Ministerial Decision No. 133 of 2023 on Business Restructuring Relief for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses
Exploring Business Restructuring Relief under Federal Decree-Law No. 47 of 2022
In a recent development, Ministerial Decision No. 133 of 2023 has introduced Business Restructuring Relief as an essential measure for the implementation of Federal Decree-Law No. 47 of 2022, which focuses on the Taxation of Corporations and Businesses in the country. Let’s delve into the details of this decision and gain a comprehensive understanding of its impact on businesses and corporations.
Article (1): Definitions
To begin our exploration, it is vital to establish the definitions outlined within this decision. The following terms hold significance and require clear interpretation:
Accounting Standards
Accounting Standards refer to the specific standards prescribed by the Minister for the purpose of complying with the Corporate Tax Law. These standards aim to ensure accuracy, consistency, and transparency in financial reporting.
Ordinary Shares
Ordinary Shares pertain to a category of capital stock or equivalent ownership interest. Owners of Ordinary Shares enjoy equal entitlement to voting rights, profits, and liquidation proceeds on a share-by-share basis.
Preferred Shares
Preferred Shares represent a category of capital stock or equity interest that grants its owners priority entitlement to profits and liquidation proceeds over the owners of Ordinary Shares.
Redeemable Shares
Redeemable Shares signify a category of capital stock or equity interest that the issuing juridical person has agreed to redeem or buy back from the owner at a predetermined amount or with reference to a predetermined amount. This redemption occurs either at a future date or after a specific event.
Membership and Partner Interests
Membership and Partner Interests denote the equity interests held by a member or a partner in a juridical person. These interests entitle the member or partner to a share of the profits, which is determined based on their capital contribution. Such interests may be transferable to other parties.
Transferor and Transferee
The Transferor refers to a Taxable Person who transfers its entire Business or an independent part of its Business to another Taxable Person under Article (27) of the Corporate Tax Law. On the other hand, the Transferee represents the Taxable Person receiving the transferred Business or independent part thereof.
Article (2): Transfers in Exchange for Shares and Other Forms of Consideration
When analyzing transfers, it is crucial to understand the conditions outlined in Clause (1) of Article (27) of the Corporate Tax Law. A transfer is deemed to meet these conditions if the Market Value of any other forms of consideration received, in addition to shares or other ownership interests, does not surpass the lower of the following:
- The net book value of the assets and liabilities transferred.
- 10% (ten percent) of the nominal value of the ownership interests issued.
Article (3): Ownership Interest
For the purposes of Article (27) of the Corporate Tax Law, an ownership interest encompasses a wide range of instruments. These may include, but are not limited to:
a) Ordinary Shares. b) Preferred Shares. c) Redeemable Shares. d) Membership and Partner Interests. e) Other types of securities, capital contributions, and rights that entitle the owner to receive profits and liquidation proceeds.
To be considered an ownership interest, the instrument must be classified as an equity interest under the Accounting Standards employed by the Taxable Person holding the ownership interest. Additionally, the Taxable Person must exercise control over the ownership interest and possess the right to economic benefits in accordance with the applied Accounting Standards.
Article (4): Election to Apply for Business Restructuring Relief
When a transfer aligns with the conditions specified in Article (27) of the Corporate Tax Law, the Transferor must make an election to apply the provisions of this article. The election process must adhere to the prescribed format and guidelines outlined by the Authority. Both the Transferor and Transferee are responsible for maintaining the necessary records as stipulated in Article (9) of this Decision.
Furthermore, if the conditions of Clause (1) of Article (27) are met, any adjustments to the Taxable Income of both the Transferor and Transferee shall be made in accordance with the Ministerial Decision governing the general rules for determining taxable income.
Article (5): Transfer of Unutilized Tax Losses
Paragraph (d) of Clause (3) of Article (27) introduces the concept of transferring unutilized Tax Losses from the Transferor to the Transferee. This transfer is permissible if the Transferee continues to conduct the same or a similar Business or Business Activity that was previously carried out by the Transferor.
Determining whether the Transferee maintains the same or similar Business or Business Activity involves considering several relevant factors, including:
a) The utilization of the same assets previously employed by the Transferor. b) The absence of significant changes in the core identity or operations of the Business since the transfer. c) Any changes that have occurred resulted from the development or exploitation of pre-existing assets, services, processes, products, or methods.
Article (6): Parties to the Transfer
To establish the parties involved in a transfer, it is essential to comprehend paragraph (a) and (b) of Clause (4) of Article (27) of the Corporate Tax Law.
a) The recipient of the shares or other ownership interests must hold a direct or indirect ownership interest of at least 50% (fifty percent) in the Transferor. b) The issuer of the shares or other ownership interests must hold a direct or indirect ownership interest of at least 50% (fifty percent) in the Transferee.
These conditions ensure the alignment of interests and underline the significance of majority ownership in the transfer process.
Article (7): Unincorporated Partnerships
In the case of an Unincorporated Partnership seeking recognition as a Taxable Person, Article (16), Clause (8) of the Corporate Tax Law allows for special treatment. Partnerships meeting the necessary requirements need not consider gains or losses for Taxable Income determination, regardless of whether shares or ownership interests are acquired by partners or if all partners are Taxable Persons.
Article (8): Subsequent Transfer
Clause (7) of Article (27) of the Corporate Tax Law necessitates the inclusion of any gain or loss resulting from subsequent transfers in the calculation of Taxable Income for the Transferor. Such gain or loss is included in the Tax Return of the Transferor for the relevant Tax Period when any of the following circumstances arise:
a) The shares or other ownership interests in the Taxable Person, either the Transferor or the Transferee, are sold, transferred, or disposed of, wholly or partially, to a non-member of the Qualifying Group to which the respective Taxable Persons belong. b) Subsequent transfer or disposal of the Business or the independent part of the Business that was previously transferred occurs.
However, if the Transferor ceases to be a Taxable Person or is a natural person, any gain or loss that would have accrued to the Transferor is attributed to the Transferee. In such cases, the Transferee includes the gain or loss in their Tax Return for the Tax Period when the circumstances mentioned in paragraphs (a) and (b) of Clause (1) of this Article materialize.
Additionally, where Clause (7) of Article (27) of the Corporate Tax Law applies to a transfer, the Transferee must make the necessary adjustments to their Taxable Income during the corresponding Tax Period. These adjustments reverse any prior depreciation, amortization, or other changes in the value of an asset or liability that had been adjusted by the Transferee for the transfer. The Ministerial Decision governing the general rules for determining taxable income provides further guidance in this regard.
Article (9): Record Keeping
To comply with Article (56) of the Corporate Tax Law, both the Transferor and the Transferee must maintain accurate records. These records include the agreement to transfer the Business or independent part thereof, as valued under Article (27) of the Corporate Tax Law. Additionally, they encompass the requirements for making any necessary adjustments prescribed by the Ministerial Decision on the general rules for determining taxable income.
Article (10): Publication and Application of this Decision
This Ministerial Decision, No. 133 of 2023, shall be published and come into effect the day following its publication. It serves as a significant step toward implementing Business Restructuring Relief in accordance with Federal Decree-Law No. 47 of 2022.
In conclusion
Ministerial Decision No. 133 of 2023 outlines crucial provisions for Business Restructuring Relief as mandated by Federal Decree-Law No. 47 of 2022. By ensuring clarity in definitions, conditions, and record-keeping requirements, this decision facilitates the smooth implementation of the Corporate Tax Law. Businesses and corporations can now navigate the landscape of restructuring with confidence, adhering to the regulations outlined in this decision.
