Understanding Qualifying Group Relief: General Overview

Article 26 of the Corporate Tax Law allows tax-neutral transfers of assets or liabilities within a Qualifying Group, known as “Qualifying Group Relief.” This provision enables restructuring without tax consequences, as long as ownership remains unchanged within the group.

Conditions to Be a Member of a Qualifying Group

• The Transferor and Transferee are juridical persons.
• The Transferor and Transferee are Taxable Persons.
• Either the Transferor or Transferee has a direct or indirect ownership interest of at least 75% in the other person, or a third Person has a direct or indirect ownership interest of at least 75% in both the Transferor and the Transferee.
• Neither the Transferor nor the Transferee are an Exempt Person
• Neither the Transferor nor the Transferee are a Qualifying Free Zone Person
• The Transferor and the Transferee must have Financial Years ending on the same date.
• The Transferor and the Transferee must prepare their Financial Statements using the same Accounting Standards.

Eligibility Criteria for Qualifying Group Relief Assets and Liabilities

Qualifying Group Relief only covers the transfer of assets or liabilities listed on the Transferor’s balance sheet under the capital account. Any transfer involving assets or liabilities not under a capital account, like inventory, isn’t eligible for this relief.

In such cases, standard Corporate Tax rules, including applying the arm’s length standard on transfers between Related Parties, apply. This holds true even if the assets or liabilities are on the Transferor’s balance sheet, but Qualifying Group Relief hasn’t been chosen.

NOTE:

• To qualify, both the Transferor and Transferee must belong to the same Qualifying Group, and the Transferor must opt for the relief. However, if within two years, the Transferee sells the asset outside the group or if either party leaves the group, any gains or losses become subject to Corporate Tax.
• Group Relief doesn’t apply when assets or liabilities are transferred to a Taxable Person due to liquidation, dissolution, or merger.

Consequences of Election for Qualifying Group Relief

Before exploring the consequences of choosing qualifying group relief, let’s review key factors to consider:

Transfer of Asset or Liability – Where the Asset or Liability Is Transferred for a No Gain No Loss, the Same
Will Be Treated as Transferred at Its Net Book Value at the Date of Transfer.

Determining Net Book Value of Asset or Liability – The Net Book Value of the Asset or Liability Will
Be the Cost of the Same After Deducting Any Depreciation, Amortization, and Any Other Value Adjustments.

Adjustments to Taxable
Income

• When an entity uses Qualifying Group relief for transferring assets or liabilities, the Transferee should adjust their taxable income to exclude depreciation, amortization, and other value adjustments to the extent of the gain or loss that has arisen to the Transferor but has not been recognized for Corporate Tax due to no gain no loss transfer.
• When transferring assets and liabilities, any unrealized amounts must be included for Corporate Tax calculation except for those that existed before the most recent acquisition within the qualifying group.
• In case of multiple no gain or loss transfers, all such gains and losses that would have arisen need to be included in taxable income upon realization.

Exchange of Assets or Liabilities

• If consideration for transferring an asset or liability in a Qualifying Group is another asset or liability, it’s treated as two transfers. Qualifying Group Relief applies if conditions are met. No gain or loss transfer applies if at least one Taxable Person involved has opted for the relief.
• If a capital asset is exchanged for a non-capital asset, the no gain or loss treatment will apply if the transferor has elected to apply Qualifying Group Relief. The treatment will not apply to the noncapital asset.
• In case of an exchange of assets or liabilities eligible for Qualifying Group Relief, any difference between their net book value is ignored when calculating Taxable Income.

Consequences of Not Meeting the Requirements Of Qualifying Group

• Qualifying Group Relief doesn’t apply to all transfers between taxable persons. If the conditions aren’t met or the Transferor hasn’t elected for it, the transaction would be outside its scope.
• Transferring assets or liabilities between related parties should meet the arm’s length standard and be based on market value. For unrelated parties, gain or loss should be calculated using standalone financial statements prepared by the Taxable Persons in accordance with applicable Accounting Standards.

Claw Back of The Qualifying Group Relief

Circumstances Where Relief Is Clawed Back.

• Qualifying Group Relief does not apply where within two years from the date of transfer, any of the following occurs:
• If there is a subsequent transfer of the asset or liability outside of the Qualifying Group, or
• If the Transferor or Transferee ceases to be a member of the same Qualifying Group.

Consequences of Claw Back of Qualifying Group Relief Consequences in the Hands of the Transferor

Where a claw back is triggered, the transfer of the asset or liability that was previously deemed to be at no gain or loss shall be treated with considering:

• the Market Value of the asset or liability at the date of the original transfer is used.
• If a part of the asset or liability is subsequently transferred outside the Qualifying Group, the gain or loss is calculated for the proportion of the asset or liability subsequently transferred.
• the net book value of the asset or liability as at the date of the original transfer will be the same amount determined for the purpose.

Consequences in Hands of the Transferee

If the claw back is triggered, the Transferee will reverse any depreciation, amortization or other change in the value of the assets and liabilities that has previously been adjusted by the Transferee.

How Bam Can Assist Your Company

• BAM can help in understanding the group structure, including subsidiaries, parent companies, and any other affiliated entities.
• BAM can assess whether the group qualifies for group relief based on the criteria set forth by the tax authorities.
• BAM can assist in preparing the necessary documentation, such as group relief claims, tax computations, and supporting schedules, to ensure compliance with tax laws and regulations.