Understanding Tax Loss Groups vs Qualifying Groups

Corporate Tax Law in UAE has announced many reliefs to support businesses in the UAE and make the country a competitive tax regime. In this article, we will understand two reliefs: how companies in the UAE can obtain these reliefs and the differences between tax loss groups and qualifying groups.

➤ Tax Loss Groups

If the below conditions are satisfied, a company can transfer their tax losses to one or more other company’s taxable income. For easy understanding, let us consider it a tax loss group that consists of 3 companies.

• All 3 companies are resident juridical persons. A juridical person means, generally, companies. Resident means companies registered in the UAE or a foreign company that has effective control and management in the UAE.

• All 3 companies are either owned by a person or company that is holding more than 75% of the shares directly or indirectly. This ownership criterion shall satisfy from the start of the year the loss incurred till the end of the year the loss set-off.

• None of the 3 companies is an exempt person.

• None of the 3 companies are qualifying free zone persons

• The financial year of 3 companies is ending on the same date. Companies can have shorter or longer financial years. However, the ending date shall be the same.

• All 3 companies are following the same accounting standards. In the Corporate Tax Law, allowed accounting standards are either IFRS or IFRS for SMEs.

If the above conditions are satisfied, any one of the companies out of 3 that incurred a loss in a tax year can transfer their loss to another company that is on profit. Keep in mind 3 things.

1. The tax loss shall be used to set off its own profit first before transferring to the tax loss group.
2. Set-off of tax loss with own profit is mandatory, whereas transfer of tax loss to group company is optional.
3. The company that is in profit can receive maximum tax loss from the group, which is less than or equal to 75% of the taxable income of the loss-receiving company. Example: - If company A has AED 100,000 in tax loss and they want to transfer this tax loss to their group company, Company B, who is eligible for the tax loss group, has AED 50,000 in taxable income. Company B can receive tax loss from A maximum of 75% of their taxable income, which is AED 35,000 (75% of AED 50,000).

➤ Qualifying Group

If certain conditions are satisfied, the assets and liabilities transferred between the qualifying group will be recorded as no loss, no gain (net book value). The purpose of this relief is that if one owner has 2 or more companies and he is transferring the assets or liabilities between the group companies, as per the normal tax rules, the gain or loss can be subject to tax. However, as per this relief, the owner can transfer assets or liabilities between the group companies in net book value, which means the assets or liabilities are transferred at value with no gain or loss. This election of a qualifying group is optional, and if not elected, the transfer of assets and liabilities between the companies shall be as per market value, and since the companies are owned by a 75% common shareholder (directly or indirectly), the value for transfer shall be as per Arm’s Length Principle.

While transferring assets or liabilities between the companies in the qualifying group, the consideration (price) paid for the assets or liabilities can be taken into consideration in the books of accounts. However, for corporate tax purposes, once the qualifying group election is made, payment is disregarded, and always the net book value shall be taken into consideration. The receiving company shall disallow the additional depreciation that may arise from the transfer of assets or liabilities. Always remember that only capital assets and liabilities can be considered for qualifying group reliefs.

Qualifying group conditions look similar to the tax loss group. So let us focus only on the difference between the tax loss group and the qualifying group.

The main differences are as follows: -

• Tax loss group companies should be all resident companies, where qualifying group eligibility is there for resident companies and foreign companies that have permanent establishments in the UAE, like branches.
• In order to transfer loss between the groups, the ownership criteria (75%) shall be satisfied from the start of the year where the loss is incurred till the end of the year in which the loss is transferred. In qualifying, this condition is not applicable. It is not specified that the 75% ownership should be there throughout the year(s).
• Tax loss group has no application or election required. If the conditions are satisfied, automatically the loss group relief can be availed. In the qualifying group, no application is required. However, the election is required to get the relief as a qualifying group. Remember that this election is irrevocable and once elected all assets (capital assets are only eligible for qualifying group relief) in the current year and future shall be transferred at net book value. This means, that once elected, in the future, if there is an asset transferred between the companies on loss, those losses cannot be booked; it has to follow no gain, no loss rules. The election of qualifying group relief needs to be done by the transferor of assets or liabilities.

Rest assured, all the conditions are the same as between the tax loss group and the qualifying group.

Summary of benefits of Tax Loss Group and Qualifying Group

Foot Note:-

Both the above are reliefs in the UAE Corporate Tax Law. In order to avail of either of the reliefs, no application to the authority is required. The companies in the tax loss group as well as the qualifying group shall register for Corporate Tax, file separate tax returns, and pay their tax liabilities. Do not confuse these reliefs with tax groups for Corporate Tax purposes. It is altogether a different concept and requirement.

To learn more about Differences between Tax Loss Groups and Qualifying Groups, 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.