Discard intragroup transactions to arrive at group taxable profits

The group companies must be diligent in ensuring seamless and comprehensive compliance

By Mahar Afzal/Compliance Corner

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Published: Sun 28 Jan 2024, 4:54 PM

Once a corporate tax group is established, it is considered a single taxable person for corporate tax purposes. The parent company is responsible for combining the financial accounts prepared for the same period and in accordance with uniformed accounting standards, determining the consolidated taxable income, submitting a single tax return, and paying the applicable tax to the Federal Tax Authority (FTA). If the parent company fails to settle the tax by the due date, all members are jointly and severally liable to pay.

While consolidating the financial results of group entities for tax purposes, intra-group transactions are eliminated. This includes transactions between the parent company and its subsidiaries, or between subsidiaries within the tax group. For example, if one group company sells an asset to another, this transaction is disregarded for tax consolidation. The same applies to income, expenses where one group company provides services to another group company, adjustments in valuation, provisions related to intra-group transactions; and changes in the accounting value of assets and liabilities, where they arise because of a gain or loss from a transaction within a tax group.

The rule to cancel out transactions within the tax group only applies when the transacting parties are members of the same tax group. If the transacting parties are not members of the same tax group, their transactions will not be eliminated when determining the taxable income of the tax group.

There is an exception to the general rule when a member has recognised a deductible loss in a tax period related to those transactions before joining or forming the tax group. In such cases, the requirement to cancel out intra-group transactions does not apply to transactions for which a member has recognised a deductible loss in a tax period prior to joining or forming the tax group, until the deductible loss is fully reversed. In these situations, the transaction is not cancelled, and the income is included in the taxable income of the tax group up to the amount that was previously deducted before joining or forming the tax group.

The exemption from elimination applies only to transactions that led to a “deductible loss” before the establishment or joining of the tax group and a subsequent reversal of that loss after the establishment or joining of the tax group. Furthermore, the exemption only pertains to income that represents a reversal of the deductible loss from the same transaction. This exemption necessitates the inclusion of income related to such a transaction but does not permit a tax group to claim an additional deductible loss on the same transaction.

Mahar Afzal is a managing partner at Kress Cooper Management Consultants.
Mahar Afzal is a managing partner at Kress Cooper Management Consultants.

For example, one member of the tax group has recorded a deductible loss by devaluing a loan receivable from another member of the tax group before the group was formed or joined. In this scenario, the relevant transaction will not be nullified. Any income related to the transaction, such as the reversal of the devaluation, will be included in the taxable income of the tax group up to the same amount as the previously deducted loss.

When an existing subsidiary joins a tax group, its unused tax losses are converted into carried forward losses of the group, known as “pre-grouping tax losses”. Such losses can only offset the taxable income of the tax group to the extent that this income is related to the subsidiary that contributed the tax losses. However, the pre-grouping tax losses carried forward for use within the tax group cannot exceed the 75% tax loss relief limit, which applies to the taxable income of the tax group.

In case a new subsidiary joins an existing tax group, the unused tax losses of the group cannot be used to offset the taxable income of the new subsidiary. If a subsidiary leaves a tax group, it retains any unused pre-grouping tax losses that were brought into the group, while any tax losses incurred while it was part of the group remain within the group. The 75% limit on the use of carried forward tax losses and the restriction on carrying forward tax losses apply at the tax group level.

The group companies must be diligent in ensuring seamless and comprehensive compliance with corporate tax law.

Mahar Afzal is a managing partner at Kress Cooper Management Consultants. The above article is not an official of Khaleej Times but an opinion of the writer. For any clarification, please feel free to contact him at mahar@kresscooper.com.


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