The Ministry of Finance (MoF) has recently introduced three new Ministerial Decisions as part of its commitment to enhancing the taxation system for corporations and businesses in the United Arab Emirates (UAE). These decisions, issued under Federal Decree-Law No. 47 of 2022, aim to simplify the process of determining taxable income while ensuring that specific scenarios are addressed with appropriate tax relief measures. The MoF's proactive measures align with international best practices, ensuring a favorable business environment and driving economic growth within the UAE.
Ministerial Decision No. 132 of 2023: Transfers within a Qualifying Group
Ministerial Decision No. 132 of 2023 presents comprehensive instructions regarding the eligibility criteria for obtaining Corporate Tax relief for asset and liability transfers within a Qualifying Group. As per this decision, entities are required to formally elect for the relief in their Tax Return and adhere to specific record-keeping obligations. Once the election is made, it becomes irreversible and applies to all subsequent Tax Periods. The decision also covers scenarios involving simultaneous exchanges of assets or liabilities and outlines the tax consequences if the relief needs to be revoked within a two-year period due to the departure of relevant assets, liabilities, or group companies from the Qualifying Group.
Ministerial Decision No. 133 of 2023: Business Restructuring Relief
Ministerial Decision No. 133 of 2023 provides guidelines on conducting business mergers and restructuring transactions without incurring Corporate Tax obligations. This relief applies when a business or a portion of it is transferred or merged into another legal entity, and in exchange, the transferring entity receives shares or other ownership interests. By electing for this relief, the transferring entity is exempted from including any gain or loss in the calculation of their Taxable Income. The decision also provides insights into clawing back the relief if subsequent transfers of the business or ownership interests occur within two years of the original restructuring.
Business restructuring refers to the process of reorganizing a company's structure to increase profitability or improve operational efficiency. The UAE Corporate Tax Law provides specific reliefs for business restructuring transactions.
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Criteria for Determining Business Restructuring
According to the law, the taxable income will include no gains or losses arising from transfers made as part of a business restructuring. To qualify as a business restructuring, the transfer must meet specific criteria:
- The transferor (the party transferring the business) must be a taxable person under the UAE Corporate Tax Law.
- The transferee (the party receiving the transferred business) can be either a taxable person or a person who will become a taxable person after the transfer.
- The transfer must involve the transfer of either the whole business or an independent part of the business.
- When one or more individuals or entities subject to taxation (transferors) transfer their entire business or a distinct portion of it to either another taxable entity or to a person who will become a taxable entity as a result of the transfer, in exchange for ownership rights or shares in the receiving entity (transferee), the transferors will cease to be subject to taxation after the transfer.
In addition to meeting these criteria, the business restructuring relief is subject to the following conditions:
- The transfer must comply with the laws of the UAE and satisfy any applicable conditions.
- The transferor must be a resident person or a non-resident person with a permanent establishment in the UAE.
- Neither the transferor nor the transferee can be exempt persons or qualifying free zone persons under the UAE Corporate Tax Law.
- The transferor and transferee must have the same financial year ending on the same date.
- Both parties must follow the same accounting standards when preparing their financial statements for the relevant tax period.
- The transfer must have a valid commercial reason or a non-fiscal reason, and the economic substance of the transaction must be established within the UAE.
By meeting these conditions, the transfer of business assets or shares as part of a restructuring can qualify for business restructuring relief, resulting in no taxable gains or losses for the parties involved.
Transfer to a Person other than a Taxable Person in Business Restructuring
In addition, there may be situations where shares or ownership interests are transferred to a person who is not the taxable person, including:
- When a person, not the transferor, receives shares or ownership interests.
- When shares or ownership interests are granted or issued by a person who is not the transferee.
- When a taxable person who is a partner in an unincorporated partnership does not receive any shares or ownership interest.
Even in these three scenarios, where the transfer does not involve the transfer of shares or ownership interest between taxable persons, it is still considered a business restructuring. Therefore, the other taxable person who should have received the shares or ownership interest can claim business restructuring relief under Article 27 of the UAE Corporate Tax Law. This provision allows for tax relief in business restructuring cases, facilitating the smooth transition of assets and ownership interests between taxable persons.
Ministerial Decision No. 134 of 2023: General Rules for Determining Taxable Income
The General Rules for Determining Taxable Income, outlined in Ministerial Decision No. 134 of 2023, simplify the process of calculating taxable income for businesses in the UAE. This decision provides clear instructions on the necessary adjustments to be made, such as considering realized and unrealized gains or losses reported in the Financial Statements. Furthermore, it defines the conditions for applying the realization basis and offers guidance on adjusting changes in the values of assets and liabilities resulting from transfers involving Related Parties, Qualifying Groups, or Business Restructuring Relief. For businesses that follow the Accrual Basis of Accounting, there is an option to recognize gains and losses on a realization basis for specific assets and liabilities. It is important to note that once this election is made, it cannot be revoked unless exceptional circumstances are approved by the Federal Tax Authority.
HHS Tax Lawyers or Tax Consultant
With the issuance of these three new Ministerial Decisions, the UAE Ministry of Finance has taken significant steps to simplify taxation processes and provide relief for corporations and businesses. The UAE maintains its favorable business environment by aligning with international best practices while promoting economic growth. The decisions address various aspects, such as transfers within a qualifying group, business restructuring, and general rules for determining taxable income. These progressive measures enhance compliance and contribute to a robust and efficient taxation system in the UAE.