Qualifying Group Relief on transfers to a newly incorporated subsidiary: when is the ≥75% own-ership condition met?

Facts

ParentCo is a juridical person incorporated and tax resident in the UAE. It proposes to establish SubCo, a new UAE company (also a juridical person and intended to be tax resident in the UAE). Upon incorporation, SubCo will issue shares to ParentCo. In consideration for the issue of those shares, ParentCo will transfer an asset to SubCo. The transfer is intended to qualify for QGR under Article 26, such that no gain or loss is recognized for Corporate Tax purposes and the asset is treated as transferred at net book value.

The parties assume, for present purposes, that the remaining qualifying-group conditions are intended to be satisfied (in particular: neither company is an Exempt Person or a Qualifying Free Zone Person; and they align their Financial Year end and accounting standards). The remaining uncertainty concerns the ≥75% ownership condition at the time of the asset transfer.

Question

In a restructuring where a newly incorporated subsidiary issues shares to the parent in consideration for the transfer of assets, can the ≥75% direct or indirect ownership condition in Article 26(2)(b) be regarded as met “at the time of transfer”, such that QGR can apply to the asset transfer?

Executive summary

Following a review of the applicable legislation and guidance, we find that:

• Article 26 provides relief for transfers of assets or liabilities between two Taxable Persons that are members of the same Qualifying Group, including by deeming the transfer to occur at net book value such that no gain or loss arises.
• The pivotal issue in this fact pattern is the temporal one: SubCo cannot exist before incorporation, and shares cannot be issued in a legal vacuum. Yet the asset transfer is typically the economic consideration for the shares. If the transaction is implemented as a single commercial plan but documented through sequential legal acts, the question becomes which step fixes the relevant moment for testing the ≥75% ownership condition.
• In our opinion, QGR should not be ruled out merely because the transferee is newly incorporated. There is a plausible and defensible route to meeting the ≥75% ownership condition, provided the restructuring is executed through a step plan in which (i) SubCo is incorporated, (ii) shares are issued to ParentCo such that ParentCo becomes the shareholder in the legally effective sense, and (iii) the assets is transferred immediately thereafter.
• Nonetheless, the application of QGR remains dependent on execution details and evidence, and therefore retains an element of uncertainty. The governing company law framework (including the relevant registry practice) and SubCo’s constitutional documents must be reviewed case-by-case to ensure that ParentCo’s entitlement to the rights and benefits of ownership exists before the asset transfer is made, not as a consequence after the fact.
• Where those mechanics cannot be made clean, reliance on the Ministerial Decision’s control and economic benefits test may support an argument in substance, but it should be treated as a secondary support rather than the primary foundation of the position.

Analysis

The relief and the ownership condition

1. Article 26 of the Corporate Tax Law provides relief for transfers of one or more assets or liabilities between two Taxable Persons that are members of the same Qualifying Group, such that no gain or loss is taken into account in determining Taxable Income. Where the relief applies, the transferred asset is treated as transferred at net book value.

2. For present purposes, the contested condition is the ≥75% ownership threshold in Article 26(2)(b), which is formulated in the alternative: either one Taxable Person holds at least 75% in the other, or a third person holds at least 75% in each. In a parent–subsidiary formation, the first limb is the relevant one, and the inquiry is whether ParentCo can be said to hold the required ownership interest in SubCo at the relevant time.

3. The complication is conceptual but concrete. In a typical pre-existing group, the shareholding relationship is already in place before the transfer. Here, the shareholding relationship is created in the same breath as the consideration mechanism for the asset transfer.

Business Restructuring Relief as an adjacent (but likely inapplicable) pathway

4. Before turning to Qualifying Group Relief under Article 26, it is important to note that the Corporate Tax Law also contains a separate reorganisation mechanism that is, at least conceptually, closer to a share-for-transfer transaction, namely Business Restructuring Relief (“BRR”). Article 27(1)(a) provides that no gain or loss is taken into account where a Taxable Person transfers its entire Business, or an independent part of its Business, to another Taxable Person in exchange for shares or other ownership interests in the transferee.

5. Critically, BRR does not require the 75% ownership condition at the moment of the restructuring. Instead, the Qualifying Group concept becomes relevant when assessing clawback: if the shares issued in the restructuring are transferred outside a Qualifying Group within two years, relief is clawed back. Nevertheless, as the present case is dealing with an asset transfer (rather than an entire business or independent part), BRR would not apply here. Thus, our focus remains on Article 26 QGR, where the ownership condition is obligatory at the time of transfer.

The moment of testing: “at the time of transfer” as a sequencing question

6. The legal and tax analysis is driven by the point in time at which Article 26 should be tested. In this scenario, the incorporation of SubCo, the issue of shares to ParentCo, and the transfer of the asset are interdependent steps. Because SubCo must exist before shares can be issued, and shares must be issued before they can be “owned”, it is easy to frame the problem as circular: ownership cannot be present until the process is complete, but relief is asked to apply to a step within the process.

7. That framing appears too blunt. Corporate incorporations routinely proceed through sequential legal acts that are commercially one arrangement. The more reasonable approach is to identify the specific juridical act that constitutes the “transfer” for Article 26 purposes and then examine whether, immediately prior to and at the moment that act is effective, the ownership threshold is satisfied.

8. On that approach, the structuring implication is straightforward: if SubCo’s shares are issued to ParentCo first, and the asset transfer occurs immediately thereafter (with no intervening third-party rights or changes), then at the moment the asset is transferred, ParentCo can, in ordinary legal terms, already hold 75%+ of SubCo. Under such sequencing, the fact that the ownership was created minutes earlier does not, by itself, negate the condition. The statute does not require a minimum holding period, but rather a state of ownership at the time the relief is applied.

9. This does not eliminate the risk entirely, because the relevant question is not merely whether the shares have been “issued”, but when they should be treated as owned by (and therefore attributable to) ParentCo for purposes of Article 26(2)(b).

In a formation where shares are subscribed for non-cash consideration, the chronological tension is structural: SubCo must first exist as a juridical person capable of issuing shares, yet the non-cash consideration (the in-kind contribution) is typically the economic price for those shares. Company law and registry practice may therefore distinguish between:

• the corporate act of allotment (issuance),
• the shareholder’s status as member (often tied to entry in the register of members or an equivalent constitutive step), and
• whether the shares are regarded as fully paid (or whether ownership is suspended, conditional, or otherwise limited pending satisfaction of the subscription consideration).

In some regimes, a subscriber may be treated as the shareholder upon allotment and entry in the register notwithstanding that consideration is to be satisfied shortly thereafter. In others, the legal and beneficial incidents of ownership may be regarded as arising only once the subscription obligation is discharged, or may arise subject to resolutory conditions and enforcement rights.

10. Accordingly, the Article 26 ownership threshold should be tested by reference to the precise legal moment at which ParentCo is treated as holding the shares (and the associated rights to profits, votes and residual value) under:

• the applicable incorporation statute,
• the registry’s constitutive rules, and
• SubCo’s constitutional documents, rather than by reference to the commercial plan alone.

The sequencing should therefore be designed, and evidenced, so that ParentCo’s ownership (legal or economic) is established before the asset transfer is effected, not merely as a consequence of that transfer.

11. Framed in those terms, the structuring objective is not simply to “issue shares first”, but to ensure that ParentCo’s ownership interest is treated as having crystallised before the asset transfer becomes effective for Article 26 purposes. The legally relevant sequence is therefore one in which SubCo is incorporated, the subscription and allotment are completed, and ParentCo is constituted as the shareholder (including, where required, entry in the register of members or the completion of any other constitutive step by which membership and the incidents of ownership arise). On such facts, that ParentCo holds the requisite ≥75% ownership interest at the moment the asset transfer is effected.

12. Where the shares are subscribed for non-cash consideration and are intended to be “paid” by the transfer of the asset, the documentation should be calibrated to avoid an analysis under which ParentCo’s ownership is regarded as arising only upon payment. That would convert the ownership condition into a post-transfer consequence and invite the argument that the Article 26 threshold was not met at the relevant time. Accordingly, the constitutional documents and transaction instruments should be, where possible, drafted so that:

• ParentCo is treated as the owner of the shares prior to completion of the asset transfer (even if customary protections or enforcement rights apply pending satisfaction of the subscription obligation), and
• any conditions, rescission mechanics, forfeiture provisions or other remedies for non-payment operate as post-allotment consequences rather than as features that postpone the existence of ownership itself.

The “ownership interest” concept

13. Article 2(3) of Ministerial Decision No. 132 of 25 May 2023 introduces an important interpretive lens for Article 26. For the purposes of QGR, a Taxable Person is treated as holding an ownership interest where (i) the ownership interest is “controlled” by the Taxable Person and (ii) the Taxable Person has the right to the economic benefits produced by the ownership interest under the applicable accounting standards.

14. This formulation matters in the newly incorporated subsidiary scenario because it shifts attention from a purely formalistic snapshot (“is the legal shareholder already registered?”) to a broader inquiry grounded in control and economic entitlement, as understood through accounting standards.

It does not automatically convert QGR into a substance-over-form test, but it provides a statutory gateway for addressing interim moments where legal formalities are in the course of being completed, while the commercial and governance reality is already fixed.

15. The Guide No. CTGQGR1 frames “control” by reference to the applicable accounting standard (IFRS), typically tracking the familiar criteria:

• power over the investee,
• exposure (or rights) to variable returns, and
• the ability to use power to affect returns.

16. In the interim period between incorporation, share issuance formalities, and the asset transfer, it is generally the case (as a matter of commercial design) that ParentCo is the only intended controller. There is no third party exercising competing control rights. That feature strengthens the argument that, provided the step plan is drafted so that ParentCo’s control and entitlement attach before the asset transfer becomes effective, the ≥75% condition can be treated as satisfied in substance at the relevant time.

Can ownership exist before shares are “paid”, and who holds interim rights?

17. A practical tension arises where shares are to be issued for non-cash consideration:

• the transferee company must first exist and be capable of issuing shares,
• yet the in-kind contribution is intended to serve as the subscription price.

18. This sequencing can create an intermediate legal state in which the corporate steps to allot shares have been initiated or completed, while the subscription consideration is discharged only upon completion of the asset transfer. The analysis therefore turns on:

• whether, during that intermediate period, ParentCo can be regarded as holding the requisite ownership interest for purposes of Article 26(2)(b), or
• whether it holds only a contractual claim to be registered (or otherwise treated) as shareholder upon satisfaction of the subscription obligation.

19. The more robust approach is to avoid relying on any pre-transfer entitlement as a proxy for ownership and instead to structure the implementation sequence so that ParentCo’s ownership interest is treated as having crystallized before the asset transfer is effected for Article 26 purposes. In practical terms, this requires that SubCo is incorporated and that the steps constituting ParentCo as shareholder (under the applicable company law, registry practice and SubCo’s constitutional documents) are completed prior to the effective time of the asset transfer, with any mechanisms addressing non-payment framed as post-allotment remedies rather than as features that postpone the existence of ownership itself.

20. This is where jurisdictional mechanics become decisive. Under general principles of company law, shares are typically capable of being allotted and issued upon incorporation (or immediately thereafter), and the allotment can be for non-cash consideration. However, the legal moment when ParentCo becomes the shareholder (whether by resolution, register entry, issuance of share certificate, or filing) can vary by jurisdiction and even by constitutional documents.

Where the incorporation and allotment mechanics do not permit ParentCo to be treated as a shareholder until the subscription consideration is satisfied (including by completion of the in-kind contribution), ParentCo may not be regarded as holding the requisite ≥75% ownership interest at the effective time of the asset transfer, which would weaken the application of Article 26 on a strict “time of transfer” analysis. Conversely, where incorporation documents designate ParentCo as the subscriber and immediate shareholder, the condition can be cleanly met.

21. Accordingly, the documentation should be drafted so that ParentCo is the subscriber (founding shareholder) becomes the registered shareholder at the earliest legally recognized moment, and in any event before the asset transfer is completed. The articles of association, share subscription agreement, shareholder resolutions, and any filings should be examined and aligned to ensure that

• ParentCo’s control is established, and
• ParentCo is entitled to the economic benefits of at least 75% of the shares before the asset transfer takes effect.

Legal ownership versus economic ownership

22. Article 26(2)(b) itself is silent on whether ownership must be legal, economic, or both. Ministerial Decision No. 132 of 2023 and the FTA’s guidance effectively import an economic and control based lens. This suggests that, even where legal title formalities lag slightly behind the commercial arrangements, QGR may still be arguable if ParentCo, under the applied accounting standards, controls the ownership interest and has rights to the economic benefits.

23. That said, this interpretive flexibility should not be overextended. The more the structure relies on “economic ownership” arguments to overcome a gap in legal ownership at the precise transfer moment, the more sensitive it becomes to challenge. The prudent position is therefore two-tiered:

• First, aim to satisfy legal ownership formally by sequencing the share issue and completing shareholder registration before the asset transfer.
• Second, treat the Ministerial Decision / accounting-control analysis as supportive evidence that, during the short implementation window, there is no realistic alternative controller or beneficiary, and that the commercial substance is consistent with the statutory purpose of Article 26 (intragroup neutrality where the same economic group continues to own the assets).

The disclaimer

Pursuant to the MoF’s press-release issued on 19 May 2023 “a number of posts circulating on social media and other platforms that are issued by private parties, contain inaccurate and unreliable interpretations and analyses of Corporate Tax”.

The Ministry issued a reminder that official sources of information on Federal Taxes in the UAE are the MoF and FTA only. Therefore, analyses that are not based on official publications by the MoF and FTA, or have not been commissioned by them, are unreliable and may contain misleading interpretations of the law. See the full press release here.

You should factor this in when dealing with this article as well. It is not commissioned by the MoF or FTA. The interpretation, conclusions, proposals, surmises, guesswork, etc., it comprises have the status of the author’s opinion only. Furthermore, it is not legal or tax advice. Like any human job, it may contain inaccuracies and mistakes that we have tried my best to avoid. If you find any inaccuracies or errors, please let us know so that we can make corrections.