Business Restructuring Relief

1: Overview of Business Restructuring Relief

Article 27 of the Corporate Tax Law in the UAE allows for Business Restructuring Relief, enabling the tax-neutral restructuring or reorganization of a business subject to satisfaction of certain conditions.

Business Restructuring Relief applies to Two categories of transactions.

Key Points on Business Restructuring Relief

Business Restructuring Relief enables tax-neutral transfers of entire businesses or independent parts between taxable Pesrons.
Business Restructuring Relief applies to transactions including conversions, mergers, legal demergers, hive-downs and share-based exchanges. Non eligible transactions include liquidations, transfers without ownership consideration and intra-company transfers without proper restructuring.
Both Transferor and Transferee must be Taxable Persons in the UAE, with aligned financial years and accounting standards.
Consideration for transfers must typically be in the form of shares or ownership interests.
Assets and liabilities are transferred at net book value, ensuring no immediate taxable gain or loss for the Transferor.
Relief is reversed if ownership changes or the business is disposed of within two years, triggering tax reassessments.
Proper election for relief and detailed record-keeping are mandatory to validate the applcation of Business Restructuring Relief.

1.1 Meaning of Business or independent part of a Business

The definition of Business covers any activity conducted regularly on an ongoing and independent basis. It includes activities such as industrial, commercial, agricultural, vocational, professional, service or excavation activities or any other activity related to the use of tangible or intangible properties.

1.2 First Category – Transfer of entire business or independent part of the Business from one Taxable Person to another

The first category is where there is a transfer of an entire business or an independent part of the Business from one Taxable Person to another. Following transactions may fall under the first category, provided the relevant conditions are met:

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A natural person converts their sole proprietorship Business into an incorporated entity and that natural person holds shares or interests of the incorporated entity.
An Unincorporated Partnership applies to the FTA to become a Taxable Person in its own right, in which case the partners in the Unincorporated Partnership will be considered as having transferred their ownership of the Businesses to a separate Taxable Person.
Exchange of shares in another Business by Transferee: A transaction in terms of which the Transferor transfers its Business to a third-party Transferee, which already holds another Business, in exchange for the issue of shares by the Transferee to the Transferor.
A legal demerger where the Transferor transfers an independent part of its Business under universal title to another Taxable Person (i.e. the Transferee) in consideration for shares of the Transferee. The Transferor continues to exist after the demerger. Shareholders of the Transferor also become shareholders of the Transferee following the demerger.

A hive down transaction where the Transferor entity transfers its Business or an independent part of its Business into its subsidiary (Transferee) and receives additional shares of the subsidiary as consideration, as shown below. This scenario would be the same if the subsidiary was a newly incorporated entity established by the Transferor to acquire the Business.
A Business merger where the Transferor transfers its Business or an independent part of its Business into a non-wholly owned entity (Transferee) and receives shares of the subsidiary as consideration, which would dilute the other shareholder(s) of the Transferee.

1.3 Second Category - Transfer of an entire business from one or more Taxable Persons to another, and the Transferor then ceases to exist

The second category is where there is a transfer of an entire business from one or more Taxable Persons to another, and the Transferor then ceases to exist. Following transactions may fall under the first category, provided the relevant conditions are met.

A legal merger where the Transferor transfers its entire Business to the Transferee under universal title, after which:

the Transferor is dissolved, or ceases to exist under law, without going into liquidation, and the shares or ownership interests of the Transferor are cancelled by law, and
the owner(s) of the Transferor become the owner(s) of the Transferee, for example, the Transferee issues new shares to the owner(s) of the Transferor in exchange for the transfer.

A legal merger where the Transferor transfers its entire Business to the Transferee under universal title, after which:

the Transferor is dissolved, or ceases to exist under law, without going into liquidation, and the shares or ownership interests of the Transferor are cancelled by law, and
the owner(s) of the Transferor become the owner(s) of the Transferee, for example, the Transferee issues new shares to the owner(s) of the Transferor in exchange for the transfer.

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1.4 Consideration for transfer

The term ‘ownership interest’ for the purposes of Corporate Tax Law has been defined as a holding interest in the form of ordinary/preferred/redeemable shares, membership and partner interest, and/or any other types of securities, capital contribution and rights that entitled the owner to receive profits and liquidation proceeds (this may include Islamic Finance Instruments or arrangements that form part of Islamic Finance Instruments.
Holder of Ownership Interest
For the purpose of Business Restructuring Relief, ownership to be recognized when following conditions are met:
Taxable Person must control the ownership interest.
Taxable Person must have the right to the economic benefits of the ownership interest.

Control Determination: Based on accounting standards, control exists if the holder:
Has power over the investee.
Has rights to variable returns from the investee.
Can influence returns via its power.
Taxable Person holding the ownership interests in another juridical person must be the economic owner of the ownership interests. A Taxable Person is the economic owner of an ownership interest where they have the benefits and burdens of ownership, including rights to profits, liquidation proceeds, or voting in respect of the ownership interests held.

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Business Restructuring Relief