It is common for business entities to commence within a group, meaning, broadly, several firms under common ownership. Tax grouping or VAT grouping means two or more businesses or limited liability partnerships can be possibly considered as a single taxable entity for VAT.
Since the enactment by the United Arab Emirates Ministry of Finance of Federal Decree-Law No. 8 of 2017 on Value Added Tax Law, associated companies may be considering restructuring their group to be eligible to meet the requirements and register as a ‘VAT group’ or ‘tax group’.
Even though the main drivers for companies deciding to register as a tax group will possibly be to avoid VAT on provisions made between group companies, there are potentially other benefits as well, like –
- Only having to provide one VAT tax return for the group, thereby decreasing the administrative load
- The ability to take advantage in certain circumstances from exempted supplies made between group companies, and
- Minimising the VAT consequences on the transfer of assets between group companies
Conditions to Apply for VAT Group Registration
There are a few conditions one must fulfil to be eligible for tax group registration. They are –
- Each individual must have a place of establishment or fixed established in the UAE as mentioned below –
- Place of Establishment – The place where a business is legally established in the Emirates according to the decision of its establishment, or a place in which substantial management conclusions are taken and central management decisions are made and fundamental management functions are conducted
- Fixed Establishment – Any fixed place of operation, other than the location of the establishment, in which the persons conducts their business often or permanently and where an adequate degree of human and technology resources are available which enables the person to supply or acquire goods or services
- Two or more individuals shall be related, i.e. they must not be separated on the financial, economic, or regulatory level, where one can control others either by law or through the acquisition of shares or voting rights
- One or more individuals who are related must manage the other business. For example – officers or directors of one another’s businesses, partners in each other’s company etc.
How to Form a Tax Group?
Once it has been determined that the potential members are qualified to create or join a tax group, it is also essential to establish whether that group is needed to or eligible to register for VAT purposes. The VAT registration guidelines can be satisfied where either –
- One prospective member alone meets the pertinent registration requirements; or
- If taken together, the total value of supplies made by or expenditures (which are subject to VAT), suffered by the prospective members satisfy the appropriate registration requirements.
Pros and Cons of Tax Grouping
There are advantages and disadvantages to everything; hence tax grouping is not an exception. Before you decide to apply for a VAT/Tax group registration, you should know its pros and cons.
- Less work in the administration part as per group, there will be only on VAT return per quarter
- Simplification of the recording process as the inter-company transaction will not have VAT charges
- The low-risk challenge of transfer pricing
- Benefits concerning cash flows are expected in case of intra-group charges
- Cheaper consultancy or compliance cost
- The groups may miss deadlines and incur penalties as it takes time to secure the relevant data for completion of one return
- Challenges and complications when it comes to tax inspection should be expected because there should be support from all group entities within a limited timeline
- Since there is only one authorised signatory needed, it is a such a high risk for the officer who is ordered to sign
- One mistake of information of one entity can affect the whole group
Do You Want to Form or Join a Tax Group?
Here is a flowchart to make the decision easier for you if you need a tax group or not.