New guidance on importations and transfers of going concerns
In this article we explain new guidance from the Federal Tax Authority (FTA) on the importation of goods by agents and on the treatment of the transfer of a business as a going concern (TOGC). We also provide a brief roundup of other guidance and clarifications issued by the FTA over the past quarter.
Importation of goods by agents
In a variety of circumstances, it is a common practice in the UAE for a VAT-registered business to engage an agent to import goods on its behalf.
This approach raises some questions about the recovery of the VAT paid at import. In principle, the owner should be able to reclaim the VAT if the goods are to be used for making taxable supplies. However, as the agent’s VAT number is used at the time of importation, the import documents will be in the name of the agent and the VAT paid will be automatically posted to the agent’s VAT return. This has caused some confusion, with taxpayers adopting a variety of approaches to deal with the VAT recovery.
The FTA has now provided guidance on the procedure that should be used where agents are involved in the importation of goods. It gives two options:
- The agent and the owner of the goods both make adjustments in box 7 (“adjustments to goods imported into the UAE”) of their VAT returns. In the agent’s case, the adjustment will off-set the amount automatically posted to its return. In the owner’s case, the adjustment will serve as declaration of the import VAT. The overall result will be that the import VAT is moved from the agent’s return to the owner’s return. The owner of the goods will then be able to recover the import VAT through its VAT return in the normal way.
- The importing agent can issue a statement, which is similar in form to a VAT invoice, to the owner of the goods. The owner can then use this as evidence to reclaim the import VAT through its VAT return.
Where option 1 is used, the agent and the owner must agree in writing to make the adjustments. This agreement should be retained, together with the normal customs documents, to support the claim.
This is very welcome guidance and will be of great assistance to businesses that import goods through agents.
Transfer of a business as a going concern
The general rule in the UAE is that the transfer of a complete business, which the buyer will continue to operate, is not a ‘supply’ for VAT purposes and hence, no VAT is chargeable.
The VAT law on TOGCs is extremely brief and the FTA has released a clarification that provides a little more detail on the type of transaction that will qualify as a VAT-free TOGC.
The FTA has confirmed that TOGC treatment cannot apply where the business is sold by means of a transfer of shares. It must be the assets of the business that are being sold.
All of the following must be met for the transfer to be VAT-free:
- The transfer must comprise either the whole business or an independent part of business that is capable of independent operation;
- The transfer must be made to a taxable person; and
- The transferee must intend to continue the same business post transfer.
Examples of situations where TOGC treatment will not apply include:
- Where there is a transfer of assets that do not amount to a complete business; and
- Where the transferee changes, or does not intend to continue the business.
The FTA’s guidance emphasises the compulsory nature of the TOGC rule. A person selling a business cannot, therefore, simply charge VAT in order to take a ‘prudent’ approach.
The FTA guidance follows principles that will be familiar to indirect tax practitioners in many other tax jurisdictions. It is a helpful guide, but sales of businesses are often complex and can be of very high value. We therefore expect this to be an area where there will be uncertainties and issues as practice develops and more detailed guidance is likely to be required in due course.
Other FTA releases
Other significant releases by the FTA concern the recharge of expenses to customers and financial options.
- Recharges of Expenses - Businesses should consider whether the recovery is a ‘disbursement’ (and therefore outside of the scope of VAT) or ‘reimbursement’ (a taxable supply). The criteria set out by the FTA are similar to the rules followed in many other jurisdictions, including the UK.
- Financial Options - The issue of options relating to debt and equity securities is, in principle, exempt from VAT. However, the exemption does not apply to options relating to commodities or non-debt and non-equity instruments or where explicit premiums are charged for debt and equity based options.