In its dedication to improving the taxation system for corporations and businesses within the United Arab Emirates (UAE), the Ministry of Finance (MoF) has recently introduced three new ministerial decisions. These decisions, released under Federal Decree-Law No. 47 of 2022, serve the purpose of streamlining the calculation of taxable income and providing targeted tax relief measures for specific situations. The MoF’s forward-thinking initiatives are in harmony with global standards, fostering a conducive business environment and stimulating economic expansion in the UAE.
Ministerial Decision No. 132 of 2023: Corporate Tax Relief for Qualifying Group Transfers
Ministerial Decision No. 132 of 2023 offers comprehensive guidance concerning the qualification requirements for corporate tax relief when transferring assets and liabilities within a qualifying group. Under this decision, entities must formally opt for relief on their Tax returns and adhere to precise record-keeping responsibilities. Once the election is made, it becomes irrevocable and applies to all subsequent tax periods. Additionally, the decision addresses situations involving simultaneous asset or liability exchanges and delineates the tax implications should the relief need to be rescinded within two years due to the departure of relevant assets, liabilities, or group entities from the qualifying group.
Ministerial Decision No. 133 of 2023: Tax Exemption for Business Restructuring
Ministerial Decision No. 133 of 2023 outlines procedures for conducting business mergers and restructuring transactions without incurring corporate tax liabilities. This exemption is applicable when a business or a portion thereof is transferred or merged into another legal entity, with the transferring entity receiving shares or other ownership interests in return. By choosing this exemption, the transferring entity is relieved from including any gains or losses in the calculation of their taxable income. Furthermore, the decision provides insights into the process of reclaiming the exemption if subsequent transfers of the business or ownership interests occur within two years of the initial restructuring.
Business restructuring involves the reorganization of a company’s structure to enhance profitability or optimize operational efficiency. The UAE Corporate Tax Law offers specific provisions for facilitating business restructuring transactions.
Determining Eligibility for Business Restructuring
To ascertain whether a business restructuring qualifies for exemption from taxable income as per legal provisions, specific criteria must be met:
1. The transferor, i.e., the entity initiating the business transfer, must be recognized as a taxable entity under the UAE Corporate Tax Law.
2. The transferee, i.e., the entity receiving the transferred business, can either be an existing taxable entity or an entity that will assume taxable status after the transfer.
3. The transfer itself must encompass the transfer of either the entire business entity or a distinct, self-contained segment of the business.
When one or more individuals or entities, subject to taxation as transferors, convey their complete business operation or a delineated portion thereof to either another taxable entity or to an entity that will gain taxable status due to the transfer and, in return, acquire ownership rights or shares in the recipient entity (transferee), the transferors will no longer be liable for taxation following the transfer.
To qualify for business restructuring relief, the transfer of business assets or shares must adhere to the following stipulations:
1. Compliance with UAE laws and relevant conditions is mandatory during the transfer process.
2. The transferor must either be a resident individual or a non-resident individual with a permanent establishment within the UAE.
3. Exempt persons or qualifying free zone persons under the UAE Corporate Tax Law cannot be either the transferor or the transferee.
4. The financial year for both the transferor and transferee must conclude on the same date.
5. Both parties must adopt identical accounting standards when preparing their financial statements for the applicable tax period.
6. A valid commercial or non-fiscal rationale must underlie the transfer, and the transaction’s economic substance must be established within the UAE.
Adherence to these conditions makes the transfer of business assets or shares during a restructuring eligible for business restructuring relief, thereby resulting in no taxable gains or losses for the involved parties.
Transfer to a Person other than a Taxable Person in Business Restructuring
Furthermore, there may arise circumstances in which the transfer of shares or ownership interests occurs involving a party who is not a taxable individual. These instances include:
1. When an individual, other than the original transferor, acquires shares or ownership interests.
2. When shares or ownership interests are conferred or issued by an entity that is not the intended recipient.
3. When a taxable person, who serves as a partner within an unincorporated partnership, does not receive any shares or ownership interest.
Even within these three scenarios, where the transfer doesn’t encompass the exchange of shares or ownership interests between taxable individuals, it still qualifies as a business restructuring. Consequently, the alternate taxable entity, which was supposed to receive the shares or ownership interest, remains eligible to avail of business restructuring relief under Article 27 of the UAE Corporate Tax Law. This provision grants tax relief in situations of business restructuring, facilitating a seamless transition of assets and ownership interests among taxable individuals.
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Ministerial Decision No. 134 of 2023: Simplifying Taxable Income Calculation
Ministerial Decision No. 134 of 2023 introduces the General Rules for Determining Taxable Income in the UAE, streamlining the taxable income calculation process for businesses. This decision furnishes comprehensive guidelines for necessary adjustments, encompassing considerations like realized and unrealized gains or losses reported in financial statements. It also establishes criteria for applying the realization basis and offers direction on adapting changes in asset and liability values resulting from transfers involving related parties, qualifying groups, or business restructuring relief. Businesses employing the accrual basis of accounting have the option to recognize gains and losses on a realization basis for specific assets and liabilities, with the caveat that this election cannot be revoked unless approved under exceptional circumstances by the Federal Tax Authority.
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In its pursuit of facilitating tax processes and providing support for corporations and businesses, the UAE Ministry of Finance has issued three new ministerial decisions. These decisions align the UAE with international best practices while fostering economic growth, thereby maintaining an attractive business environment. They cover diverse aspects such as intra-group transfers, business restructuring, and general taxable income determination rules. These forward-thinking measures promote compliance and bolster the efficiency of the UAE’s taxation system.