If your company is going through a merger, restructuring, or winding down a division, you’ll want to know how tax rules apply during those transitions. In this blog, we explore the Business Restructuring Relief offered under UAE’s Corporate Tax Law. We also take you through recent updates on qualifying entities, deregistration, and changes in tax periods. Whether you’re considering internal shifts or structural changes, these reliefs can offer some breathing room—if you meet the conditions.
Preface
In the previous blog, we talked about how tax loss relief and group relief could reduce tax burdens. Now, we continue that conversation by zooming in on another important area: business restructuring relief.
This type of relief is particularly relevant for companies undergoing mergers, demergers, or ownership transfers. Along with it, there are new clarifications around public benefit exemptions, changing your tax year, and how to handle tax deregistration. Let’s unpack the details.
Business Restructuring Relief
In case of a business restructuring—like a merger, acquisition, or spin-off—the UAE allows for no gain or loss to be recorded during the transfer, as long as certain conditions are met. What does that mean? You won’t be taxed on paper gains or losses just because ownership or structure has changed.
Here’s what’s also allowed: if the transferor has unutilized tax losses, they can be handed over to the transferee—but again, this depends on meeting specific rules.
There are two main restructuring situations:
- Situation I: A company transfers either the full business or just a part of it to another company in exchange for shares or ownership interest.
- Situation II: Multiple companies transfer their entire businesses to a single company. After the transfer, the original companies cease to exist.
This relief encourages smoother transitions during corporate reorganizations. However, if only a part of a business is transferred, it becomes tricky. Without distinct accounting for that division, attributing tax losses can be challenging and may lead to disputes or audits.
The rules also cover less conventional cases.
The relief still applies even when:
- The shares or ownership go to someone other than the original transferor,
- The shares are issued by someone other than the transferee, or
- No shares are issued at all, like in the case of a partner in an unincorporated firm being excluded from the transaction.
Bottom line: the law is flexible about who gets shares and who issues them, as long as the transaction structure matches the spirit of a genuine restructuring.
To qualify for this relief, several strict conditions must be met:
- The transfer must comply with all relevant UAE laws.
- Both the transferor and transferee must be taxable persons, either UAE residents or non-residents with a permanent establishment in the UAE.
- None of the parties involved can be exempt entities or qualifying free zone persons.
- They must follow the same financial year and use the same accounting standards.
- The transaction should be driven by genuine commercial or economic reasons—not just tax advantages.
- The transfer must occur at net book value, not market value.
- The value of ownership received (like shares) must be:
- For Situation I: Net book value of transferred assets minus other consideration
- For Situation II: Book value of shares surrendered, minus other consideration
There’s an important note about how to value the transaction.
To claim business restructuring relief:
- The value of the transfer must be based on book value, not fair market value.
- Even if globally accepted valuation methods exist (like DCF or comparable companies), they can’t be used here.
Also, regarding consideration:
- The transaction should primarily involve an exchange of shares or ownership interest.
- However, some non-share consideration (like cash or property) may be allowed—but only within strict limits.
If the total consideration exceeds book value, the relief is disqualified. So, it’s not just about what you give—it’s about how it’s valued.
There’s also a cooling-off period after the transaction.
For two years following the transfer:
- You cannot sell, transfer, or dispose of the shares or ownership in the transferor or transferee outside your qualifying group.
- You also cannot transfer or sell the business (or part of it) that was originally restructured.
If you break these rules, here’s what happens:
- The entire transaction is re-evaluated at market value as of the original transfer date.
- The relief is reversed, and tax applies as if the restructuring never happened.
This is designed to prevent misuse of the relief for short-term tax avoidance.
Qualifying Public Benefit Entities
Some entities are automatically exempt from corporate tax. These are called qualifying public benefit entities.
Key points:
- A list of these entities is maintained by the government and may be updated through cabinet decisions.
- These entities must provide documentation and proof that they still meet the conditions.
- If any amendment is made to this list or an entity’s status changes, procedures are laid out for how to handle it.
This exemption isn’t a one-time thing—you’ll need to continuously prove eligibility.
Conditions for Change in Tax Period
Need to align your financial year with a parent company or tax group? UAE corporate tax law allows a change in tax period, but only under certain conditions:
You must have a valid reason, such as:
- The company is being liquidated
- You want to align with a parent or subsidiary
- You’re forming or joining a tax group
- You have another genuine commercial reason
In addition:
- The change can extend the current period (up to 18 months) or shorten the next (to 6–12 months).
- Your tax return for the current period must not be filed yet.
- You must apply within 6 months of your original tax period end date.
This flexibility helps groups sync operations, but planning ahead is crucial.
Tax Deregistration Timelines
When a business winds down—either through liquidation, closure, or stopping operations—you must apply for tax deregistration.
Timelines:
- For natural persons, apply within 3 months of ending business activity.
- For legal entities, apply within 3 months of ceasing to exist (or being dissolved).
Missing this deadline can lead to penalties. The rule ensures the tax authority can properly close your file and settle any dues.
Exemption from Corporate Tax
Certain entities can apply for a full exemption, but they must follow strict timelines.
Registration deadlines:
- Qualifying public benefit entities – Apply by 1 October 2023
- Investment funds, pension/social security funds, or government-controlled entities – Apply by 1 June 2024
Once registered:
- You have 60 business days from the end of your tax period to apply for corporate tax exemption (if eligible).
- You may need to submit annual declarations proving continued eligibility.
If you enter incorrect dates or structure your application poorly, the authority has the right to:
- Adjust your effective exemption date, or
- Delay approval until all other obligations are met.
Final Thoughts
Business restructuring relief is one of the more nuanced features in the UAE’s corporate tax regime. It helps businesses grow, shift, or combine without triggering unnecessary tax burdens—but only if every condition is met.
From the transaction value to the ownership structure, from intent to timing, every part of the process must align with the law. And once the transaction is done, you’re not in the clear just yet—you’ll need to hold off on further transfers for two years to keep your relief.
Outside of that, the updates on public benefit exemptions, tax period changes, and deregistration show how the tax law continues to evolve toward flexibility—with structure.
If your business is planning a move, whether operational or structural, now’s the time to check how these reliefs can apply—and make sure you don’t miss the fine print.
