On April 17, 2024, the Federal Tax Authority (FTA) released a Corporate Tax Guide focusing on “Business Restructuring Relief” (Relief) to offer general insights into the Relief provisions outlined in Article 27 of the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (CT Law). While the guide is not legally binding, the guide aims to aid in comprehending the Relief provisions within the CT Law. Following are the key aspects that can be summarized from the Corporate Tax Guide issued by the FTA.  

1. What is a Business Restructuring relief?

The Corporate Tax Law offers relief for restructuring transactions, allowing smooth business reorganizations without tax penalties, supporting legitimate commercial activities. Business Restructuring Relief necessitates meeting outlined conditions and requires the Transferor’s election for application. If the Transferee disposes of the transferred Business or if there are ownership changes in either party within two years, the relief is revoked. Business restructurings can be of two types as follows:

• transferring a whole business or an independent part* of it from one taxpayer to another (Article 27(1)(a)), and
• transferring a whole business from one or more taxpayers to another, resulting in the cessation of the transferor (Article 27(1)(b)).

*An independent part of a business is one that can operate autonomously from other business components. Some factors may be as follows:

• This requires that transferred assets and liabilities can function independently as a separate entity.
• Part of a Business is transferred on a going concern basis as per applicable accounting standards.
• The need for operational support, whether from a Related Party or a third party, does not negate the classification of the transfer as an independent part of a business.

 

2. Consideration for the transfer

For Business Restructuring Relief, the usual consideration for a transfer is shares or ownership interests of the Transferee. An exception allows consideration in the form of shares issued by someone owning at least 50% of the Transferee. This can include a mixture of shares from the Transferee and its majority shareholder. The issuer of the consideration shares doesn’t need to be a Taxable Person, but they must have the capacity to issue shares. To be eligible for Business Restructuring Relief, the consideration for transferring a business or its part must be in the form of shares or other ownership interests. Ownership interests include equity or similar stakes that grant rights to the entity’s profits and liquidation proceeds. A Taxable Person shall be treated as holding an ownership interest where the following two conditions are met:

• The ownership interest is controlled by that Taxable Person under the Accounting Standards applied by the Taxable Person, and
• That Taxable Person has the right to the economic benefits produced by the ownership interest under the Accounting Standards as applied by the Taxable Person

Besides shares or ownership interests, if cash or other forms of consideration are involved, Business Restructuring Relief can still apply if the Market Value of this consideration is within specific limits: either not exceeding the net book value of the transferred assets and liabilities or 10% of the nominal value of the issued ownership interests. An exception occurs when partners of an Unincorporated Partnership opt to treat it as a Taxable Person under Article 16(8) of the Corporate Tax Law, approved by the FTA. This transforms the partnership into a Taxable Person, treating the partners’ shares as transferred to the partnership for tax purposes without legally transferring assets and liabilities. In such cases, Business Restructuring Relief may apply even if no formal consideration is issued, and regardless of whether the partners are Taxable Persons.  

3. Conditions to qualify for Business Restructuring Relief

• The transfer is undertaken in accordance with, and meets all the conditions imposed by, the applicable legislation of the UAE (the “legally compliant condition”)
• The Transferor and the Transferee are Resident Persons, or Non-Resident Persons that have a Permanent Establishment in the UAE (the “Taxable Persons condition”)
• Neither the Transferor nor the Transferee is an Exempt Person (the “Exempt Person condition”)
• Neither the Transferor nor the Transferee is a Qualifying Free Zone Person (the “Qualifying Free Zone Person condition”)
• The Financial Year of Transferor and Transferee ends on the same date (the “Financial Year condition”)
• The Transferor and Transferee prepare their Financial Statements using the same Accounting Standards (the “Accounting Standards condition”)
• The transfer is undertaken for valid commercial or other non-fiscal reasons which reflect economic reality (the “valid commercial reasons condition”).

 

4. Consequences of electing for Business Restructuring Relief

Where a Business or an independent part of a Business is transferred on a no gain or loss basis under Article 27(1) of the Corporate Tax Law, the assets or liabilities transferred will be treated as transferred at their net book value at the date when the transfer takes place. Accordingly, for the Transferor, there will be no taxable gain or loss on transferring the assets and liabilities.*  

5. Adjustments to be made by Transferee

Generally, the assets and liabilities of the business are acquired at market value, and the transferee’s financial statements reflect this value. Consequently, any changes in value, such as depreciation or amortization, are based on market value in the transferee’s financial statements. If BRR applies, the Transferee shall make the following adjustments in his financial Statements. In cases other than upon realisation: to exclude depreciation, amortisation or other change in the value of the transferred assets and liabilities to the extent of the amount not previously recognised for CT. Upon realisation: to include the amount of depreciation, amortisation or other change in the value of the transferred assets and liabilities not previously recognized for CT purposes.  

6. Effects of Several Transfers

• If there are several transfers on a no gain or loss basis, all the gains and losses in relation to those transfers shall be included upon realisation.
• The depreciation, amortisation or any other amount previously excluded shall be included in the taxable income of the transferee upon realisation
• If a clawback is triggered in any of the transfer within the several transfers, then the amount of gain previously excluded shall be taxable in the hands of “transferor of the transaction” for which the clawback is triggered in the tax period in which the clawback is triggered.

 

7. Clawback of Business Restructuring Relief

Business Restructuring Relief won’t be granted if, within two years of transfer

• Shares or ownership interests in either the transferor or transferee that were issued as a part of business restructuring relief are sold, transferred, or disposed of, either wholly or in part, to an entity not a part of the qualifying group of the relevant taxable persons.
• The business or its independent parts transferred under Article 27(1) of the Corporate Tax Law are subsequently transferred or disposed of.

 

8. Other Points to be considered in claw back

• In the event of transfer of shares,