FTA Public Clarification CTP007 on Tax Groups - A Structured Summary
Financial Statements and Related Audit Requirements for a Tax Group
CORPORATE TAX (CT)
Overview:
The UAE's Corporate Tax Law allows for the formation of a Tax Group, which is treated as a single taxable entity. For tax purposes, the group must prepare special Aggregated Financial Statements.
Key points:
Special Purpose Framework: These statements follow a special framework that intentionally deviates from standard IFRS consolidation rules, though they are otherwise based on IFRS.
Required Statements: They must include an aggregated statement of financial position, profit or loss, other comprehensive income, and changes in equity.
Audit Requirement: these Aggregated Financial Statements must be audited according to International Standards on Auditing (ISA) for this special purpose.
Detailed Analysis _ Aggregated Financial Statements of a Tax Group
are prepared by combining the standalone financial statements of all members and eliminating all transactions between them.
Key points on eliminations:
What is Eliminated: All transactions between parent companies and subsidiaries within the same tax group, including related valuation adjustments, provisions, and changes in asset/liability values resulting from those transactions.
Key Exception: Transactions are not eliminated if a member had previously recognized a deductible loss on that transaction before joining the tax group. The related income is included in the group's taxable income until the prior loss is fully offset.
Example: Transactions between members of a Tax Group that are not to be eliminated:
Year 1: Company X loans money to Company Y (a wholly owned subsidiary).
Year 2: Company X impairs the loan and claims a deductible loss.
Year 3: Companies X and Y form a Tax Group. The loan is not eliminated due to the prior deductible loss recognition in respect of the loan transaction prior to forming the Tax Group.
Year 4: Company X reverses the impairment. This reversal is included in the group's taxable income up to the amount of the original loss. After this, the loan transaction is eliminated.
However, other than the deviations from IFRS mentioned below, the Aggregated Financial Statements should comply with IFRS.
Currency: Must be in AED.
Financial Year: All members must share the same financial year.
Accounting Policies: Uniform accounting policies must be applied by all members.
Basis & Method: Use standalone financial statements and aggregate them line-by-line.
Profit Figure: Aggregate the pre-tax profit/loss; exclude UAE Corporate Tax (current or deferred) balances if any, since this is not relevant to the calculation of Taxable Income.
Purpose: The goal of the Aggregated Financial Statements is to determine the aggregated accounting net profit for the Tax Return. Taxes other than UAE Corporate Tax (such as foreign taxes or local Emirate-level taxes) must be included in the Tax Group's aggregated income statement.
Starting Point: The Aggregated Financial Statements must start from the unconsolidated (standalone) financial statements of each member. For tax purposes, standard IFRS consolidation adjustments for business combinations —such as those under IFRS 3 and IFRS 10 like goodwill, fair value adjustments, and bargain purchase gains— are excluded, unless the combination did not involve acquiring a separate legal entity.
No Elimination (for Investments/Equity): Intra-group investments and equity are aggregated without elimination. This deliberate non-elimination "grosses up" the balance sheet (meaning these amounts are counted for both the parent and subsidiary) to ensure the impact of IFRS 10 and IFRS 3 is completely excluded.
No Elimination (for intra-group investment Impairment): Any impairment on an intra-group investment (e.g., a parent's investment in a subsidiary, or one subsidiary's investment in another) must not be eliminated when preparing the Aggregated Financial Statements.
Elimination (Other Transactions): All transactions between group members_ such as income, expenses, and unrealised gains/losses_ must be eliminated (in the same way as if consolidated Financial Statements were being prepared under IFRS), except for:
Intra-group investments and equity (as previously stated).
transactions prior to forming or joining a Tax Group, as per the specified Ministerial Decisions.
Investments in subsidiaries, joint ventures and associates outside the tax group must be carried at cost less impairment.
Detailed Analysis _ Financial Statements of member leaving the Tax Group
When a subsidiary leaves a Tax Group, it must continue using the same accounting methods and asset/liability values that were used by the Tax Group for its own standalone financial statements for corporate tax purposes.
This rule applies even if its regular accounting standards do not permit these values, in other words, the former member of the Tax Group will calculate its Taxable Income as if the Accounting Standards would have allowed using such values.
Example: Value to be considered in standalone Financial Statements of members leaving the Tax Group
Impact of elimination of gain or loss on transfer of asset:
Company A sells an asset (book value: AED 100) to Company B for AED 120, recording a AED 20 gain.
Company B records the asset at the AED 120 purchase price.
Upon Aggregation: The AED 20 gain is eliminated, and the asset is valued at its original AED 100 cost in the Tax Group's Aggregated Financial Statements.
Impact of elimination on depreciation:
In subsequent years:
Company B's Standalone Financial Statements: Depreciates AED 12 per year (based on AED 120).
But Tax Group's Aggregated Financial Statements: Depreciates AED 10 per year (based on the value AED 100). In other words, any depreciation recorded in the standalone Financial Statements on the portion of the gain or loss that is eliminated in the Aggregated Financial Statements, shall be disregarded.
Impact of leaving tax group after 2 years from the date of the transaction:
When Company B leaves the Tax Group, it must use the asset's Aggregated Financial Statement value (AED 100) for corporate tax purposes, not its own accounting value (AED 120). This lower tax base will result in a higher taxable gain (or lower loss) if the asset is later sold.
Impact of leaving Tax Group within 2 years from the date of the transaction:
An exception exists if a clawback is triggered (e.g., a company leaves the group within two years of an internal asset transfer), the previously eliminated AED 20 gain is added to the Tax Group's taxable income (since Company A is still a member of the Tax Group).
Consequently, Company B's cost base for the asset is adjusted upward to AED 120 for the opening value of the asset in its standalone Financial Statements.
For a complete review of the official guideline, download the full document here:
Click to Download the Full FTA Public Clarification CTP007 (PDF)
We recommend seeking professional advice to implement these rules for your specific projects.
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