Article (40) of the Corporate Tax Law lets a Resident Person, called the "Parent Company," apply to the Federal Tax Authority to form a "Tax Group" with one or more other Resident Persons called "Subsidiaries," provided the Parent Company owns at least 95% of the capital and voting rights of each Subsidiary. A Tax Group formed this way is treated as a single Taxable Person, represented by the Parent Company before the Authority.
Conditions for Forming a Tax Group
Clause (1) of Article (40) requires all of the following conditions to be met to form a Tax Group:
- The Resident Persons concerned must be juridical persons.
- The Parent Company must own, directly or indirectly (through one or more Subsidiaries), at least 95% of the share capital of each Subsidiary.
- The Parent Company must hold at least 95% of the voting rights in each Subsidiary.
- The Parent Company must be entitled to at least 95% of the profits and net assets of each Subsidiary.
- Neither the Parent Company nor any Subsidiary may be an Exempt Person or a Qualifying Free Zone Person.
- The Parent Company and all Subsidiaries must have the same Financial Year and prepare their financial statements using the same accounting standards.
The Effect of Forming a Tax Group
Once a Tax Group is formed under Clause (1) of Article (40), the whole Group is treated as a single Taxable Person represented by the Parent Company, which handles registration and Tax Return obligations on the Group's behalf. The Parent Company and each Subsidiary are jointly and severally liable for the Corporate Tax payable by the Group for the Tax Periods in which they were members, and this joint liability may be limited to one or more members with the Authority's approval.
Joining, Leaving and Replacing the Parent Company
A Subsidiary may join an existing Tax Group upon a joint application from the Parent Company and the Subsidiary concerned, and a Subsidiary must leave the Group if it no longer meets the membership conditions, or after the Authority approves a joint request to leave from the Parent Company and the Subsidiary. The Parent Company may also be replaced by another Parent Company without the Tax Group ceasing to exist, provided the new Parent Company meets the same conditions required of the previous Parent Company. The Authority may also, at its discretion and based on information available to it, dissolve the Tax Group or change its Parent Company, provided it notifies the Group accordingly.
Why Do Companies Form a Tax Group?
Forming a Tax Group simplifies administrative obligations for related companies by allowing a single Tax Return to be filed for the whole Group instead of a separate return for each company, and it allows, under the Law's general provisions, the results of the Parent Company and its Subsidiaries to be combined when computing the Group's overall Taxable Income. Even so, joining a Tax Group remains an election, not a requirement, and it calls for a careful assessment of its effect on each company involved before an application is submitted to the Authority.
Illustrative Example
A Resident parent company owns 95% of the capital, voting rights and profit entitlement of a Resident subsidiary, neither is an Exempt Person or a Qualifying Free Zone Person, and both share the same Financial Year and accounting standards. They may file a joint application to form a Tax Group, and once the Authority approves it, the two companies are treated as a single Taxable Person filing one consolidated Tax Return instead of two separate returns.
Legal References
- Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses — Article (40).
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