UAE Corporate Restructuring, M&A: New Tax Relief Laws

With the new UAE tax code coming into effect from tomorrow (June 1^st) various changes are being implemented at different levels and to deal with different circumstances. In its latest update, new regulations have been released by the Ministry of Finance on business restructuring relief and how this ties into the new tax regime.

This applies in situations under which M&A and other restructuring transactions can be undertaken without triggering a corporate tax liability. This relief is available when a business – or an independent part of it – is transferred or merged into another legal entity in exchange for shares or other ownership interests.

Where the transferor applies for the restructuring relief, no gain or loss needs to be included in the calculation of their taxable income.

The relief can also apply if the business is ‘exchanged for shares and a limited amount of other consideration such as cash’, or when the shares are received or issued by someone other than the transferor or the transferee ‘as long as they are received or issued by an entity which owns the transferor or transferee’.

The decision also details the mechanism for clawing back the relief if the business or ownership interests are subsequently transferred within two years of the date of the original restructuring.

Determining Taxable Income

The Ministry has also clarified the parameters for calculating taxable income of UAE businesses.

The decision sets out the adjustments needed for the taxable income calculation, including the recognition of realized and unrealized gains/losses in the financial statements. It also set out the conditions for ‘applying the realization basis’ and provides guidelines for adjusting changes in values on assets and liabilities derived from transfers involving related parties, qualifying groups or business restructuring relief.

“Businesses preparing financial statements on an ‘accrual basis of accounting’ can choose to recognize gains and losses on a realization basis for certain assets and liabilities,” the Ministry said. “This election must be made during the first tax period and is irrevocable, except under exceptional circumstances approved by the Federal Tax Authority.”

Transfers Between Qualifying Groups

If asset or liability transfers happen within a qualifying group, claims can be placed for corporate tax relief. The entity must make an election in their tax return to apply the relief and comply with the associated record-keeping requirements.

The election to apply the relief for transfers within a qualifying group is ‘irrevocable’ and applies to all future tax periods.

The decision also clarifies the implications of simultaneous asset or liability exchanges and those if the relief needs to be revoked (or ‘clawed back’) because the relevant assets and liabilities or the relevant group companies leave the qualifying group within two years of the original transfer.

Younis Haji Al Khouri, the Undersecretary of the UAE Ministry of Finance has stated concerning the new regulations that “The new decisions aim to simplify the process of determining taxable income in addition to providing tax relief for intra-group transfer of assets or liabilities between members of the same qualifying group or when carrying out specific organizational restructuring.”

For assistance and further clarifications please contact Dezan Shira & Associates Dubai office at dubai@dezshira.com

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