Intra-qualifying group transfers allows no gain or loss

The UAE corporate tax law offers to juridical taxable persons (resident and permanent establishment of non-resident) the opportunity to benefit from qualifying group relief (QGR). According to article 26(1) of the law, upon satisfying the criteria, assets and liabilities can be transferred between members of the same qualifying group at book value (cost less accumulated depreciation or amortization or other change in value) without acknowledging any gain or loss. This relief is available because the eligible assets or liabilities that are being transferred within the same qualifying group do not alter ownership from the Group’s perspective.

The QGR is optional, and for discussion purposes, we have structured our analysis into three main stages: the pre-transfer phase, the transfer phase, and the post-transfer phase. During the pre-transfer phase, we have reviewed the eligibility criteria. Transitioning to the transfer phase, we have discussed essential aspects required for executing the transaction. Subsequently, in the post-transfer phase following a successful transfer, certain legal requirements must be fulfilled to maintain the benefit of the QGR.

To qualify for QGR, both the transferrer and transferee must be juridical taxable persons that are resident or non-resident having PE in the UAE. A juridical person refers to an entity recognised under the law, with a distinct legal personality from its founders, owners, and directors.

The resident juridical taxable persons include entities incorporated in the UAE including free zone businesses (excluding exempt persons), entities established outside the UAE but controlled and managed from the UAE; and non-resident juridical taxable person means a non-resident person that has fixed place of business, branch, office, exclusive agent etc in the UAE, which must be considered PE of the non-resident person.

Natural persons with business revenue surpassing Dh1 million in a Gregorian calendar year, along with non-residents persons deriving UAE sourced income or having a nexus to the UAE, are considered taxable persons. However, the former group comprises natural persons rather than juridical persons, while the latter group consists of non-residents lacking a PE in the UAE, so they are not ineligible to opt for the QGR.

The law stipulates that for QGR eligibility, there must be a common ownership of at least 75 per cent (held or contributed paid up capital/total paid up capital*100). This means that the transferor must directly or indirectly own 75 per cent equity or equitable interest in the transferee, or vice versa, or a third party must own 75 per cent in both the transferor and transferee. Neither the transferrer nor the transferee is exempt or qualifying free zone persons. Additionally, they must have financial years ending at the same time and adhere to the same accounting policies.

Upon meeting of these conditions, the transferor can transfer the assets and liabilities at the book value without considering any gain or loss provided that these assets and liabilities are held in the capital account and transferor has opted for the QGR. QGR does not required any consideration to be paid, and consideration, if any, is being received or paid, it will be assumed equal to the book value of the transferred assets and liabilities; and there is no specific mode of consideration.

Different kinds of transactions, including sales, exchanges, relinquishments, sale-and-leaseback deals treated as sales per accounting standards, option exercises to buy or sell assets or liabilities, and transfers under universal title, can be classified as transfers. However, if assets or liabilities are transferred to a taxable person due to liquidation, dissolution, or merger resulting in the legal cessation of an entity, QGR cannot be enjoyed.

The consideration in kind in the form of another asset or liability held on capital account constitutes an exchange and the exchange of the assets or liabilities, held on the capital accounts, between the members of the same qualifying group, shall be treated two separate transactions, and each transaction will be assessed individually for QGR.

The losses of the transferrer cannot be transferred to the transferee even the transferee is a member of the same qualifying group.

During the post-transfer phase, the relief becomes void if either the transferor or transferee exits the qualifying group within two years of the initial transfer, or if the related asset or liability is transferred out of the qualifying group. Where a clawback situation arises, the gain or loss is calculated based on the assumption that the initial transfer was at market value, the transferor will record this in the same tax period when the clawback is triggered. If, for any reason, the transferrer ceases to exist, the associated gain or loss will be recorded by the transferee.

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

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