The UAE Federal Tax Authority (FTA) has published Public Clarification VATP015 on the key considerations for a transaction to qualify as a transfer of business in the UAE. As a transfer of business is outside the scope of VAT, qualified transactions will have implications for both the seller and the buyer. Although Public Clarifications merely reflect the view of the FTA (from the inception of VAT, e.g., 1 January 2018) and are not binding, they provide useful guidance on how the FTA interprets the legislation.
Asset sale vs. share sale
It is important to differentiate between a sale of shares and a sale of assets from a VAT perspective. While a sale of shares is not subject to VAT, a sale of assets is, in principle, subject to VAT at the standard rate of 5%, unless:
- the zero rate applies (for example, for medical equipment)
- an exemption applies (for example, the sale of bare land)
- the sale takes place between members of the same VAT group
- the sale of assets qualifies as a transfer of business that is outside the scope of VAT
Transfer of business
The FTA has now clarified its view on the three conditions required for a sale of assets to qualify as a transfer of business.
1. The assets must constitute a business (as a whole or part)
The transferred assets must effectively give the buyer possession of the whole or part of a business, where that part is capable of operating separately. All the assets and liabilities that are necessary for the continued operation of the business must be transferred to the buyer, although the FTA does not seem to take into account the assets of the buyer in determining the transfer of business. For example, even if the buyer has adequate employees to continue the business, it appears that the FTA will still require the transfer of the seller's employees in order for the sale to qualify as a transfer of business.
In addition, the transfer of assets does not qualify as a transfer of business if the business has yet to commence or if the business has ceased its activities. The FTA does not explain how such transfers can be qualified but considering the business does not exist at the time of transfer, the transfer of assets should be outside the scope of VAT (unless the ceased or new business is part of a wider business whereby the normal VAT rules would apply). Only supplies made by an existing business are within the scope of VAT.
2. The transfer of assets must be made to a taxable person
Any of the following conditions must be in effect on the date of transfer:
- The buyer is registered for VAT.
- The buyer is required to be registered under the mandatory registration rules and has applied for registration to the FTA.
- The buyer has applied for voluntary registration and the FTA has accepted the application.
Difficulties may arise when a new company is used to buy the assets, as it would need to make sure that it has all the required documents to apply for VAT registration before the transfer takes place.
3. The buyer must intend to continue the business
The buyer's intention must be genuine and must be to carry out the same kind of business. Although the FTA has not indicated a specific timeframe, a short or 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.
The seller is responsible for the correct VAT treatment of the transfer of assets. If it is incorrectly treated as a transfer of business, the seller is liable for the VAT on the purchase price. Since the treatment as a transfer of business depends on conditions to be satisfied by the buyer, it is important that the buyer agrees in writing that it will continue the business and provides proof that it is registered for VAT (or applied for registration). The seller remains liable for the tax obligations incurred during its ownership of the business and the underlying assets.
Treating a sale of assets as a transfer of business is not optional; if the transfer qualifies as such, it should be treated outside the scope of VAT. Therefore, if the transfer is incorrectly treated as being subject to VAT, the seller is not entitled to recover the VAT.
Parties should therefore agree on a mechanism to correct the VAT treatment in case the transfer has not been treated correctly.
VAT recovery of deal-related cost
Both the seller and the buyer may incur significant deal-related costs and VAT on top of that. The VAT recovery position of the seller depends on the nature of the transaction (share sale versus asset sale versus transfer of business) and the location of the buyer. The buyer should be entitled to recover the input tax as residual VAT.
VAT recovery on deal-related cost is a contentious topic resulting in many litigation cases in other VAT jurisdictions, especially in cases where the deal is cancelled and there is no supply against which to recover the VAT. Unfortunately, the Public Clarification is silent on the VAT recovery position of deal-related costs.
- Parties should consider the VAT implications of the transaction (share sale versus asset sale) and whether it qualifies as a transfer of business. An asset sale qualifies as a transfer of business if:
- the assets constitute a whole or part of a business
- the buyer is registered for VAT or has applied for registration
- the buyer intends to continue the business
- Although the FTA has provided useful guidance, the treatment as transfer of business depends on the facts and circumstances of the transaction. Parties should therefore agree on a mechanism to correct the VAT treatment of the transaction in case.
- Parties should consider the VAT recovery of deal related costs.