With the introduction of corporate taxation in the UAE, reorganisation strategies of businesses of all sizes have been significantly impacted.

The UAE, which has been referred to as a tax haven in the past, is currently in the process of implementing its new corporate tax system for fiscal years commencing on or after 1 June 2023.

It levies a 9% tax on taxable income exceeding AED 375,000 (USD 102,110).  The structural and compliance implications are substantial, despite the fact that the tax rate remains internationally competitive.

Companies can no longer view mergers, spin-offs, share transfers, or asset reallocations as mere administrative processes. Restructuring today requires strategic planning, careful timing, and documentation.

Read here how corporate tax in the UAE affects restructuring decisions, what tax benefits are available, and what practical implications this has for companies that want to remain flexible, efficient, and compliant.

From Zero Tax To Strategic Structuring

The Former Landscape

Before introducing the business tax, internal restructurings – such as asset transfers, spin-offs, or mergers – were tax-free. Companies could transfer operations between companies, consolidate ownership, or sell business units without generating tax.

What Has Changed?

Most restructurings can now be taxable unless they are exempted under specific provisions. Transfers of assets or entire businesses between companies can result in taxable gains. Capital gains from increases in the value of assets or goodwill arising during a restructuring are no longer automatically tax-exempt.

Result: Restructuring Is No Longer Routine

These changes have made tax efficiency a key issue. Companies must now consider the financial implications of corporate tax when changing operations or ownership.

The result is a significant shift from reactive restructuring to forward-looking strategic planning that enables companies to anticipate and manage their tax liabilities.

Tax Breaks That Enable Tax-Neutral Restructuring

Support For Corporate Restructuring

The UAE Corporate Tax Law (Article 27) provides for a corporate restructuring regime allowing certain transactions to be tax-free. To qualify:

The transfer must concern an independent company or part of one.

• The remuneration must be in shares (not in cash or kind in addition to shares).
• Both companies must be UAE residents and taxable (not exempt or a qualified person in the free zone).
• Both must use the same accounting standards and the same fiscal year.
• The transaction must serve a valid commercial purpose and not be motivated by tax considerations.

If these conditions are met, the restructuring can be carried out at the remaining book value, avoiding direct profit taxation.

Recovery Phase

The deferred tax credit expires if the shares or transferred assets are sold within two years. This anti-abuse clause prevents companies from disguising taxable sales as internal restructurings.

Group Deduction For Asset Transfers

According to Article 26, intra-group asset transfers can also be treated as tax-neutral if:

• United Arab Emirates is the home base for both of these businesses.
• Both are part of a “qualified group” with a joint ownership interest of 75% or more.
• The transferred asset is a capital asset (not inventory).

The tax reduction will also be reclaimed if the asset or company disappears from the group within two years.

Impact On Mergers And Acquisitions

Stock Versus Asset Deals

In the post-tax era, the structure of mergers and acquisitions is essential. Share sales may be tax-free if the share exemption applies. Requirements:

• The seller must retain at least 5% ownership in the target company.
• The shares must be held for at least 12 months.
• The subsidiary must not be tax-exempt or subject to 0% tax under a preferential system unless other conditions are met.

This exemption incentivizes structuring transactions as stock sales, which facilitates transactions. However, asset sales are generally subject to tax on any capital gains.

Assessments And Documentation

Accurate valuations, management decisions, and legally sound contracts are crucial today. Transfer pricing regulations, which require either market prices or reasonable tax-neutral decisions, apply to transactions involving related parties. A company must keep documentation to support any tax benefits it receives.

New Considerations On Mergers And Acquisitions

Buyers are now reviewing more comprehensive tax risks, deferred tax assets, and prior restructurings. Sellers also structure their transactions to be exempt from the 9% tax or to minimize risk. Many are choosing to restructure before sale to meet exemption requirements.

Spin-Offs And Start-Ups: The New Approach

Independent Business Units

To be treated tax neutrally, a spin-off company must be independent, meaning it can operate independently. This means its assets, operations, management, and customer relationships must be separate.

Implementation Structure

Typically, the parent company transfers assets to a newly formed subsidiary in exchange for shares. It allows the parent company to retain ownership while preparing their potential investments or divestitures.

Strategic Timing

Businesses must ensure they comply with their fiscal years, accounting standards, and business purposes; otherwise, the exemption may cease to apply, and direct tax costs may arise.

Intra-Group Transfers And Holding Structures

Qualifying Group Lighting

Many companies reorganize under a single holding company to meet the 75% or 95% thresholds required for group deductions or tax grouping.

Formation Of Tax Entities

Companies with a share of more than 95% can form a tax group and file a single consolidated tax return. This reduces the compliance burden and allows for the pooling of profits and losses within the group.

Advantages Of Holding Structures

Investments are also covered by the participation tax exemption, which allows for tax-free dividends and capital gains under certain conditions, making them attractive for both investment and restructuring.

Challenges

Companies with qualified free trade zone status (0% tax) are exempt from group tax relief and cannot join a tax group. Mixed structures with mainland and free trade zone companies require special attention to avoid unexpected tax liabilities.

Transfer Pricing And Compliance Considerations

Prices Are Based On Market Conformity

All transactions between related parties should be at market prices unless tax benefits are applied. This means that valuations and comparable benchmarks should support internal restructurings.

Documentation Of Transfer Pricing

Larger companies with revenues exceeding AED 200 million (USD 54,460.00) must establish and maintain master and local files by OECD guidelines. All companies exceeding certain thresholds must submit a transfer pricing form with their tax returns.

Things To Consider For Small And Medium-Sized Businesses

Small and medium-sized enterprises also need to document restructurings. Transactions that may seem small now may be scrutinized once the company exceeds the tax threshold of AED 375,000 ($102,110). It is essential to document business purposes, valuations, and legal agreements.

Advantages And Disadvantages Of Restructuring Under The New Tax System

Benefits:

• Access to tax-neutral treatment in legitimate corporate restructurings.
• Possibility to form a tax group and share losses within the group.
• The participant compensation enables tax-attractive exit strategies.
• Promotes formalization of corporate structures and improves corporate governance.

Borders:

• Exceptions are conditional and require detailed documentation.
• A two-year recovery period limits flexibility.
• QFZPs are exempt from many benefits.
• Increased administrative and compliance burden, especially for small and medium-sized enterprises.

Restructure Your Business Effectively

The introduction of corporate tax in the UAE is more than just a revenue-generating measure – it is changing how businesses operate and grow. For companies planning mergers, spin-offs, or restructuring, the days of informal transfers and simple reorganizations are over.

Tax strategy, documentation, and compliance are central to business planning today. Companies should conduct a tax impact assessment, review corporate structures, and adjust accounting standards. By hiring experienced experts, you can secure long-term tax benefits and benefits.

Companies can effectively restructure by understanding the new tax landscape and taking advantage of available tax benefits and exemptions while maintaining the UAE’s key advantages: flexibility, competitiveness, and commercial growth.