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Qualifying Group Relief

The Corporate Tax Law allows assets or liabilities to be transferred between two Taxable Persons that are members of the same Qualifying Group without creating a gain or loss for Corporate Tax purposes (“Qualifying Group Relief”). 1 Broadly, this relief allows tax neutral restructuring of assets and liabilities where there is no change in the overall ownership of the assets or liabilities from a group perspective.

Ordinarily, a transfer refers to an act by which the legal and economic ownership in an asset or liability is conveyed from one Person to another. Examples of a transfer include, but are not limited to, the following transactions:

• sale 

• exchange 

• relinquishment

• sale-and-lease back treated as a sale under Accounting Standards

• exercise of options to sell or acquire an asset or liability, and

• transfer under universal title.

Where assets or liabilities are transferred to a Taxable Person as a result of liquidation, dissolution or merger (that is, an entity ceasing to have legal existence), Qualifying Group Relief shall not apply.

Qualifying Group Relief does not require any consideration to be paid. Where it is paid, it does not need to be in a specific form. Accordingly, no gain or loss treatment under Qualifying Group Relief can be available if the value of the consideration differs from the net book value or the Market Value or is paid by a Person other than the Transferee. Further, the consideration can be in cash or in kind.

Where the Transferee pays consideration in kind in the form of another asset or liability held on capital account, this constitutes an exchange transaction. An exchange of assets or liabilities between two members of the same Qualifying Group shall be treated as two separate transfers for the purposes of Qualifying Group Relief.

Since the relief applies on an asset-by-asset basis, in an exchange transaction, both transfers shall be tested separately to assess whether Qualifying Group Relief is available. Whether a clawback is triggered under Article 26(4)(a) of the Corporate Tax Law on one of the transfers in an exchange, shall also be tested on each transfer separately. Therefore, it is possible that a clawback applies on one of the transfers in an exchange of assets and liabilities, but not on the other transfer.

The Transferor and Transferee shall be treated as members of the same Qualifying Group where all of the following conditions are met:

• the Transferor and Transferee are juridical persons (the “juridical persons condition”)

• the Transferor and Transferee are Taxable Persons (the “Taxable Persons condition”)

• either 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 (the “ownership condition”)

• neither the Transferor nor the Transferee are an Exempt Person (the “Exempt Person condition”)

• neither the Transferor nor the Transferee are a Qualifying Free Zone Person (the “Qualifying Free Zone Person condition”)

• the Transferor and the Transferee must have Financial Years ending on the same date (the “Financial Year condition”), and

• the Transferor and the Transferee must prepare their Financial Statements using the same Accounting Standards (the “Accounting Standards condition”).

Where the Transferor and Transferee elect to apply the Qualifying Group Relief, they must remain members of the same Qualifying Group for a period of two years from the date of the transfer in order to avoid a clawback of the relief as discussed in Section 6 below. Thus, each of the above conditions must be met throughout the relevant two year period.