VAT Treatment of Transfer of a Business as a Going Concern in the UAE

When you sell a business as a Transfer of Going Concern (TOGC) in the UAE, it is not considered as a supply. And hence the sale of the business as a TOGC is not subject to VAT in the UAE as per Article 7(2) of the Federal Decree-Law No. (8) of 2017. However, there is a chance for you to confuse a normal sale of your company’s assets with the sale of assets as part of TOGC. Since the VAT treatment of the former is different from the latter, VAT consultants in Dubai suggest you get a good understanding of the tax implications.

The Federal Tax Authority (FTA) has issued a Public Clarification (VATP015) that offer great insights into the VAT treatment of TOGC. Based on the FTA clarification, here is some valuable guidance on the conditions that have to be met for a transfer to qualify as a TOGC.

Share Sale and Asset Sale under VAT in the UAE

You must understand the difference between a normal sale of assets and a sale of assets as part of TOGC. Generally, a sale of assets by a taxable person is treated as a taxable supply subject to VAT at the appropriate rate. In some specific situations such as the sale of bare land or residential property, the supply may be exempt for VAT purposes.

However, when assets are sold as part of a TOGC, the transfer is not a supply at all and therefore no VAT is charged. If you are selling your manufacturing factory building, it is a supply of goods subject to VAT at 5%. On the other hand, if you are selling the factory building along with manufacturing equipment, and employment and supply contracts it would be a transfer of a business as a TOGC. It is, therefore, not considered as a supply for VAT purposes.

Requirements of a TOGC

You must meet the following three conditions:

1. Transfer of the whole or an independent part of a business must be there

The sale of a business will be considered as a TOGC under Article 7(2) of the UAE VAT Law, only if there is a transfer of a business and not a mere transfer of assets. The FTA mandates that the transfer should provide the purchaser with possession of the whole business or part of a business that is capable of independent operation. You must ensure that the purchaser is provided with all the goods and services that are essential for the continued operation of the business. This may include goodwill, licensees, employees and ongoing contracts. Most importantly, the transferred business must be operational before and at the time of transfer to qualify as a TOGC.

2. The transfer should be executed to a taxable person

A recipient is required to be a taxable person at the time of transfer to qualify as a TOGC. To meet this condition, any of the following must be in effect on the date of the transfer:

(a) The recipient has already registered for VAT

(b) The recipient is eligible for mandatory VAT registration in the UAE and applied for the same

(c) The recipient has applied for voluntary VAT registration and the FTA accepted the application

However, the seller is not required to register for VAT to qualify as a TOGC. If the seller is trading under a mandatory registration threshold, the TOGC won’t affect its registration requirements as TOGC is not a taxable supply. This doesn’t mean the TOGC relieves the supplier from its tax obligations incurred during its ownership of the business and the underlying assets. For instance, if the seller incorrectly failed to register for VAT and charge VAT on its supplies during its ownership of the business, it will still be liable to relevant penalties by the FTA.

3. The recipient has the intention to continue the transferred business

The purchaser must have a genuine intention to carry on the same kind of business that it acquires to qualify as a TOGC.

How can Jitendra Chartered Accountants Help?

A business must assess whether a transfer of a business qualifies as a TOGC, subject to the conditions stated above. For a proper assessment, consult with the best VAT consultants in Dubai such as Jitendra Chartered Accountants (JCA). JCA is one of the leading VAT consultants in Dubai providing services such as VAT registration, VAT return filing, VAT deregistration etc. JCA can help you ensure VAT compliance at affordable costs.