Business Restructuring Relief: Navigating Tax Benefits for Strategic Growth

The UAE Corporate Tax Law aims to encourage business restructuring activities by exempting certain transactions from corporate tax. These activities, which include mergers, acquisitions, demergers, and debt restructuring, are essential for economic dynamism. Taxing these transactions would disincentivize businesses from engaging in strategic restructuring, hence the relief provided under the law.

For a transaction to qualify for business restructuring relief, the transferor must opt for the relief and meet specific conditions. The relief is categorized into two primary types:

One-to-One Transfer of Business:

Transfer of an Entire Business or Independent part of the business from One Taxable Person to Another Taxable Person. 

1. Conversion of Sole Proprietorship:

   A natural person converting a sole proprietorship into an incorporated entity, retaining shares or interest in the new entity.

2. Unincorporated to Incorporated Entity:

   An unincorporated entity applying to become a taxable person under UAE law.

3. Business Transfer with Shares Exchange:

   Transfer of business to a transferee who issues shares to the transferor.

4. Legal Demerger:

   Independent part of a business transferred to another taxable person in exchange for shares.

5. Hive Down Transaction:

   Transfer of business to a subsidiary with additional shares issued as consideration.

6. Business Merger:

   Transfer of business to a non-wholly owned entity, resulting in a dilution of other shareholders’ stakes.

Transfer by a Group of Shareholders:

Transfer of an Entire Business from one or more taxable persons to another taxable person and the transferor then cease to exist. 

1. Legal Merger:

   Transfer of entire business to the transferee, resulting in the dissolution of the transferor.

   1. The transferor is dissolved or cease to exist under law, without going into liquidation (by share transferred) 

   2. And owners remains the same (transferee issues shares to the owner of transferor)  

2. Full Legal Demerger:

   Transfer of entire business to at least two or more persons, with shareholders of the transferor becoming shareholders of the transferee.

Consideration for the transfer can be in various forms, including:

• Shares or Ownership Interest of the Transferee:

  Full or partial consideration can be in shares or ownership interest.

• Received by Transferor or Related Person:

  Consideration received by the transferor or another person with at least 50% direct or indirect ownership interest in the transferor.

• Payment by Transferee or Related Person:

  Payment by the transferee or another person with at least 50% ownership interest in the transferee.

To qualify for relief, the transaction must:

• Comply with UAE legislation, including the Corporate Tax Law.

• Have valid commercial or non-fiscal reasons reflecting economic reality.

• Involve UAE residents or entities with permanent establishments in the UAE.

• Ensure neither party is considered an Exempt Person or a Qualifying Free Zone Person under the Corporate Tax Law.

• Align financial years and accounting standards of both parties.

Certain transactions do not qualify for business restructuring relief, including:

• Liquidation Transfers:

  Transfer of assets and liabilities following liquidation.

• Subsidiary Mergers:

  Mergers resulting in share cancellation.

• No Consideration Transfers:

  Transfers without issuing shares or ownership interests.

• Support-Dependent Transfers:

  Transfers of parts of a business requiring ongoing support from other assets or liabilities.

• Business:

  Any activity conducted regularly, including industrial, commercial, agricultural, vocational, professional, service, excavation activities, or activities related to tangible or intangible properties.

• Independent Part of a Business:

  A segment capable of operating independently from other business segments, with assets and liabilities that can function separately.

• Assets and liabilities transferred must be capable of being operated independently as a separate and distinct Business. Individual assets or liabilities cannot be considered as an independent part of a Business, if they require ongoing support from the other assets and liabilities to be operated. However, an integrated pool 

• Part of a Business is transferred on a going concern basis as per applicable Accounting Standards.

•  The fact that some form of operational support is required (whether from a Related Party or from a third party) does not imply that the transfer is not a transfer of an independent part of a Business. 

If the transferee disposes of the transferred business within two years or if there are changes in the ownership of the transferor or transferee, the relief may be revoked by FTA. 

Understanding the intricacies of business restructuring relief is crucial for companies looking to optimize their operations and drive growth without the burden of additional tax liabilities. By leveraging the provisions of the UAE Corporate Tax Law, businesses can strategically restructure to enhance efficiency and competitiveness. At Kitaab, we provide expert guidance and services to help you navigate the complexities of business restructuring, ensuring compliance and maximizing the benefits available under the law.

For more detailed insights and personalized advice on how Kitaab can support your business restructuring activities, visit Kitaab.ai.