As part of the continuous efforts of the Federal Tax Authority (FTA) to assist corporate taxpayers to understand and manoeuvre through the complexities of the corporate tax regime of UAE, FTA has released the latest Business Restructuring Relief Guide for Corporate Tax Purposes (Guide). However please be mindful that, unlike Tax laws, FTA Guidelines are not legally binding.
Business Restructuring is a transaction in which a company or its group companies restructures its business operations and is a primary driver to maximize organizational efficiency in general and financial efficiency in particular.
This guide is designed to provide general guidance on the Business Restructuring Relief available under Article 27 of the UAE Corporate Tax Law.
The Guide provides the readers with an overview of the following with respect to Business Restructuring Relief:
• transactions covered within the scope of the relief,
• conditions to be eligible for the relief,
• consequences of electing for the relief,
• circumstances when the relief will be clawed back and consequences of clawback
of the relief,
• compliance requirements, and
• interaction with other provisions of the UAE Corporate Tax Law.
What is Business Restructuring Relief?
It is the relaxation or elimination of the Corporate Tax impact on certain transactions that are part of the restructuring or reorganization of a Business.
Commonly, business restructuring transactions such as mergers or demergers could result in a taxable gain or loss, even where the ultimate ownership of the Business or Taxable Person does not change, or the original owners of the Business or Taxable Person retain ownership in the restructured business.
The Business Restructuring Relief in Article 27 of the Corporate Tax Law allows certain types of restructuring transactions to take place in a tax-neutral tax-neutral manner. It supports restructuring transactions undertaken for valid commercial or other non-fiscal reasons.
Transactions covered within the scope of the relief:
Business Restructuring Relief applies to two categories of transactions as detailed under Article 27(1)(a) and Article 27(1)(b) of the Corporate Tax Law respectively.
The first category is where there is a transfer of an entire business or an independent part of the business from one Taxable Person to another.
The second category is where there is a transfer of an entire business from one or more Taxable Persons to another, and the Transferor then ceases to exist.
Conditions to be eligible for the relief:
In order for Business Restructuring Relief to apply, all of the following conditions need to be met:
- the transfer is undertaken in accordance with, and meets all the conditions imposed by, the applicable legislation of the UAE (the “legally compliant condition”),
- the Transferor and the Transferee are Resident Persons, or Non-Resident Persons that have a Permanent Establishment in the UAE (the “Taxable Persons condition”),
- neither the Transferor nor the Transferee is an Exempt Person (the “Exempt Person condition”),
- neither the Transferor nor the Transferee is a Qualifying Free Zone Person (the “Qualifying Free Zone Person condition”),
- the Financial Year of Transferor and Transferee ends on the same date (the “Financial Year condition”),
- the Transferor and Transferee prepare their Financial Statements using the same Accounting Standards (the “Accounting Standards condition”), and
- the transfer is undertaken for valid commercial or other non-fiscal reasons which reflect economic reality (the “valid commercial reasons condition”).
There is no condition in respect of the ownership of the Transferor or the Transferee. Thus, the relief covers Business restructuring transactions where a Business is transferred from one Related Party to another and also where the Business restructuring is between third parties.
Consequences of electing for Business Restructuring Relief:
Tax relief is a lucrative consideration for undertaking a business restructure, hence section 5 of the Guide highlights the consequences of electing for business structuring relief in order to enable the taxpayers to take an informative decision.
5.1. Transfer of assets and liabilities at net book value
Where a Business is transferred on a no gain or loss basis, the assets or liabilities transferred will be treated as transferred at their net book value at the date when the transfer takes place. Accordingly, for the Transferor, there will be no taxable gain or loss on transferring the assets and liabilities
5.2. Value of shares or ownership interest received
In this case, the Transferor or shareholder(s) of the Transferor who hold at least 50% of the ownership interests directly or indirectly in the Transferor shall treat the shares or other ownership interests received as having a value not exceeding the net book value of the assets transferred and any liabilities assumed, less the value of any other form of consideration received for Corporate Tax purposes.
5.3. Transfer of Tax Losses: This states that unutilized Tax Losses incurred by the Transferor in Tax Periods before the restructuring transaction, can be carried forward and are considered as Tax Losses of the Transferee, provided the Transferee continues to conduct the same or a similar Business or Business Activity as the Transferor conducted before the restructuring transaction.
Consequences of not meeting requirements or not electing for Business Restructuring Relief:
Article 27(1) does not apply to all transfers of a Business between two Taxable Persons. If the conditions for a no gain or loss transfer are not met (see Section 4) or if the Transferor has not elected for the application of Article 27 of the Corporate Tax Law (see Section 7.1), the transfer would be outside the scope of Article 27 of the Corporate Tax Law.
Claw back of Business Restructuring Relief details that if there is a sale/dispose of the shares of (partial or complete) of the transferor or transferee to a person who is not part of a qualified group or if there is a subsequent business restructuring under Article 27 of Corporate Tax Law occurs within 2 years from the date of transfer, then such Business Restructuring Relief shall not apply.
In addition, this Guide also include Section 7 detailing about compliance requirement for companies opting for business restructuring relief and Section 8 dealing with interaction of Business Restructuring Relief with other parts of Corporate Tax Law
Closing Remarks:
The above are few of the main provisions this FTA guide providing comprehensive explanation of relief provisions, ensuring businesses can strategize their expansions aligning with the new tax regime with confidence. Businesses can delve deep into the provisions of this Business Restructuring Relief guide to optimize their tax positions during restructuring activities and tap into tax benefits.
Disclaimer
This publication does not provide any legal advice and it is for information purposes only. You should not rely upon the material or information in this publication as a basis for making any business, legal or other decisions. Any reliance you place on such material is therefore strictly at your own risk.
Author: Sridevi Sidharthan & Thara Kumar
