Taxation of Corporations and Businesses

Ministerial Decision No. 132 of 2023 on Transfers Within a Qualifying Group for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses

Introduction

In this article, we will explore the concepts of ownership interest and transfers within the framework of corporate tax law. We will discuss the definitions of various terms, the conditions for applying tax provisions, and the implications of subsequent transfers. It is essential for businesses to understand these concepts to ensure compliance with the relevant regulations and optimize their tax strategies.

Definitions

To begin, let’s clarify some important terms used in corporate tax law:

Accounting Standards

Accounting Standards refer to the specific standards set by the Minister for the purpose of the Corporate Tax Law. These standards govern the accounting practices that businesses must adhere to.

Ordinary Shares

Ordinary Shares represent a category of capital stock or equivalent ownership interest. Holders of ordinary shares have equal entitlement to voting rights, profits, and liquidation proceeds.

Preferred Shares

Preferred Shares represent a category of capital stock or equity interest that grants its owner priority entitlement to profits and liquidation proceeds over owners of ordinary shares.

Redeemable Shares

Redeemable Shares refer to a category of capital stock or equity interest wherein the issuing entity agrees to repurchase or redeem the shares from the owner at a future date or after a specific event, either at a predetermined amount or with reference to a predetermined amount.

Membership and Partner Interests

Membership and Partner Interests denote equity interests held by members or partners in a juridical person. These interests entitle the members or partners to a share of profits determined based on their capital contributions. Such interests may also be transferable.

Transferor

A Transferor is a taxable person who transfers one or more assets or liabilities to another taxable person under the provisions of the Corporate Tax Law.

Transferee

A Transferee is a taxable person who receives one or more assets or liabilities from a Transferor under the provisions of the Corporate Tax Law.

Islamic Financial Instrument

Islamic Financial Instrument refers to a financial instrument that complies with Sharia principles.

Ownership Interest

The Corporate Tax Law recognizes various forms of ownership interest. Let’s delve into the details:

1. Ordinary Shares, Preferred Shares, Redeemable Shares, Membership and Partner Interests, and Other Securities: An ownership interest encompasses these instruments. Ownership interests entitle the owner to receive profits and liquidation proceeds. It is crucial to classify these interests as equity interests based on the Accounting Standards applied by the taxable person holding them.
2. Control and Economic Benefits: A taxable person is considered to hold an ownership interest if they control it and have the right to the economic benefits associated with it, as defined by the Accounting Standards they follow.
3. Islamic Financial Instruments: Islamic Financial Instruments, classified as equity interests under the applicable Accounting Standards, are also considered ownership interests under the Corporate Tax Law.
4. Percentage of Ownership: The percentage of ownership held through various ownership interests is determined based on the total paid-up capital or equity interest contributions made by the taxable person.

Transfers Within a Qualifying Group

When transfers occur within a qualifying group, specific provisions apply. Let’s explore them:

1. Election and Record Keeping: To apply the provisions of Article 26 of the Corporate Tax Law to a transfer meeting the required conditions, the Transferor must make an election. This election should be made while submitting the Tax Return for the relevant Tax Period. Both the Transferor and Transferee must maintain the necessary records specified in Article 6 of this Decision.
2. Irrevocability and Calculation: Once an election is made, it becomes irrevocable and applies to the calculation of taxable income for the specified Tax Period and subsequent periods, unless determined otherwise by the Authority. The provisions of Article 26 of the Corporate Tax Law are applicable to transfers of assets and liabilities held on the capital account, as defined in Article 20 of the Corporate Tax Law.
3. Adjustments and General Rules: Adjustments to taxable income resulting from transfers within a qualifying group are made according to the Ministerial Decision on general rules for determining taxable income.

Exchange of Assets and Liabilities

The exchange of assets or liabilities involving consideration in the form of another asset or liability is treated as separate transfers. Let’s understand the implications:

1. Separate Transfers: When consideration is given in the form of another asset or liability, the transfer is treated as two distinct transfers under Article 26 of the Corporate Tax Law.
2. Application of Provisions: Both transfers, involving at least one taxable person who elected to apply Article 26 of the Corporate Tax Law, are subject to its provisions and the Ministerial Decision on general rules for determining taxable income.

Subsequent Transfers

Subsequent transfers outside the qualifying group require careful consideration. Here’s what you need to know:

1. Gain or Loss Calculation: Any gain or loss resulting from subsequent transfers is accounted for in the Taxable Income of the Transferor. It should be included in the Transferor’s Tax Return when:
2. There is a subsequent transfer of the asset or liability outside of the qualifying group.
3. The Transferor or Transferee cease to be members of the same qualifying group.
4. Transferor as Non-Taxable Person: If the Transferor ceases to be a taxable person, any gain or loss that would have accrued to them is attributed to the Transferee.
5. Gain or Loss by Transferee: In cases mentioned in point 1, the Transferee accounts for any gain or loss when calculating their Taxable Income. It should be included in the Transferee’s Tax Return when:
6. There is a subsequent transfer of the asset or liability outside of the qualifying group.
7. The taxable persons involved cease to be members of the same qualifying group.
8. Partial Transfers: A subsequent transfer of part of an asset or liability outside the qualifying group follows the proportionate application of Clause 4 of Article 26 of the Corporate Tax Law.
9. Adjustments and Ministerial Decision: The Transferee must make necessary adjustments to their Taxable Income in the relevant Tax Period to reverse any previous depreciation, amortization, or value changes resulting from the transfer. The relevant provisions of the Ministerial Decision on general rules for determining taxable income no longer apply to the transfer in question.

Record Keeping

To comply with the Corporate Tax Law, both the Transferor and Transferee must maintain records of the transfer agreement, value prescribed under Article 26, and any necessary adjustments as per the Ministerial Decision on general rules for determining taxable income.

Conclusion

Understanding ownership interest and transfers within corporate tax law is essential for businesses to navigate the regulatory landscape effectively. By grasping the definitions, conditions, and implications discussed in this article, businesses can optimize their tax strategies while ensuring compliance with the relevant provisions. Stay informed, keep accurate records, and seek professional guidance when needed to make the most of your tax planning efforts.