What does it mean VAT on Sale of Business as going Concern?
Sale of an asset is a taxable supply under the UAE VAT Law. What about the applicability of VAT on the sale of a business or transfer of a business as such? The Federal Tax Authority (FTA) has issued a public clarification with regard to this on 20th August 2019 vide clarification No: VATP015.
This article contains a detailed analysis of sale or transfer of a business as a going concern in the light of the said public clarification.
As per Article 7(2) of the Federal Decree-Law No(8) of 2017, the transfer of the whole or an independent part of a business from a person to a taxable person for the purpose of continuing the business that was transferred shall not be considered as a supply. It means that if the buyer is registered under VAT and is continuing the business after the purchase, then the consideration paid for such sale/transfer will not be taxable.
When a business unit fully or partially sold/transferred and the operation is continued, it will be considered as the sales/transfer is done undergoing concern concept. As per the VAT law, the consideration paid for such sales or transfer as out of scope.
What are the conditions that should be satisfied for a transfer to be considered as the transfer of assets on a going concern (TOGC)?
There are three conditions to be satisfied:
- There must be a transfer of the whole or an independent part of a business;
- The transfer must be made to a taxable person; and
- The recipient intends to continue the business which was transferred.
1. There must be a transfer of the whole or an independent part of a business:
“For a transfer to be subject to Article 7 of the Decree-Law, there must be a transfer of a business, and a mere transfer of assets will not qualify as a TOGC”. Let us discuss the above provision in detail based on the public clarification:
FTA clarifies that Sale of an asset by a taxable person is treated as a taxable supply subject to VAT at the appropriate rate except in those cases where supply is exempted such as the sale of bare land or residential property.
However, if all the assets which constitute the business are transferred then such transfer will be the sale of asset as part of TOGC and transfer will not constitute a supply for UAE VAT purpose.
Here the important point that should be kept in mind is that 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 the goods and services including among other things, goodwill, licenses, premises, machinery and equipment, employees, ongoing contracts, and liabilities that are necessary for the continued operation of that business or a part of a business must be supplied to the recipient. In this case, the taxability of the individual asset/s should not be considered but such transaction should be considered as a transfer of a business unit.
2. The transfer must be made to a taxable person:
The public clarification also makes it clear that the transfer must be 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.
If the sale or transfer of the business is as a going concern, it is not necessary for the supplier to get registered under VAT. At the same time, the public clarification also makes it clear that if the supplier didn’t comply with the requirement of the VAT Law, during its ownership of the business it will be liable if any fines or penalty comes for the transactions happened before the said sale or transfer.
3. The recipient intends to continue the business which was transferred.
The third condition for a transfer to be categorized as going concern (TOGC) is that the recipient should have acquired the business for the purpose of continuing the same kind of business.
It does not matter whether the new owner will operate the transferred business separately from, or as part of, any other businesses that he is already operating. Also, there is no requirement for the minimum period for which the transferred business must be operational under the recipient’s ownership. The only requirement is that the intention to continue the business should be genuine.
Proof of intention:
In this regard, it should be noted that the supplier has the responsibility to satisfy himself that the recipient intends to continue the business as a going concern. Because if it is found at a later point that the transfer is not genuine the VAT will be retrospectively due on the supply.
Let us understand the entire concept with an example:
ABC LLC, a manufacturer of motor vehicles, sold one of its factory buildings along with production plant to another Vehicle Manufacturing company called EFG LLC for production purpose. Such sale constitutes a taxable supply of asset chargeable at 5%. It should not be considered as a transfer of assets as a going concern (TOGC) even though the buyer company is using the factory building for the same kind of business.
On the other hand, if ABC LLC had sold the factory as a unit along with all the related resources such as goodwill, licenses, premises, machinery and equipment, employees, ongoing contracts, liabilities, etc. that are necessary for the continued operation of that business to EFG LLC, then it would have been resulted as the transfer of a business as a going concern and should not be considered as supply for VAT purpose.
Whether the transfer of ownership in a company by the sale of shares could be considered as the transfer of a business as a going concern?
The public clarification makes it clear that, 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.
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