Implications for Business Restructuring Relief under Federal Decree-Law No. 47 of 2022

Ministerial Decision No. 133 of 2023 has brought significant changes to the landscape of business restructuring relief in accordance with Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses. The decision outlines various provisions related to transfers, ownership interests, elections, transfer of unutilized tax losses, parties involved, unincorporated partnerships, subsequent transfers, and record-keeping requirements. This article aims to analyze the implications of these provisions and their potential impact on businesses in the UAE.

 

Article 2 of the decision introduces conditions for transfers to qualify under Article 27 of the Corporate Tax Law. It states that the Market Value of any other forms of consideration received in addition to shares or other ownership interests do not exceed the lower of 1. The net book value of the assets and liabilities transferred; or 2. 10% (ten percent) of the nominal value of the ownership interests issued. This provision ensures that transfers are valued accurately and prevents the overvaluation of consideration.

 

Article 3 broadens the definition of ownership interest under Article 27 of the Corporate Tax Law. It includes ordinary shares, preferred shares, membership, and rights that entitle owners to receive profits and liquidation proceeds. Classifying an ownership interest as an equity interest under applicable accounting standards is a prerequisite for its treatment under tax regulations. This clarification promotes consistency and avoids potential ambiguity.

 

Article 4 specifies the requirement for the transferor to make an election to apply the provisions of Article 27. The election must be made in the prescribed form and manner, with the transferor and transferee maintaining the necessary records. Additionally, any adjustments to the taxable income of the transferor and transferee, as a result of applying Article 27, should be made in accordance with the general rules for determining taxable income as mentioned in Ministerial Decision 134 of 2023.

 

Article 5 addresses the transfer of unutilized tax losses. It allows for the carried forward of the unutilized tax losses of the transferor to become tax losses of the transferee, provided the transferee continues the same or similar business activity as conducted by the transferor before the transfer. The article lists relevant factors to determine continuity, such as using the same assets, limited changes to the core identity or operations, and changes resulting from developing or exploiting pre-existing assets, services, processes, products, or methods. This provision encourages business continuity and safeguards the utilization of tax losses for eligible transferees.

 

Article 6 defines the parties involved in the transfer. It mandates that a person with direct or indirect ownership interests of at least 50% in the transferor must receive the shares or ownership interests. Similarly, the same percentage of ownership interest must apply to the Transferee issuing the shares or ownership interest. This provision ensures the transfer involves significant ownership interests and discourages arrangements for tax purposes.

 

Article 7 addresses the treatment of unincorporated partnerships. It states that if an application has been made by an unincorporated partnership to be treated as a taxable person, no gain or loss needs to be taken into account in determining taxable income, regardless of whether shares or ownership interests are received by the partners or if all partners are taxable persons. This provision offers flexibility for unincorporated partnerships seeking to be treated as taxable persons.

 

Article 8 deals with subsequent transfers and their impact on taxable income. It stipulates that any gain or loss resulting from the application of Article 27 shall be taken into account for calculating the taxable income of the transferor under certain circumstances. Subsequent transfers or disposals of shares or ownership interests to non-members of the qualifying group or the transferred business trigger such calculations. Additionally, the article outlines circumstances in which the gain or loss is attributed to the transferee instead of the transferor, including when the transferor ceases to be a taxable person or is a natural person. These provisions ensure transparency and accountability in subsequent transfers.

 

Article 9 emphasizes the importance of maintaining records related to the transfer. The transferor and transferee must keep records of the agreement, the value prescribed under Article 27, and any necessary adjustments per the Ministerial Decision on general rules for determining taxable income. These record-keeping obligations aim to facilitate transparency and provide a basis for auditing and enforcement purposes.

 

Ministerial Decision No. 133 of 2023 has introduced comprehensive provisions governing business restructuring relief under Federal Decree-Law No. 47 of 2022. These provisions enhance transparency, consistency, and fairness in business restructuring processes while ensuring tax compliance. Businesses in the UAE should familiarize themselves with these provisions and consult tax professionals to navigate the intricacies of the amended regulations effectively.