Federal Tax Authority releases Corporate Income Tax Guide on Business Restructuring Relief

Background

On 17 April 2024, the UAE Federal Tax Authority (FTA) released a Corporate Income Tax (CIT) Guide on the Business Restructuring Relief introduced by the Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses (CIT Law) as part of the CIT regime governing in the UAE.

The guide is organized into six comprehensive chapters, each focusing on a key aspect of the Business Restructuring Relief. It offers insights into the types of transactions that fall under the Business Restructuring Relief, supplemented with various illustrative examples for better understanding. The guide also elaborates on the prerequisites for availing this relief, the outcomes of its application, and other practical considerations that are relevant for taxpayers in the UAE who are undergoing restructuring transactions.

The integration of Business Restructuring Relief into the UAE’s CIT regime demonstrates the UAE government’s commitment to facilitate business restructurings by reducing the usual tax liabilities that would typically arise in the framework of such reorganisations.

General considerations

Set forth in article 27 of the UAE CIT Law, the Business Restructuring Relief provides UAE taxpayers with a mechanism to mitigate potential CIT implications arising from business restructuring transactions.

By exempting potential capital gains and excluding losses arising from a number of restructuring transactions (and subject to certain conditions being met), the UAE CIT regime ensures tax neutrality for taxpayers conducting business reorganisations for sound economic reasons and excludes such possibility for tax-driven transactions.

The Business Restructuring Relief is designed as a voluntary regime, applicable as per the taxpayer’s election.

Further, the Business Restructuring Relief includes a clawback clause, which essentially implies that the tax neutrality will be forfeited in certain scenarios described both in the CIT Law and the Business Restructuring Relief Guide.

Transactions covered under the Business Restructuring Relief

The Business Restructuring Relief will only be applicable to two (2) kinds of transactions specified in the UAE CIT Law and further developed in the Business Restructuring Relief Guide:

• Transfer of an entire business or an independent part of the business from one taxable person (Transferor) to another person who is a taxable person or will become a taxable person as a result of the transfer (Transferee)¹. The Business Restructuring Relief Guide provides an extensive list of illustrative examples which will be covered under this first scenario².

• Transfer of an entire business from one or more taxable persons (Transferor) to another person who is a taxable person or will become a taxable person as a result of the transfer (Transferee) when the transferring entity ceases to exist³. The Business Restructuring Relief Guide also provides an extensive list of illustrative examples which will be covered under this second scenario⁴.

For the purpose of the above, the Business Restructuring Relief Guide defines “business” and “independent part of a business” and provides with multiple examples of transactions which are not in scope of the relief, including the transfer of assets and/or liabilities as part of a liquidation process⁵.

Consideration of the transfer

The Business Restructuring Relief will only be applicable to transactions in scope as described above, when the transfer is made in exchange of shares or other ownership interests in the Transferee or in a person who holds, either directly or indirectly, at least 50% of the shareholding in the Transferee.

The consideration for the transfer needs to be received by the Transferor or by a person who holds a direct or indirect ownership of at least 50% in the Transferor. Such person may be a juridical or natural person and is not required to be a taxable person for CIT purposes.

Other forms of consideration, such as cash, may be part of the total consideration paid, as long as the market value of such consideration does not exceed the lower of (i) the net book value of the assets and liabilities transferred or (ii) 10% of the nominal value of the ownership interest issued.

Conditions to apply the Business Restructuring Relief

As anticipated in the UAE CIT Law, the Business Restructuring Relief will only be applicable provided that certain conditions are met:

• The transfer shall be conducted in accordance with the applicable laws and regulations in the UAE.
• Both the Transferor and the Transferee shall be taxable persons for UAE CIT purposes (i.e., resident persons or non-resident persons with a Permanent Establishment (PE) in the UAE). In this sense, the Business Restructuring Relief Guide specifies that the Transferor (but not the Transferee) may be a natural person, as long as it’s considered a taxable person for CIT purposes. A transfer between a PE and its head office will not be eligible for the Business Restructuring Relief.
• Neither the Transferor nor the Transferee can be exempt persons for CIT purposes.
• Neither the Transferor nor the Transferee can be Qualifying Free Zone Persons (QFZP) for CIT purposes. The fact that an entity is incorporated in a Free Zone does not exclude the possibility to apply the relief, as long as it is not considered a QFZP.
• Both the Transferor and the Transferee shall have the same financial year end. An application can be made to the FTA to request a change in the financial year end to accommodate this requirement (subject to certain conditions specified in the guide).
• Transferor and Transferee must prepare their Financial Statements in accordance with the same Accounting Standards.
• The business restructuring must be supported by valid commercial reasons and shall not be tax driven.
• Within two (2) years from the date of transfer there are no circumstances which would trigger a clawback (see below).

Main implications of applying the Business Restructuring Relief

Where a taxpayer is eligible and elects to apply the Business Restructuring Relief in the framework of a business reorganisation, the relevant assets and liabilities will be treated for tax purposes as transferred at their net book value at the time of the transfer. Hence, no capital gain/loss will materialise in the hands of the Transferor upon transfer of the assets/liabilities. The Business Restructuring Relief Guide provides further guidance on the calculation of the net book value for these purposes.

Unutilised tax losses registered by the Transferor may be carried forward and available to be offset by the Transferee in the future, provided that the Transferee continues to perform the same or similar business activity as the Transferor conducted before the transfer. The Business Restructuring Relief Guide specifies certain criteria to determine when a business may be considered as of “same or similar nature”. Whilst this is specified for tax losses, it does not apply for unutilised net interest expenses.

Clawback provisions

The Business Restructuring Relief will be clawed back in the event that, within the two (2) years subsequent to the transfer, one of the two (2) circumstances take place:

• The shares or other ownership interests in the Transferee are wholly or partially transferred to a person which does not form part of a Qualifying Group with the entity transferring the shares; or
• The business or independent part of a business transferred is subsequently disposed of.

Where the clawback provisions are triggered, the transfer will be treated as executed at market value and, hence, any potential capital gains/losses will need to be included as part of the taxable income of the Transferor and Transferee in the fiscal year in which the clawback is triggered.

For these purposes, the potential capital gain will be calculated as the market value of the assets and liabilities transferred minus their net book value at the time of the transfer.

Compliance requirements

From a compliance perspective, either the Transferor or the Transferee will need to make an election to apply the Business Restructuring Relief for each particular restructuring transaction (i.e., unlike the Qualifying Group Relief, it will not be applicable to subsequent reorganisations, but will rather need to be requested on a transaction basis).

Both the Transferor and Transferee will need to maintain the relevant supporting documentation, including the agreements, to justify compliance with the requirements to apply the relief.

Conclusion

Amidst the positive impact that the Business Restructuring Relief will have on taxpayers navigating complex restructuring processes by reducing their overall tax burden, it will also require an extra effort to ensure compliance with the applicable regime and minimize potential risks when applying the relief.

Taxpayers willing to apply the relief will need to:

• Closely monitor and analyse the conditions required to apply the incentive to ensure they fall under the relevant scenarios.
• Ensure that the transactions are supported with sound commercial and economic reasons and maintain the relevant supporting documentation to justify those reasons.
• Avoid any transfers within the two (2) years subsequent to the restructuring transactions to ensure that the clawback provisions are not triggered and avoid adverse tax implications.

Reference

• FTA Corporate Tax Guide on Business Restructuring Relief (CTGBRR1)