If you’re selling your business now or if you ever consider selling it, read below how liable your transactions may be to UAE VAT Laws.
As experts is UAE Tax Laws, we want you to understand what the tax impact of the transaction is, in order to avoid transactions that can lead to future penalties. When selling your company some of the common cases you may encounter are the following:
- Selling a portion of the business
- Selling just some of the major assets in the business
- Selling the entire business
The Bottom Line: What is important to understand is, if this transaction as per the VAT law in UAE meets the conditions of:
- “transfer of business as a going concern (TOGC)”, if so, it is not subject to VAT, or
- is it just a sale of assets, if so, it is subject to VAT, chargeable at 5% or 0%.
If the identification of this treatment is not done correctly hefty penalties may be applied, with a fixed penalty ranging from AED 3K to 5K, and a variable penalty of up to 300% of the tax to be applied on the transaction.
For the purpose of VAT, it is important to distinguish between a normal sale of assets and sale of assets are part of Transfer of Going Concern (TOGC).
So how do you know the transaction qualifies to be a TOGC?
- If you sell a whole or an independent part of the business: YES!
Explained- This transaction should give the buyer control of the entire business or a part that is capable of its separate continued operation. This may include goodwill, licences, premises, machinery and equipment, employees, ongoing contracts, and liabilities.
Example – A biscuit manufacturing company decides to sell the packaging division of the business, including the machinery, equipment and premises of the factory, staff hired, and the existing contracts of this division. This clearly qualifies as a TOGC.
- If the sale is made to a taxable person: YES!
Explained- In this case, the buyer of the business must be registered for VAT or have applied to be registered for VAT, by crossing the mandatory threshold. It can be noted that there is no requirement for the supplier to be registered for VAT for a TOGC to take place.
- If the recipient intends to continue the business
Explained – The buyer of the business must continue the same kind of business.
Example – The buyer of the packaging division of the biscuit factory, should have an intention to continue the packaging activity in order to meet the TOGC. If they decide to scrap the machinery and lease the premises for warehousing, this will not meet the conditions of TOGC.
If the conditions for TOGC are not met, this transaction will be treated as a sale of assets.
If you need more professional advice on identifying if the sale of your business meets the criteria to qualify as a TOGC, you can contact our team for a quick free consultation.