How intra-group transactions are treated
1. Within a tax group
When your entities are in a tax group, the intra-group transactions, such as the sale of assets or services, are normally eliminated tax-wise since the group is now considered as a single taxable entity.
Practical implications:
- The aggregated tax calculations eliminate the income, expenses, and unrealized gains/losses among group members.
- No double-counting of profits occurs.
- The adjustments might be needed in case one of the members had pre-group losses, foreign tax credits or other incentives.
This arrangement minimizes compliance costs but needs good group creation and management.
2. Between related parties outside a tax group
In case the transaction in question is with a related party but is not a part of an approved tax group, then the rules of transfer pricing take effect. Key points:
- The CT Law on articles 35 and 36 make a distinction between a related party and a connected person. Determine whether the counterparty is a related party or a connected person.
- Apply a well-known method of transfer pricing- Comparable Uncontrolled Price, Resale Price, Cost-Plus, Transactional Net Margin or Profit Split.
- Maintain documentation. Report transactions when the limits are reached (AED 40 million overall or AED 4 million each category).
As an example, when UAE company offers management services to a foreign sister company, the charge should be fair at arms-length and it should be reported.
3. Qualifying group relief / business restructuring relief
Intragroup asset or liabilities transfer may be tax-neutral when the following conditions are met:
- Qualifying Group Relief: Intercompany! Transfers to qualifying entities (75 % + ownership, same accounting period) need not be recorded upon their occurrence.
- Business Restructuring Relief: Relates to the restructuring or part business transfers within a group.
Some of the conditions include holding on to ownership thresholds, continuity in accounting policies, timely relief election, and not having claw-back events.
4. Examples
- An intangible asset that has been transferred by a UAE parent is transferred to a subsidiary that has over 75 per cent ownership. Transferred at the net book value, Election Qualifying Group Relief results in no taxable gain.
- Two UAE firms constitute a tax group, and they do business in-house. These are disallowed for tax purposes, but they might have adjustments in the case of pre-group losses.
- A company based in the UAE that delivers services to a foreign sister company is obliged to adhere to arm-length regulations and has to record the transfer in accordance with TP criteria.
Why this matters for your financial and tax planning
- Making wrong pricing in intra-group transactions may attract tax adjustments by the Federal Tax Authority (FTA), fines for non-compliance, and the likelihood of facing double taxation. The TP regulations are now established solidly.
- Tax group formation may simplify intra-group flows, may remove much internal transactional noise (tax-wise), but does have conditions and continued compliance. It has joint and several liabilities between group members.
- Revamping and selling assets within a group may be tax-neutral on relief taking (Qualifying Group Relief etc) - however, otherwise the default tax rates apply.
- Documentation and disclosure limits of related-party/ connected-person transactions imply that you should have effective record-keeping, support your preferred method of TP, and internal controls to regulate intra-group flow.
- Since this is a relatively new regime (effective 2023 and onwards), most businesses will be required to restructure their group structures, intra-group service arrangements, cost-sharing arrangements, asset ownership and transfer, so that compliance is achieved during the first filing cycles.
Key Factors
- Find out whether the transaction belongs to a tax group or if related parties are not members of a tax group to determine the rules applicable.
- In a tax group: aggregate financials, eliminate internal flows, and make eligibility.
- Transaction involving related parties not within a group: use arm-length pricing, choose a transfer pricing approach, record and track thresholds.
- In respect of intra-group asset or liability transfers: think of Qualifying Group Relief or Business Restructuring Relief.
- Be proactive: synchronize the group structures, cost-sharing situations, and service arrangements with the UAE tax regulations to prevent any accidents.
Quick checklist for UAE businesses
- Establish tax group qualification (95 percent+ ownership, resident entities, same accounting period).
- Record intra-group transactions: loans, service, cost allocations, asset transfer.
- Correct treatment: Correct treatment is to be eliminated when part of the group, and arm-length when out of the group.
- Transfer prices of documents, keep track of monitors, and disclose files when necessary.
- In the intra-group restructuring: check relief eligibility, elect at the right time, and record the net book values.
- Keep meticulous records to be examined by FTA; most will initially make their first corporate tax returns at the end of 2025.
Conclusion
The tax compliance in the UAE is based on intra-group transactions. Whether the process entails the arrangement of multiple parties, the sharing of expenses, restructuring of the assets, businesses are expected to comply with the regulations on tax group, transfer pricing and reliefs. When the operations comply with these rules, then compliance is achieved easily and less regulatory risk is created. In Parsh.ae, we are a team of professionals and we provide help in accounting, bookkeeping, auditing etc. to help businesses in their logistical problems in this field.
To be advised on certain issues regarding intra-group transactions to operate in the UAE tax law - call Parsh.ae today.