It is a common practice for closely related Businesses to transfer assets and liabilities between each other for operational reasons. Ordinarily, there would be a taxable gain or loss where an asset or liability is transferred for an amount different to its net book value. However, Corporate Tax relief is available where an asset or liability is transferred between members of a Qualifying Group which allows the transfer to take place without giving rise to a Corporate Tax liability.255

Taxable Persons will be treated as being members of the same Qualifying Group if they meet all of the following conditions:256

• The Taxable Persons are juridical persons that are Resident Persons, or Non- Resident Persons that have a Permanent Establishment in the UAE;257
• Either Taxable Person has a direct or indirect ownership interest of at least 75% in the other Taxable Person, or a third Person has a direct or indirect ownership interest of at least 75% in each of the Taxable Persons;258
• None of the Persons are an Exempt Person;259
• None of the Persons are a Qualifying Free Zone Person;260
• The Financial Year of each of the Taxable Person ends on the same date;261 and
• Both Taxable Persons prepare their Financial Statements using the same accounting standards.262

Where an election is made to apply the transfer within a Qualifying Group provisions, assets or liabilities held on capital account that have been transferred between

members of a Qualifying Group are treated as being transferred at the net book value of the asset or liability so that no gain or loss arises.263

The amount paid or received for the transfer will be treated as being equal to the value at which the transferor (the Taxable Person that transferred the asset or liability) records the transferred asset or liability.264

When calculating their Taxable Income, and unless and until the asset is subsequently transferred or sold to a third party, the transferee will exclude any depreciation, amortisation or other change in the value of the transferred asset or liability to the extent that it relates to the gain or loss that arose to the transferor that has not been subject to Corporate Tax due to the application of the relief for transfers within a Qualifying Group.265

Upon realisation of the asset or liability, the transferee will need to include any amount that has not been recognised for Corporate Tax purposes, other than any such amount that arose prior to the most recent acquisition where the relief did not apply.266

An election must be made by the transferor to apply this treatment and both the transferor and transferee must maintain a record of the agreement to transfer the asset or liability at net book value.267

The election is made alongside the Tax Return for the Tax Period in which the transfer occurs.268 This election is irrevocable and will apply to all future transfers of assets and liabilities held on capital account by the transferor within the Qualifying Group in all future Tax Periods.269

The relief will be clawed back if, within two years of the transfer, there is a subsequent transfer of the asset or liability outside of the Qualifying Group, or either the transferor or transferee ceases to be a member of the same Qualifying Group.270 In either of these scenarios, the transferor shall treat the transfer as having taken place at Market Value at the date of the original transfer, and shall account for any gain or loss that arises as a result in the Tax Return for the Tax Period in which the subsequent transfer

occurred.271 If the transferor no longer exists (for example, they have ceased to carry out a Business), the transferee would be responsible for meeting any Corporate Tax obligation on the deferred gain or loss

Relief for transfers within a Qualifying Group

C LLC and D LLC are both manufacturing businesses wholly owned by X LLC. C LLC and D LLC also meet all other conditions to be considered as members of a Qualifying Group.

During the Tax Period, D LLC won a large contract to supply goods to a new customer. In order to manufacture these goods, it needs specialist machinery. C LLC had this kind of machinery and, due to a recent change in its clients’ needs, no longer requires the machinery. C LLC transferred the machinery to D LLC. C LLC did not request payment and D LLC did not pay for the machinery. At the time of the transfer, the net book value of the machinery was AED 800,000 and its Market Value was AED 1,200,000. D LLC uses the fair value method of accounting and as a result, recognised the asset at a net book value of AED 1,200,000 for accounting purposes.

For Corporate Tax purposes, the machinery can be treated as having been transferred at the asset’s net book value, AED 800,000. This means that when calculating their Taxable Income, C LLC will be treated as having received AED 800,000 and D LLC will be treated as having paid AED 800,000 for the machinery. As a result, no gain or loss will arise for C LLC for Corporate Tax purposes

Subsequent transfer

One year later D LLC lost the contract with the large customer and therefore no longer required the specialist machinery. As a result, D LLC sold the machinery to a third party for AED 1,500,000.

The relief shall no longer apply because there is a subsequent transfer of the asset outside of the Qualifying Group within 2 years. As a result, C LLC (the original transferor) shall treat the transfer from C LLC to D LLC as having taken place at Market Value at the date of the transfer, and shall include a gain of AED 400,000 (AED 1,200,000 – AED 800,000) in the Tax Return for the Tax Period in which D LLC subsequently transferred the asset.

Given that the transferor has paid Corporate Tax on the gain arising on the original transfer (due to the clawback), this means that the original gain does not need to be taken into account by the transferee. Therefore, for the purposes of calculating the gainloss that will be subject to Corporate Tax for D LLC, the tax treatment would follow the accounting treatment, meaning that the taxable gain for D LLC will be AED 300,000 (AED 1,500,000 – AED 1,200,000).

For further details on Transfers within a Qualifying Group, readers are advised to consult Ministerial Decision No. 132 of 2023 on Transfers Within a Qualifying Group.

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