Since the enactment by the UAE Ministry of Finance of Federal Decree Law No. 8 of 2017 on Value Added Tax (VAT Law), associated companies may be considering restructuring their group in order to be eligible to qualify and register as a “VAT group” or “tax group”.
Although the main driver for companies deciding to register as a tax group will likely be to avoid VAT on supplies made between group companies, there are potentially other advantages as well, such as:
- only having to produce one VAT tax return for the group, thereby lessening the administrative burden;
- the ability to benefit in certain circumstances from exempt supplies made between group companies; and
- minimizing the VAT consequences on the transfer of assets between group companies.
Under the VAT Law, two or more persons conducting business can apply to register as a tax group, if three conditions are satisfied. A “person” is defined as a natural or legal person, but practically speaking an individual could not join a tax group, given that only a legal person is entitled to carry out business in the UAE under applicable laws and regulations. Legal persons alone therefore will be capable of being included in a tax group. The three eligibility criteria are, that:
- each person has a legally established business, management headquarters or other place of key business operations (“fixed establishment”) in the UAE;
- the relevant persons are “related parties” within the meaning of the VAT Law; and
- one or more persons conducting business in a partnership, control the others.
Even though “Designated Zones” under the VAT Law have not yet been identified, we would comment that in general, offshore limited liability companies incorporated in the Jebel Ali Free Zone are used for a number of reasons, but in particular, for real estate transactions. Typically such entities do not have significant human and technological resources, and therefore will not likely be able to meet the ‘fixed establishment’ requirement under the VAT Law to be party to a tax group.
Whilst the VAT Law sets out some key principles to qualify as a tax group, there remain a number of issues to be addressed under the impending Executive Regulations to the VAT Law, so the complete picture cannot yet be seen.
The VAT Law provides that the Executive Regulations will:
- determine the instances where the Federal Tax Authority (FTA) may reject an application to register a tax group;
- specify the conditions under which the FTA may require a related party be part of a tax group, where such related party has not applied to be in a tax group;
- set out the circumstances upon which the FTA may deregister a tax group; and
- determine when the FTA may include or remove a person from a tax group.
We expect that one of the main reasons the FTA may reject an application for tax grouping will be where it suspects tax avoidance. In such cases, the Executive Regulations will likely set out various anti-avoidance provisions seeking to prevent third parties from controlling the group through bespoke commercial arrangements.
It is also worth noting that tax grouping may not always be the best idea for companies. There will be disadvantages to tax grouping, which should be carefully considered and on which professional advice should be sought in the particular circumstances. Notwithstanding the FTA’s powers to impose tax grouping, as mentioned above, we expect, for example, that the Executive Regulations will provide that all group companies will be jointly and severally liable for VAT owed to the FTA, which may also include former group companies. Other factors affecting the ability for the proposed tax group to take full benefit of input VAT credits where, for example, exempt supplies are also a feature of the group, should be considered. These matters could be fundamental to the question, “to group, or not to group”?