How businesses can transfer their losses and enjoy tax relief

The group entities would be allowed to transfer their losses and claim tax relief on the transfer of assets and liabilities between the group entities. To form a tax group that would be considered a single entity for tax purposes, there would be at least 95 per cent ownership, while to transfer the losses between the group entities and claim tax reliefs on the transfer of assets and liabilities between group companies, there would be at least 75 per cent common shareholdings as proposed in the corporate tax public consultation document and explained as follows.

Transfer of losses

The group entities that do not meet 95 per cent ownership criteria or the entities that meet the criteria but do not want to be part of the tax group; can still transfer their losses from one group company to another group company provided the income of the group company is not exempt or subject to a zero per cent corporate tax, and the UAE resident group companies are at least 75 per cent commonly owned.

Relief on transfers of assets and liabilities

The assets and liabilities in the group entities would be under the common major ownership, and if these assets or liabilities are being transferred between the group entities, ultimately major ownership of the assets and liabilities will not change. So, it has been proposed in the document, that if the entities are 75 per cent commonly owned, any transfer of assets or liabilities between such group entities will not arise any gain or loss provided that these assets or liabilities remain within the same group for a period of minimum three years, and we can call it intra-group relief on the transfer of assets and liabilities within the group.

Where the intra-group relief is claimed, the transfer of assets between the group entities (75 per cent commonly-owned group) would be at the tax net book value, so the gain or loss would not be booked in the transferor and transferee books. This means that these assets and liabilities would be removed from the transferor books and added to the transferee books at the same value.

For the physical assets like plants and machinery the tax net book value would be equal to the allowable cost less related accumulated tax depreciation. While calculating the tax net book value, the accounting depreciation would be irrelevant, and the tax authorities would consider only tax depreciation to arrive at the tax net book value.

The word allowable cost and related tax depreciation are important. There is a possibility that assets might not be used fully for business purposes, and the assets might have mixed use both for business and non-business purposes. We are expecting that the expected corporate tax law (the law) would allow the mixed use of the asset and only business use would be allowed for tax purposes. Keeping in view the business usage, the cost and related tax depreciation would be apportioned accordingly to arrive at the tax net book value.

Where the asset has a mixed-use and is being transferred between the group entities, then the new usage of the asset in the group would be important to decide the application of the corporate tax on such transfer of assets. We need to wait for the law and regulations that would provide us complete guidance on the transfer of assets having business and not business use between the group entities.

Where the assets and liabilities had been transferred in the group companies and these did not remain in the group companies for a period of three years, then the tax relief would not be available to the businesses. The transferor would calculate the gain or loss that would have arisen at the time of transfer, and this gain or loss would be included in the transferor’s tax return in the tax period in which such assets were sold to any third party (the party which was not under the 75 per cent common ownership).

Restructuring relief

In the business world, there is merger, spin-off and other forms of restructuring. It has been proposed in the document that where the whole business or independent part of the business is being transferred in exchange for shares or other ownership interest (like an individual working as self-employed, transferred his business to a newly established company in exchange for shares in the company), the UAE corporate tax regime will exempt or allow deferral of tax on such transfers provided that the business or independent part of the business is not further being transferred within the three years from the date of first transfer. Such transfers will be booked at the tax net book value in the transferor and transferee books, and any profit and loss will not arise from such transfers.

The restructuring relief will be clawed back if the business or independent part of the business has been further transferred to a third party within three years from the date of the initial transfer. Any gain or loss that would have arisen at the time of initial transfer would be calculated, and it would be booked in the tax return for the tax period in which the business was transferred to a third party.

Where the tax relief had been claimed, we recommend that the businesses should be careful to further transfer the assets, liabilities, whole business or independent part of the business due to which relief was claimed.

Mahar Afzal is a managing partner at Kress Cooper Management Consultants. The above is not an official but a personal opinion of the writer based on the public consultation document on corporate tax. For any queries/clarifications, please write to him at compliance@kresscooper.com