What Are the Consequences of Election for Qualifying Group Relief?

Since the Federal Tax Authority has issued a comprehensive corporate tax guide on qualifying group relief, there has been a lot of insight into many topics surrounding the transactions of entities in business. These are mostly related to the scope of the relief, the eligibility conditions for the same, situations where there is a possibility of triggering clawback, compliance requirements, and more. 

The objective of this is to help navigate the transfer of capital assets or liabilities within taxable persons in a qualifying Group- without having to pay taxes on any depreciation or amortization on said assets and liabilities. This is helpful in the overall restructuring of a business, preserving ownership, etc. 

In this blog, we address the consequences of the election for qualifying group relief. But before that, it is important to understand what is meant by election in this context.

Qualifying Group Relief: Election

In the context of Qualifying Group Relief, any kind of transfer takes place between two parties. Here, the Transferor refers to someone from whose side any assets or liabilities are to be transferred. The party receiving them is known as the Transferee. 

Since Qualifying Group Relief allows neutral restructuring of assets or liabilities being transferred, it is preferred for any transfer within a Group structure. But for this, the Transferor has to elect for Qualifying Group Relief for transfers within a strategically formed Group. 

Once such an election is made by the Transferor, it is irrevocable, and cannot be reversed without the approval of the Federal Tax Authority (FTA). This Relief will apply to all transfers that are held on capital account within the strategic Qualifying Group, within the reporting and subsequent tax periods. 

You can also read: Summary On Qualifying Group Relief Conditions Under UAE Corporate Tax

Consequences of Election for Qualifying Group Relief: Transferor

There are different consequences of election for both Transferor and Transferee in a Qualifying Group Relief. The consequences look like this:

• Transfer Of the Assets and Liabilities at Net Book Value

The most significant consequence is about no gain/ no loss. This refers to the transfer of assets and liabilities are made at Net Book Value- the depreciation and the amortization in the current book value of the assets or liabilities are taken and deducted at the Transferor level, hence there will be no taxable gain or loss on the transfer of the asset or liability.

The net book value of the asset and liabilities are calculated by deducting any depreciation and amortization amount or any other adjustments from the cost of the asset or liability in the financial statements. 

• Adjustments to the Taxable Income of Transferee

In cases other than realisation, the transferee will be required to adjust their taxable income to exclude any depreciation, amortization, or any change in value of the asset or liability to the extent of an amount not previously recognized as a taxable gain in the taxable income of the Transferor which was not been recognized for CT purposes as the treatment for the no gain or loss was implied.

In cases of the realisation of assets and liabilities, the transferee will be required to adjust and include the amount, if any, that has not been recognized for CT purposes under the application of the no gain or loss rule.

• Effect of several transfers on net book value method

When there is a previous transfer of assets and liabilities based on the no gain or loss rule under the CT law, then there might be a chance of gain or loss that might be received during the disposal that was not considered earlier. In such circumstances, the income on disposal should be adjusted for that amount.

• Exchange Of Assets and Liabilities 

• In case of exchange of assets and liabilities between the transferor and the transferee, instead of consideration, the exchange will be seen as two separate transfers. 
• The Relief will be made available if at least one of the Taxable Persons has made an election.
• In case the asset or liability being exchanged is not held in capital account, the Relief will not be made available. 
• In both transfers, no gain or loss values will be computed for Corporate Tax purposes.

• Transfer Of Losses

Qualifying Group Relief does not have any provision for the Tax Losses to be transferred to a Transferee. In such a case of Tax Loss Transfer, the provisions of the Article 38 of the UAE Corporate Tax Law would be applied. 

You can also read: What is a “Qualifying Registrant” for e-commerce purposes?

Consequences of Not Meeting Requirements to Elect for Qualifying Group Relief 

Since the article 26(1) might not apply to all kinds of asset or liability transfers between Taxable Persons, such transfers are outside the scope of the Qualifying Group Relief. Now, there are different provisions for the same, like:

• If such a transfer is between related parties, then the transfer, as a transaction, should meet the Arm's Length Standard. 

The gain or loss resulting from such a transfer will then be determined based on the market value of the asset or liability being transferred. 

• If the transfer or assets or liabilities is not between related parties, the gain or loss on such a transfer should be determined based on the standalone financial statements provided by the Taxable Persons in accordance with the accounting standards applicable. 

Electing to apply for Qualifying Group Relief can be quite a strategic move for businesses operating within a Qualifying Group in the UAE. Multiple benefits, enhanced operational efficiency, and facilitation of efficient business restructuring are some of the pros of the election for Qualifying Group Relief. 

However, it is also important to understand the consequences pertaining to certain sections of the Qualifying Group relief, as well as the clawback conditions proposed in the same. 

Ensure Your Tax Compliance with CDA

CDA being one of the best auditing and accounting firm in Dubai, UAE has been providing tax assistance to its potential clientele to ensure their compliance with the tax laws prevailing in the land. CDA with its team of experienced professionals, can provide your business with vital insights of the tax exemptions, reliefs, tax return filing procedures etc. whereby you can reduce the tax expenses for your business in UAE.

To get our varied tax services connect with our team now!