VAT On Transfer of a Business in UAE: TOGC
As per Article 7(2) of the Federal Decree-Law No. (8) of 2017 on Value Added Tax, 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 as supply for VAT purposes.
As its not considered to be a supply it would become an Out of Scope Supply and as a consequence VAT will not be levied. Such a transfer is known as Transfer of Business as a Going Concern or TOGC.
Requirements for a TOGC
The following all conditions must be met to classify a transfer as TOGC:
- There must be a transfer of whole or an independent part of a business
- The transfer must be made to a taxable person
- The recipient intends to continue the business which was transferred
Transfer of the whole or an independent part of a business
For a transfer to classify as TOGC, there must be a transfer of a business. Mere transfer of assets will not qualify as a TOGC.
As a result of transfer the recipient must receive possession of the whole of a business or part of a business where that part is capable of separate operation (Independent part of a business).
As part of the transfer, all of the goods and services that are necessary for the continued operation of that business or a part of a business must be supplied to the recipient. This may include, among other things, goodwill, licenses, premises, machinery and equipment, employees, ongoing contracts, and liabilities.
To qualify as a going concern, the transferred business must be operational before and at the time of transfer.
An agreement to transfer a business which is yet to commence or business which ceased their operation before the transfer does not qualify as TOGC.
The transfer must be made to a taxable person
For a transfer to classify as TOGC, the recipient must be a taxable person at the time of transfer – i.e. the recipient should be registered or obligated to register for VAT.
Any of the following conditions must be fulfilled on the date of transfer:
- The recipient is registered under VAT Law
- The recipient is required to be registered under the mandatory registration rules and has applied for registration to the FTA
- The recipient has applied for voluntary VAT registration and the FTA has accepted the application
The registration condition is for the recipient, there is no requirement for the supplier to be registered for VAT for a TOGC to take place. Where the supplier is trading under the mandatory VAT registration threshold, the transfer of a business as a going concern will not affect the supplier’s registration requirements as it not a supply for VAT purpose.
However, TOGC does not relieve the supplier from its tax obligations incurred during its ownership of the business and the underlying assets. The supplier is liable for the tax liability, fines, penalties etc. pertaining to the period of its ownership.
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.
In contrast, the condition will not be met if the recipient has fundamentally changed, or did not use, the business after acquiring it.
The recipient at its discretion can operate the transferred business separately from, or as part of, any other businesses that he is already operating.
However, 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
The supplier should satisfy themselves that the recipient intends to continue the business as a going concern.
Both the supplier and recipient must take a due care while classifying a transfer as TOGC if the supply has been incorrectly treated as a TOGC, VAT, Fines, penalties etc. may be levied retrospectively due on the supply.
This blog post is written by CA Rashid Ali, Tax Advisor at Flyingcolour Accounting & Tax Services. At Flyingcolour, we have a team of qualified professionals who can help you with all kind of UAE VAT solutions. Feel free to call +971 4 4542366 today for a quality consultation or please send inquiry to info[at]flyingcolour[dot]com.
