The conditions that need to be met for transfers of businesses to benefit from an exclusion from VAT in the United Arab Emirates (UAE) have been clarified by the Federal Tax Authority (FTA) in the country.
In a recent public clarification paper, the FTA provided much needed explanations on the conditions to be met for transfers of businesses to be outside the scope of the UAE VAT regime, said Dubai-based tax expert Joanne Clarke of Pinsent Masons, the law firm behind Out-Law.
"The most noticeable condition which is not specifically outlined within the UAE VAT legislation is that the business or part thereof being transferred must be a going concern," Clarke said. "The FTA confirmed that, to qualify as a going concern, the transferred business must be operational before, as well as at the time of, transfer."
Clarke said that this allows for only a short period of temporary closure post acquisition for the purpose of the new owner preparing the business for operation. She said this requirement, although common in some global VAT regimes, is unique in the region to the UAE as the tax authorities in Saudi Arabia or Bahrain have not specifically stated the requirement for the business to be in operation at the time of transfer.
The FTA emphasised that, for a transfer to be treated as outside the scope for VAT purposes, the three conditions set out within the UAE VAT law must be met. Those conditions are that there must be a transfer of whole or an independent part of a business; the transfer must be made to a taxable person; and that the recipient intends to continue the business which was transferred.
However, the FTA went on to clarify that "a mere transfer of assets" would not constitute the transfer of whole or independent part of a business, because the transfer "must effectively give the recipient the possession of the whole of a business, or part of a business where that part is capable of separate operation".
"As part of the transfer, all of the goods and services that are necessary for the continued operation of that business or a part of a business must be supplied to the recipient," the FTA said. "Depending on the facts, this may include, among other things, goodwill, licences, premises, machinery and equipment, employees, ongoing contracts, and liabilities."
Clarke said that FTA's interpretation that a person must be VAT registered or have already submitted a VAT registration application to be considered a 'taxable persons' for the purposes of UAE VAT rules on business transfers is a further divergence from the requirements in Saudi Arabia and Bahrain.
"In Saudi Arabia and Bahrain, it is sufficient for the purchaser to become obliged to register for VAT as a result of the transfer of business and there is no strict requirement that it must have already applied for its VAT registration," Clarke said.
The FTA also said that it is an obligation of the supplier to obtain and retain evidence that the buyer has a genuine intention to use the assets for the same kind of business post transfer so as to satisfy the requirement that the recipient intends to continue the business which was transferred. This puts a burden of proof on the supplier but does give clarity that where the business assets transferred are used for the "same kind of business", even if not for the exact same business, the transaction should still be outside the scope of VAT, Clarke said.
The FTA further confirmed that it will seek to recover any VAT due on a business transfer which was incorrectly not charged as a result of the erroneous application of transfer of going concern rules.
"All businesses considering any form of business transfer in the region, whether that is in order to expand operations or withdraw from the region, should be considering the VAT rules and should ensure that they seek comfort on the correct treatment before proceeding, in order to avoid unnecessary errors and the application of penalties," Clarke said.
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