr. A is getting 100% shares of the LLC as a consideration for this transfer. All the assets and liabilities of the sole establishment are transferred to the new LLC at net book value, and it is considered no gain or loss for Mr A in this transfer if the Business Restructuring Relief is elected.

Clawback of Business Restructure Relief

Any transferor who elected the Business Restructure Relief and enjoys the tax burden on the business sale can have a clawback on the transaction if there is a subsequent transfer of business to a third party by the initial transferee within 2 years of the initial transfer. Example: Company A sold to Company B and availed the business restructuring relief. If Company B sells the business or part of business to a third party within 2 years from the initial transfer, the availed relief is considered as cancelled, and Company A should consider the initial transfer of business at market value and calculate the tax based on the gain or loss that arises from the initial transfer. If company A is not existing at the time of clawback, the tax liability will be on company B.

Key points to note in Business Restructuring Relief

1. Business Restructuring Relief is an election at the time of filing a corporate tax return; no separate application is required.
2. The transferor is required to elect for Business Restructuring Relief while submitting the Corporate Tax return.
3. Assets and liabilities can be transferred at net book value, meaning no gain, no loss.
4. If there is any unutilized tax loss with the transferor of business, such losses can be transferred to the transferee.
5. The consideration against the transfer can be either in the form of shares or other considerations like cash. The share value should be equal to the net book value of the assets and liabilities transferred. 
6. Any consideration other than shares should be lower than;
   • Net book value of the assets transferred; or
   • 10% of the nominal value of the shares received.

To learn more about Business Restructuring Relief in UAE Corporate Tax, book a free consultation with one of the Flyingcolour team advisors.

Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.