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UAE Corporate Tax: Expanding Scope of Business Restructuring Relief

In the wake of the UAE's robust economic growth and the implementation of a competitive corporate tax framework, significant transformations are underway across various sectors. We are witnessing a notable surge in mergers, acquisitions, and hive-offs, reflecting a dynamic shift in the business landscape.

At a granular level, individual entrepreneurs are transitioning their sole establishments into incorporated entities. Moreover, multinational corporations are actively considering the conversion of their UAE branches into limited liability companies (LLCs). Notably, the UAE's corporate tax system promotes tax neutrality through what is termed as "business restructuring relief," particularly in scenarios involving the transfer of existing businesses or independent segments thereof.

Under the business restructuring relief mechanism, the transferring entity is exempted from corporate tax on any gains or losses arising from the transfer. This entails that assets and liabilities are treated as transferred at net book value, thereby resulting in a neutral financial impact.

Recently, the Federal Tax Authority issued comprehensive guidance outlining the conditions, procedural requisites, and repercussions of non-compliance pertaining to business restructuring relief.

Eligibility Criteria: To qualify for this relief, both the transferor and transferee must be resident juridical persons or UAE-based permanent establishments of foreign entities. Furthermore, they should not fall under the category of exempt persons or qualifying free zone entities. Alignment in financial year and adherence to accounting standards are also prerequisites. Importantly, the business transfer should be driven by legitimate commercial or non-fiscal motives that reflect economic realities.

Scope of Relief: The scope of business restructuring relief encompasses transfers of businesses for consideration, primarily in the form of shares or ownership interests. Cash consideration should not surpass the lower of the net book value of transferred assets and liabilities or 10% of the nominal value of shares/ownership interests issued.

This relief mechanism covers a spectrum of transactions including the conversion of sole proprietorships into LLCs, business transfers, mergers, demergers, and hive-downs in exchange for shares. Additionally, it facilitates transfers between non-resident entities with permanent establishments in the UAE.

However, it's crucial to note that certain transactions such as subsidiaries merging with their parent companies resulting in dissolution and share cancellation, asset/liability transfers during liquidation, and transfers between group entities without share transfer do not qualify for relief due to the absence of share transfer.

For further details on eligibility criteria, procedural guidelines, and the scope of relief, please refer to the guidance issued by the Federal Tax Authority.

Stay informed with MAC and Ross Chartered Accountants for the latest updates on regulatory developments and tax strategies shaping the UAE business landscape.