On 20 August 2019, the United Arab Emirates (UAE) Federal Tax Authority (FTA) issued value added tax (VAT) public clarification VATP015 on the transfer of a business as a going concern (TOGC). The public clarification sets out the conditions that must be met for a transfer to qualify as a TOGC under Article 7(2) of Federal Decree-Law No. (8) of 2017 on VAT (UAE VAT Law).
In accordance with Article 7(2) of the Federal Decree-Law No. (8) of 2017 on Value Added Tax (the “Decree-Law”), the transfer of whole or an independent part of a business from a person to a taxable person for the purposes of continuing the business that was transferred is not considered to be a supply for VAT purposes
As a consequence of not being a “supply” for VAT purposes, such transfer of a business, commonly known as a “transfer of business as a going concern” or a “TOGC”, is not subject to VAT. This rule has a compulsory application
A transfer of business as a going concern is a type of an asset sale, not a share sale.
When the shares in a company are sold, the ownership in the company got transferred from the seller to the buyer. In such cases, there is no transfer of business from one person to another. Only the owner of the company which holds the business is getting transferred. The company itself is not involved in the transaction and the business will remain with the company itself. Therefore, the transfer of ownership of a company by the sale of shares shall not be a transfer of a business as a going concern
Normally, a sale of assets by a taxable person is treated as a taxable supply subject to VAT @ 5%, In contrast, where assets are sold as part of a transfer of a business as a going concern, the transfer is not a supply at all and therefore no VAT is charged
For example, a manufacturer selling its factory building on its own is a supply of a good and is subject to VAT at 5%. On the other hand, the manufacturer selling the factory building together with manufacturing equipment, and employment and supply contracts may be a transfer of business as a going concern, and therefore not a supply for VAT purposes.
Following conditions necessary for a TOGC as follows,
- There must be a transfer of whole or an independent part of a business;
There must be a transfer of a business for a transfer to qualify under Article 7(2) of the UAE VAT Law. The transfer must give the purchaser possession of the whole business or part of a business which enables separate operation. All the goods and services necessary for the continued operation of the business (or independent part thereof) must be supplies to the purchaser, including goodwill, licenses, employees and ongoing contracts. To qualify as a TOGC, the transferred business must be operational before and at the time of transfer.
- The transfer must be made to a taxable person
This means that the recipient should be:
- Registered for VAT or
- is required to be registered under the mandatory registration rules and has applied for registration to the FTA or
- has applied for voluntary VAT registration and the FTA has accepted the application.
The seller is not relieved from its tax obligations incurred during its ownership of the assets and will remain liable to the FTA for any tax violations. it is not necessary for the supplier to get registered under VAT.
- The recipient intends to continue the business which was transferred.
This requirement will be met as long as the recipient of the business intends to carry on the same kind of business which it acquires. For example, if the recipient acquires a property with a leasing business, the condition will be met if the recipient intends to continue carrying out the leasing business on the property.
For the purposes of a TOGC, it is irrelevant whether the new owner will operate the transferred business separately from, or as part of, any other businesses that he is already operating.
Although there is no requirement for the minimum period for which the transferred business must be operational under the recipient’s ownership, the intention to continue the business must be genuine.
A short period of temporary closure of the business immediately after the transfer is permissible if it is necessary to prepare the business for operation under the new ownership.
Proof of intention:
As discussed above, for a TOGC to take place, the recipient must intend to continue the business which was transferred. As a consequence, prior to treating the transfer as a non-supply under Article 7(2) of the Decree-Law, the supplier should satisfy themselves that the recipient intends to continue the business as a going concern.
Where the supply has been incorrectly treated as a TOGC, VAT may be retrospectively due on the supply. The parties should consider the potential consequences of any such errors when entering into contractual arrangements