Unlocking the secrets of qualifying group relief

In our preceding article, we examined the discretionary aspect of Qualifying Group Relief (QGR) and segmented our examination into three primary phases: pre-transfer, transfer, and post-transfer. We delved into the qualification criteria during the pre-transfer stage, the terms of the transfer phase, and the events that lead to the clawback of QGR in the post-transfer phase. The prior discourse offered a general outline of these prerequisites, while the current article concentrates on an in-depth exploration of critical aspects of QGR.

QGR necessitates that both the transferrer and transferee are juridical resident persons or permanent establishments (PE) of non-resident persons and are part of the same qualifying group. Furthermore, both are taxable persons; or become taxable person as result of this transfer. These criteria imply that certain entities, such as government entities, natural person even with an annual income exceeding Dh1 million, and non-residents, are not eligible for QGR benefits. Nevertheless, two PES, even if one serves as the transferrer and the other as the transferee, may qualify for QGR provided they satisfy all other requirements.

The legislation mandates a minimum of 75 per cent common ownership, where either the transferrer holds at least 75 per cent of the equity or equitable interest in the transferee, or the transferee holds the same in the transferrer, or another person owns at least 75 per cent of the equity or equitable interest in both the transferrer and transferee (acting as a common shareholder). This common shareholder could be any person, including individual, non-resident person, exempt person, taxable or nontaxable person etc.

Requirements

According to QGR provisions of the law, it is required that the transferrer and transferee are not qualifying free zone persons (QFZP) or exempt persons. This requirement is applicable at the time of the transfer. If either party becomes a QFZP or exempt persons within two years from the transfer date, they will cease to be members of the qualifying group and trigger a clawback.

However, if they become QFZP or exempt persons after two years from the transfer date, no clawback will be initiated.

Parties involved are not required to start their financial years simultaneously, but having the same fiscal year end is crucial. They can align their financial years as needed following the directives in Federal Tax Authority Decision No. 5 of 2023. The requirement for consistent accounting policies is fulfilled when both parties prepare financial statements using uniform policies, even if different methods are used internally, or if statements are adjusted to a common basis for tax purposes.

Unlike business restructuring relief (BRR), QGR does not have a designated consideration requirement. To qualify for QGR, there may be no consideration at all, or it can take various forms such as cash, assets, or others. Regardless of the form of consideration, its value will be deemed equivalent to the book value of the assets or liabilities being transferred.

Assets and liabilities

The transferrer can transfer assets and liabilities at their net book value, with any profit between market value and book value at the transfer date not affecting the transferrer’s tax records. Instead, the equivalent profit amount will be disallowed for tax purposes for the transferee. Upon realisation, any previously unrecognised profit is considered, and taxable income is determined by calculating disposal income in the financial statements (sale proceeds minus net book value).

This relief is available only for assets and liabilities held in the capital account, signifying they are long-term assets and liabilities subject to depreciation and amortisation. Assets that are capital in nature but classified in the revenue account due to business operations, like heavy equipment treated as inventory by a trading company, do not qualify for this relief since they are accounted for in the revenue account.

When considering an exchange involving assets or liabilities held on the capital account within a qualifying group, the provision of assets or liabilities in kind represents a trade. In such cases, each exchange of assets or liabilities within the capital accounts of qualifying group members is treated as two distinct transactions, with each transaction evaluated independently for QGR eligibility.

The clawback provision is triggered within two years of the transfer if the asset or liability is transferred to a party outside the qualifying group or if the transferrer or transferee leaves the tax group. In such instances, the transferrer is accountable for calculating and settling the tax based on the market value assumption of the original transfer. If the transferrer no longer exists, the transferee takes on the responsibility of tax calculation and payment.

The writer is a managing partner at Kress Cooper Management Consultants. The above article is not an official opinion of Khaleej Times but an opinion of the writer. For any queries/clarifications, please feel free to contact him at mahar@kresscooper.com