Business Restructuring Relief
Article 27 of the Corporate Tax Law allows for the taxable person to avail certain relief in case of restructuring or reorganization of a Business.
Corporate restructuring transactions, such as mergers or demergers, can lead to a taxable gain or loss. This can happen even if the ownership of the business or taxable entity remains the same, or if the original owners retain partial ownership in the restructured business.
The Business Restructuring Relief stated in Article 27 of the Corporate Tax Law allows certain types of restructuring transactions to take place without any tax implications. This is to ensure that legitimate commercial or non-fiscal reasons that require such transactions are not hindered by tax implications.
Transactions Covered in Business Restructuring Relief
Business Restructuring Relief applies to two categories of transactions
- The first type of business transfer involves the transfer of an entire business or an independent segment from one taxable person to another
- The Second Category Is When a Business Is Transferred From One or More Taxable Persons to Another, and The Transferor Ceases to Exist.
Conditions for Application And Availment of Relief:
- The transfer complies with applicable legislation of other Federal Law’s.
- Taxable Persons are Residents or NonResidents with a Permanent Establishment in the State
- None of the Persons are an Exempt Person.
- None of the Persons are a Qualifying Free Zone Person.
- The Financial Year of each of the Taxable Persons ends on the same date
- The Taxable Persons prepare their financial statements using the same accounting standards
- The transfer is made for genuine business or other non-tax reasons that align with economic reality.
Transactions Not Covered Under Business Restructuring Relief
- When a taxable person liquidates, their assets or liabilities may be transferred to another taxable person.
- When a subsidiary merges with its parent company and dissolves without going into liquidation, and its shares get cancelled by law.
- When a company transfers its business to a wholly-owned subsidiary without issuing shares
- Business transferred by the subsidiary to the parent without issuing shares.
Conditions for Application And Availment of Relief:
- Shares or other ownership interests of the Transferee.
- Under certain conditions, consideration may take a form other than shares or ownership interest.
- Consideration may be received by the Transferor or another Person that has at least 50% direct or indirect ownership interest in the Transferor.
- Consideration may be paid/issued by the Transferee or another Person that has at least 50% direct or indirect ownership interest in the Transferee.
Consequences of Not Meeting Requirements or Not Electing for Relief
- Business transfers between taxable persons may not be eligible for tax relief if certain conditions are not met or if the transferor has not opted for relief.
- If the transfer is between related parties, the “arm’s length” standard is required to calculate gain or loss based on fair market value. Otherwise, standalone financial statements according to applicable accounting standards are used to determine gain or loss.
Consequences of Not Meeting Requirements or Not Electing for Relief
Transfer of the Assets and Liabilities
- When a business is transferred on a no-gain or loss basis, the assets and liabilities transferred will be treated at their net book value. There will be no taxable gain or loss for the transferor.
- Net book value (NBV) is the cost of an asset or liability after subtracting depreciation and amortization. Depreciation or amortization recorded before asset transfer lowers the net book value, which can reduce taxable income, even if the transfer doesn’t trigger a gain or loss.
- When a business acquires assets and liabilities at market value, the receiving business’s financial statements will reflect this. Depreciation and amortization will be based on the higher market value and certain adjustments will need to be made to show accurate taxable income for corporate tax purposes, both before and at the time of realization.
Value of Shares or Ownership Interest –
When a business is transferred without gain or loss, the shares or ownership interests received can’t be valued higher than the net book value of the transferred assets and assumed liabilities, minus other payments. This value is used to calculate taxable gain or loss if the shares are later sold.
Transfer of Tax Losses
When a business is transferred on a no gain or loss basis, any unused tax losses from before the transfer can be carried forward to the new owner if they continue to conduct the same or a similar business activity as the previous owner.
Interaction With Other Parts of Corporate Tax Law
Qualifying Group Relief
For a transaction to be eligible for Business Restructuring Relief and Qualifying Group Relief, it must meet these conditions:
- Transferor Transfers Business to Transferee,
- Transferor continues to exist,
- Consideration paid in the form of shares or ownership interests, and
- Both Transferor and Transferee are members of a qualifying group.
If a different relief would trigger a clawback, the originally triggered relief would still be clawed back.
Realisation Basis
If a Taxable Person prepares their Financial Statements on an accrual basis, they may choose to account for gains and losses on a realisation basis, subject to certain conditions.
- This election can apply to either,
- All unrealised accounting gains and losses or
- Only unrealised gains and losses relating to the assets and liabilities held on the Taxable Person’s capital account.
Transitional Relief
When an asset or liability is transferred without any gain or loss due to Business Restructuring Relief, such transfer is not considered a disposal for the purpose of transitional relief. This means that the ownership period of the asset or liability is deemed to continue and includes the ownership period of the Transferee.
If the clawback provisions of Business Restructuring Relief are applicable, then the asset or liability is regarded as disposed of in the Tax Period when the transfer of Business took place. However, if the relief is clawed back, then the gain or loss is taxable in the Tax Period of the clawback event. In this case, the transitional relief should be claimed in the Tax Period when the clawback is triggered.
Conditions for Clawback Of Relief
If the below circumstances take place within two years of the transfer date, any relief given will be taken back,
- If ownership interests of the Transferor/Transferee are sold/transferred to a non-Qualifying Group member, the clause takes effect.
- If the Business or an independent part of it is subsequently transferred or disposed of.
Transfer of Shares
Business Restructuring Relief will be clawed back if shares or ownership interests of the Transferor or Transferee are transferred to a Non-Qualifying Group within two years. This applies only to the shares or ownership interests issued as part of the Business Restructuring Relief.
Subsequent Transfer of Business
If a business or independent part of it is transferred or disposed of within two years of receiving Business Restructuring Relief, the Relief will be clawed back. The clawback only applies to the transferred part of the Business and not to any other parts held by the Transferee. The clawback applies to any type of transfer or disposal of the Business.
Consequences of the Clawback
If either clawback applies, the Business transfer will be valued at Market Value on the transfer date. The profit or loss will be included in the Transferor’s Taxable Income during the clawback-triggered Tax Period.
The Transferee will undo previous adjustments to assets and liabilities. After the clawback, they will stop making adjustments for Taxable Income. However, if the transfer was recorded differently in Financial Statements, the Transferee must account for related parties.
Implication of VAT
When a whole business or an independent part of it is transferred from one person to a taxable person to continue operating it, this isn’t considered a “supply” for VAT purposes. Because it’s not seen as a “supply,” this type of transfer, known as a “transfer of business as a going concern” or “TOGC,” isn’t subject to VAT.
A transfer of business as a going concern is an asset sale, not a share sale. It is crucial to distinguish between a standard asset sale and a sale of assets as part of a TOGC for VAT purposes.
- A taxable asset sale is subject to VAT, but some sales may be VAT-exempt, such as bare land or residential property sales.
- However, if assets are sold as part of a transfer of a business as a going concern, no VAT is charged. This applies to the transfer of the business, regardless of the VAT treatment for any of the underlying assets.
Requirements for a TOGC:
To avoid a transfer being considered a supply for VAT purposes, the transfer must meet the following criteria:
- The entire or an independent portion of a business must be transferred.
- The transfer must be made to a taxable person.
- The person receiving the transfer must have the intention to continue the business that has been transferred.
How BAM Can Assist Your Company
- BAM can help in understanding the requirements of business restructuring relief and if any transactions that have been conducted under the relief
- BAM can analysis the provision of VAT Law’s and CT Law’s to maximize the benefits.
- BAM can assist to ensure that restructuring efforts do not violate tax codes and help manage any associated risks.
- Post restructuring, BAM can offer ongoing support to monitor tax compliance and performance, helping to ensure that the intended tax benefits are realized and maintained.
- BAM can assist in preparing the necessary documentation, such as relief claims, tax computations and supporting schedules to ensure compliance with tax laws and regulations.
