Updates to the UAE tax regulations relating to tax groups, the participation exemption and permanent establishments (PEs) of foreign entities, which apply as from 1 January 2025, ease some compliance obligations and provide administrative relief for businesses operating in the country.
The requirements for dual-resident entities are simplified. Foreign juridical persons that are considered to be resident in the UAE may be included in a tax group without having to produce a confirmation from a foreign tax authority regarding tax residency status. A UAE resident person that becomes tax resident in another country will cease to be part of the tax group from the beginning of the tax period.
Eligible entities wishing to form a tax group must apply to the UAE Federal Tax Authority before the end of the relevant tax period.
Administrative relief is granted to taxable persons with pre-group tax losses or unutilised net interest expenditure by allowing them to forfeit these amounts if they prefer not to determine the taxable income for the relevant group member on a standalone basis in accordance with the transfer pricing rules. This requirement is also waived in cases where a foreign tax credit needs to be claimed.
Income from ownership transfers under qualifying group relief or business restructuring relief will not face double taxation even if the clawback provisions under the participation exemption apply. This resolves the ambiguity regarding the 5% thresholds where the aggregate cost of acquisition criteria is fulfilled, specifically that the 5% profits/liquidation proceeds test does not apply if the minimum acquisition cost exceeds AED 4 million. Previously, this relaxation seemed applicable only to the 5% ownership criteria.
To ensure equal treatment of participations and PEs of foreign entities operating in the UAE, the updated guidance allows PEs that transfer their assets and liabilities to benefit from the participation exemption once the profits from the participation fully offset any aggregate tax losses incurred by the PE.
The guidance specifies that the asset test for the participation exemption applies only when the participation is categorised as a related party under the UAE corporate tax law.
Shivendra Jha
BDO in United Arab Emirates
Tax Groups
The requirements for dual-resident entities are simplified. Foreign juridical persons that are considered to be resident in the UAE may be included in a tax group without having to produce a confirmation from a foreign tax authority regarding tax residency status. A UAE resident person that becomes tax resident in another country will cease to be part of the tax group from the beginning of the tax period.Eligible entities wishing to form a tax group must apply to the UAE Federal Tax Authority before the end of the relevant tax period.
Administrative relief is granted to taxable persons with pre-group tax losses or unutilised net interest expenditure by allowing them to forfeit these amounts if they prefer not to determine the taxable income for the relevant group member on a standalone basis in accordance with the transfer pricing rules. This requirement is also waived in cases where a foreign tax credit needs to be claimed.
Participation Exemption and Foreign PE Exemption
Income from ownership transfers under qualifying group relief or business restructuring relief will not face double taxation even if the clawback provisions under the participation exemption apply. This resolves the ambiguity regarding the 5% thresholds where the aggregate cost of acquisition criteria is fulfilled, specifically that the 5% profits/liquidation proceeds test does not apply if the minimum acquisition cost exceeds AED 4 million. Previously, this relaxation seemed applicable only to the 5% ownership criteria.To ensure equal treatment of participations and PEs of foreign entities operating in the UAE, the updated guidance allows PEs that transfer their assets and liabilities to benefit from the participation exemption once the profits from the participation fully offset any aggregate tax losses incurred by the PE.
The guidance specifies that the asset test for the participation exemption applies only when the participation is categorised as a related party under the UAE corporate tax law.
Shivendra Jha
BDO in United Arab Emirates