Two UAE companies may file as a single entity for UAE corporate tax if strict criteria are met. The main requirement is that a parent company holds at least 95% of the subsidiary’s share capital, voting rights, and profits (either directly or indirectly). Both companies must be UAE residents that are neither exempt nor qualifying free zone persons. Formal application to the Federal Tax Authority (FTA) is required.
Key conditions for forming a tax group
The FTA lays out the following threshold requirements for two (or more) UAE companies to form a corporate tax group:
Condition | Requirement |
|---|---|
Legal form | Both must be juridical persons (e.g. LLCs, PJSCs, PSCs, etc.) |
Residency | Both must be resident in the UAE |
Exemption status | Neither can be an exempt person nor a qualifying free zone person |
Parent company share capital | Parent must own at least 95% of the subsidiary’s share capital |
Voting rights | Parent must hold at least 95% of the subsidiary’s voting rights |
Rights to profits and net assets | Parent must be entitled to at least 95% of profits and net assets |
Financial year | Same financial year end |
Accounting standards | Prepare financial statements using the same standards |
Example: If Company A owns 96% of Company B’s share capital directly, holds 96% of voting rights, has an equivalent share in profits and net assets, and both use the same accounting standards and year end, they can apply to be taxed as a group, provided neither is exempt or a qualifying free zone person.
How 95% thresholds are applied
The 95% thresholds must be tested at the level of share capital, voting rights, and rights to profits/net assets. Indirect ownership (such as through intermediate companies) may be included, so long as each step in the chain meets the 95% rule.
If a parent holds 100% of an intermediate subsidiary, and that subsidiary owns 96% of the company wishing to join the group, this equates to effective ownership of 96% (since 100% x 96% = 96%).
All rights, not just shareholding, must be considered: both the legal ownership and the substantive economic and decision-making rights must meet the threshold.
Exclusions: who cannot be part of a tax group
Two companies cannot form a tax group if one or both is:
- An exempt person (such as a qualifying investment fund, pension fund, government entity or government-controlled entity)
- A qualifying free zone person (even if they are otherwise related)
If one member of an existing tax group becomes exempt, or becomes a qualifying free zone person, it automatically leaves the group.
Joining and leaving a tax group
Only after all conditions are met can companies apply to form a tax group via the FTA portal. Newly incorporated subsidiaries can join if they meet the same criteria. The FTA must be notified of any member leaving, merging, or changing status (such as exemption or ceasing residence).
Exit from the group may have tax consequences, particularly if assets were previously transferred between members. The tax group must also review its eligibility on an ongoing basis, if a 95% threshold is breached, or any requirement no longer holds, FTA must be notified and the group must be reconstituted.
Tax group compliance: key points
- The tax group files a single corporate tax return for all members. The parent company is legally responsible for filing, reporting and payment.
- Members remain jointly and severally liable for any corporate tax due for periods they were part of the group.
- Intra-group transactions between members of the tax group are eliminated from the taxable income calculation, unless they relate to items such as inventory that are subsequently sold outside the group.
- All members must use identical accounting standards and financial year ends.
Impact on losses and rate thresholds
Forming a tax group affects several tax features:
- Previous tax losses from before joining the group may be subject to restriction or limitation on use.
- The AED 375,000 threshold for the 0% tax rate applies to the tax group as a whole, not per company, so all taxable profits are aggregated before this threshold applies.
Summary: key figures for eligibility and compliance
- 95%: The minimum share capital, voting rights, and profit/net asset entitlement required for group formation
- All members must be resident UAE juridical persons and not exempt or qualifying free zone persons
- The group must share the same financial year and accounting standards
- Single tax return to be filed by the parent, but all remain jointly and severally liable while members
This structure can simplify compliance for qualifying groups, but only where the strict conditions are met and maintained.
