Tax grouping is the process where two or more companies or partnerships with limited liabilities are considered as one taxable entity for VAT. For tax grouping in UAE, the VAT or tax group will be regarded as a single company. It will be stated under the terms and conditions of the law. 

A federal corporate tax law was introduced in the UAE, effective June 1, 2023. This complies with the global standards. One of the key aspects of the tax law is the provision related to tax group structures. One of the important aspects of this tax law is the provisions that are related to tax group structure. The UAE CT framework identifies two group types: qualifying groups and tax groups.

In this blog post, we will discuss the difference between the qualifying groups and tax groups, the eligibility criteria, and the benefits of tax groups. Dive into the sections below to understand them in detail.

Difference Between Qualifying Groups and Tax Groups in the UAE's Corporate Tax Framework

There is a fundamental difference between qualifying groups and tax groups. Qualifying Groups allow only limited consolidation, but Tax Groups will allow full consolidation. Also, tax groups are regarded as a single taxable entity.

Formation of a Qualifying Group is acceptable for two or more entities when any one of them holds 75% of ownership directly or indirectly in each entity. Also, approval from the Federal Tax Authority is not necessary for the creation of a qualifying group. The major benefits of qualifying groups include the transfer of tax losses and assets within the group members at a value without the recognition of profits or losses. However, every member has to file their tax returns individually, depending on their own results. So, due to the limited benefits of Qualifying Groups, it is not possible to allow for full consolidation.

However, at tax groups, entities will witness more significant benefits. This is because it allows full horizontal consolidation. The Tax Groups have stricter criteria to meet in order to fill out the form successfully. The entities must meet all the necessary requirements in order to form a Tax Group. The foremost thing is that the company must directly or indirectly hold voting rights of at least 95% to form a Tax Group.

Eligibility Criteria to Form Qualifying Tax Groups and Their Impact On Financial Consolidation

Eligibility Criteria to Qualify As A Qualifying Group

Here is the list of requirements which the companies have to meet:

• Has to be a UAE resident or must have a permanent establishment in the country.

• It is mandatory to have at least 75% voting rights. Also, the share capital of the company should be owned by another company within the group. 

• Every company has to prepare its financial statements with the use of the same accounting standards and should share the same financial year. 

• No company in the group will be exempt from corporate tax.

After a qualifying group is formed, the corporate tax will be calculated on the basis of the group's overall profits, not on the basis of each individual company’s profits. This will further result in individual tax savings for the group when any companies are at a loss within the group. 

Eligibility Criteria For Tax Grouping

Here are the requirements that have to be met for tax grouping. 

• A company must directly or indirectly have to have voting rights of 95%. Also, the share capital of these companies is to be included in the Tax Group.

• It is necessary to have 95% of voting rights to be satisfied both at the beginning and end of the tax period. 

• Through shareholding, the company's voting rights need to be held directly or indirectly. 

• Tax groups cannot be formed when entities are completely owned by individuals. It is not applicable even if they belong to the same Tax Group. It is mandatory to have group ownership

• Companies that are not eligible are real estate investment groups, qualifying free zone persons, and Exempt persons.

The tax grouping will reduce the tax liability. Moreover, it will ease tax compliance and enhance financial reporting. 

Benefits of Tax Groups

The tax grouping comes with several benefits. It will reduce the burden of tax liability, improve financial reporting, and simplify tax compliance. Here are the details of the benefits of tax grouping. Moreover, the benefits of creating a tax group include the ability to file a single group tax return. It also includes the ability to transfer tax losses, liabilities, and assets within the group members without the need to create a tax impact. Below is the list of benefits of tax grouping. 

• All the members included in the tax group will be considered a single taxable person for VAT. This is how the accounting process for VAT becomes simplified. It also simplifies compliance reporting, such as VAT tax returns. This is because it has to be filed at the group level rather than individually. 

• Another major benefit is that VAT will not be charged for purchases and supplies made by tax group members. But, VAT will be charged for transactions that are made outside the tax group.

• Every group will have one VAT return per quarter. This means you will have less work stress at the administration level.

• VAT will not be charged for inter-company transactions. Therefore, in this event, you will notice simplification in the process of accounting and record-keeping. Moreover, there will be a low risk of the challenge of transfer pricing.

• Under intra-group charges, cash flow benefits can be expected. Regarding the intra-group charges, there is a small risk of incurring penalties.

• You will witness more ease in system implementation and configuration. The cost of Tax consulting and compliance will become relatively cheaper.

Final Words

Hope you have understood the Qualifying Groups and Tax Groups in detail, including their eligibility criteria and benefits. The above comparison clearly shows that companies can get significant advantages from tax grouping over qualifying groups.