The UAE Federal Tax Authority (FTA) has published Public Clarification VATP015 on the key considerations for a transaction to qualify as a transfer of business in the UAE. As a transfer of business is outside the scope of VAT, qualified transactions will have implications for both the seller and the buyer. Although Public Clarifications merely reflect the view of the FTA (from the inception of VAT, e.g., 1 January 2018) and are not binding, they provide useful guidance on how the FTA interprets the legislation.

Asset sale vs. share sale

It is important to differentiate between a sale of shares and a sale of assets from a VAT perspective. While a sale of shares is not subject to VAT, a sale of assets is, in principle, subject to VAT at the standard rate of 5%, unless:

• the zero rate applies (for example, for medical equipment)
• an exemption applies (for example, the sale of bare land)
• the sale takes place between members of the same VAT group
• the sale of assets qualifies as a transfer of business that is outside the scope of VAT

Transfer of business

The FTA has now clarified its view on the three conditions required for a sale of assets to qualify as a transfer of business.

1. The assets must constitute a business (as a whole or part)

The transferred assets must effectively give the buyer possession of the whole or part of a business, where that part is capable of operating separately. All the assets and liabilities that are necessary for the continued operation of the business must be transferred to the buyer, although the FTA does not seem to take into account the assets of the buyer in determining the transfer of business. For example, even if the buyer has adequate employees to continue the business, it appears that the FTA will still require the transfer of the seller’s employees in order for the sale to qualify as a transfer of business.

In addition, the transfer of assets does not qualify as a transfer of business if the business has yet to commence or if the business has ceased its activities. The FTA does not explain how such transfers can be qualified but considering the business does not exist at the time of transfer, the transfer of assets should be outside the scope of VAT (unless the ceased or new business is part of a wider business whereby the normal VAT rules would apply). Only supplies made by an existing business are within the scope of VAT.

2. The transfer of assets must be made to a taxable person

Any of the following conditions must be in effect on the date of transfer:

• The buyer is registered for VAT.
• The buyer is required to be registered under the mandatory registration rules and has applied for registration to the FTA.
• The buyer has applied for voluntary registration and the FTA has accepted the application.

Difficulties may arise when a new company is used to buy the assets, as it would need to make sure that it has all the required documents to apply for VAT registration before the transfer takes place.

3. The buyer must intend to continue the business

The buyer’s intention must be genuine and must be to carry out the same kind of business. Although the FTA has not indicated a specific timeframe, a short or 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.

VAT liability

The seller is responsible for the correct VAT treatment of the transfer of assets. If it is incorrectly treated as a transfer of business, the seller is liable for the VAT on the purchase price. Since the treatment as a transfer of business depends on conditions to be satisfied by the buyer, it is important that the buyer agrees in writing that it will continue the business and provides proof that it is registered for VAT (or applied for registration). The seller remains liable for the tax obligations incurred during its ownership of the business and the underlying assets.

Treating a sale of assets as a transfer of business is not optional; if the transfer qualifies as such, it should be treated outside the scope of VAT. Therefore, if the transfer is incorrectly treated as being subject to VAT, the seller is not entitled to recover the VAT.

Parties should therefore agree on a mechanism to correct the VAT treatment in case the transfer has not been treated correctly.

VAT recovery of deal-related cost

Both the seller and the buyer may incur significant deal-related costs and VAT on top of that. The VAT recovery position of the seller depends on the nature of the transaction (share sale versus asset sale versus transfer of business) and the location of the buyer. The buyer should be entitled to recover the input tax as residual VAT.

VAT recovery on deal-related cost is a contentious topic resulting in many litigation cases in other VAT jurisdictions, especially in cases where the deal is cancelled and there is no supply against which to recover the VAT. Unfortunately, the Public Clarification is silent on the VAT recovery position of deal-related costs.

Planning points

• Parties should consider the VAT implications of the transaction (share sale versus asset sale) and whether it qualifies as a transfer of business. An asset sale qualifies as a transfer of business if:
  • the assets constitute a whole or part of a business
  • the buyer is registered for VAT or has applied for registration
  • the buyer intends to continue the business
  • Although the FTA has provided useful guidance, the treatment as transfer of business depends on the facts and circumstances of the transaction. Parties should therefore agree on a mechanism to correct the VAT treatment of the transaction in case.
  • Parties should consider the VAT recovery of deal related costs.

For the purpose of VAT in UAE, Designated Zones will be treated as being outside the State and outside the Implementing States. Though it is considered to be outside the State, movement of Goods from a place in the State to the Designated Zone will not be considered as an export of Goods. This implies that supply of goods from the mainland to the Designated Zone will not be zero-rated and the standard rate of VAT will be applicable.

On the other hand, goods imported from a place outside the State to a Designated Zone will not be considered as imports. This means, that the import of goods from other countries will not be taxable and it will be considered as out of the scope of UAE VAT.

In this article, we will understand the VAT treatment of goods purchased into Designated Zone under the following scenarios:

1. Goods purchased from Designated Zone in UAE
2. Goods supplied from Mainland
3. Goods supplied from outside the UAE State

To know more about Designated Zones, please read VAT on Designated Zone and VAT on Free Zones in UAE .

Goods purchased from Designated Zone in UAE

Supply of goods between Designated Zones will not attract VAT. For example, Rose Traders located in Jebel Ali Free Zone purchased goods from A-One Traders, Dubai Airport Free Zone.

In the above illustration, Jebel Ali Free Zone and Dubai Airport Free Zone are Designated Zones. The purchase of goods from A-One Traders will be VAT free since the supply is between Designated Zones.

Goods supplied from Mainland to the Designated Zone

Movement of goods from a place inside the State to the Designated Zone will not be considered as export of goods. Thereby, the standard rate of VAT will be applicable on such purchases by the taxable person in Designated Zone. The Input VAT paid on such purchases can be recovered by adjusting with output VAT liabilities.

For example, Rose Traders located in Jebel Ali Free Zone purchased goods from Abdul Traders, located in Dubai mainland.

In the above illustration, goods are purchased from Dubai (mainland) to Jebel Ali Free Zone (Designated Zone). The supply of goods from Abdul Traders to Rose Traders will attract VAT at 5%. This because the supply of goods from the mainland to Designated Zone are not considered as exports.

Goods supplied from outside the UAE State into Designated Zone

Goods purchased into Designated Zone from outside the UAE State will not be considered as imports and will be out of the scope of UAE VAT. As a result, there will be no VAT implications on such purchases.

For example, Rose Traders located in Jebel Ali Free Zone purchased goods from National Traders, located in India.

In the above illustration, goods are purchased into Jebel Ali Free Zone (Designated Zone) from India. The purchase of goods by Rose Traders from National Traders will be considered out of the scope of UAE VAT. Thereby, VAT is not applicable.

The Federal Tax Authority’s (FTA) requirements for accrediting the tax accounting software truly reflects the commitment of the Authority to simplify the taxpayer’s life in adhering to the VAT compliance. This also emphasises the importance of usage of an accounting software in the journey of achieving 100 % compliance for businesses.

The prime objective which FTA wants to drive through the Tax accounting software requirements is that the automation of all tax based responsibilities of a taxpayer such as keeping track of records, payments, file VAT returns, generating FAF (Audit File) etc.

In this article, we will discuss the key benefits of using the FTA accredited Software for businesses. Before we put down the list of benefits, let us understand the key functionalities a tax accounting software must have.

Key Functionalities of Tax Accounting Software

Among the various requirements, the three key functionalities that must be included in the accounting software is that the system should have the ability to automatically generate

FTA Audit File (FAF) 2. VAT return file 3. VAT compliant tax invoices and credit/debit notes.

To know more on tax accounting software requirements, please read ‘FTA’s Tax Accounting Software Requirements’

In the context of FTA, a tax accounting software is one, which has, inbuilt capabilities to produce tax reporting from the accounting records. Let us understand this with pictorial graphics.

From the above illustration, it is clear that an accounting software should produce the tax reporting from the accounting records i.e. the details of purchase and sales should automatically be reported into relevant VAT reports such as VAT return form and audit file. This will be possible only when the tax accounting software has the inbuilt capabilities to:

1. Understand the VAT requirements, both at the transaction level and reporting level
2. Determine the tax applicability at transactions level, based on the input available in the master (Ledgers, Stock Items etc.)
3. Verify the tax calculation based on the configuration you had done.
4. Validate the transaction recorded in line VAT return format and FAF (Audit File) requirements and allows seamless system assisted correction.

Benefits of FTA Accredited Tax Accounting Software

Tax accounting software is accredited by FTA after a strict verification of requirements that an accounting software has met. Once the accounting software is accredited by FTA, it is guaranteed to simplify the VAT compliance for businesses. The following are some of the key benefits of FTA Accredited Tax Accounting Software.

1. Generating VAT compliant tax invoice, Debit note and Credit note
2. Automatic generation of VAT return form (VAT 201) with zero or minimum efforts
3. Auto-generation of FAF (Audit File) in the structure prescribed by the FTA with zero-efforts
4. With the inbuilt capabilities to prevent, detect and system-assisted correction, you can be rest assured, VAT returns and audit file generated will be complete and error-free.
5. On-Time filing of VAT returns since the VAT returns and audit file can be generated effortlessly
6. Saves you from paying hefty penalties starting from AED 1000 to AED 50,000 which will be applicable for non-adherence for various compliance requirements
7. Maintaining books and all other VAT records for a period of 5 years or 10 years as applicable.
8. With the automation of all tax based responsibilities, it helps in reducing the compliance cost for businesses
9. While all the VAT reports are always ready (automated), it creates a platform which makes it easier for you as well as FTA to co-operate in areas such as audits.
10. With all these benefits, it gives the business owner’s peace of mind and allows you to invest more time concentrating towards your business growth rather than get stuck in the compliance grid.

All this sounds to be too good! Are there any other benefits of Tax Accounting software?

The answer is ‘Yes’

A Tax Accounting Software is integrated software which helps the businesses in managing their business needs such as managing books of accounts, Accounts payable, Accounts receivable, Billing, Financial reporting, Order management, inventory management etc. and at the same time, helps you to be 100% VAT compliant.

Supplies not eligible for input tax recovery under VAT in UAE

Under VAT in UAE, registered businesses are eligible to recover the VAT paid on purchase of goods and services used for business purposes. This is of course subject to the conditions discussed in our previous article. In addition, there are certain supplies on which input tax recovery is not allowed. Let us understand the nature of these supplies:

1. Supplies used to make exempt supplies

Certain supplies are declared as exempt in the VAT Law, such as supply of local passenger transport, supply of bare land, etc. A registered business cannot recover tax paid on purchase of inputs used to make these exempt supplies.

For example:Fatima Transports in Dubai purchases 10 units of Item A @ AED 1,000. VAT paid on the purchase @ 5% is AED 500. Item A was used to supply local passenger transport service, which is exempted. Hence, Fatima Transports will not be eligible to recover AED 500 paid on purchase of Item A, as it was used to supply an exempted service.

2. Entertainment services provided to non-employees

Registered businesses cannot claim input tax recovery on entertainment services provided to non-employees. These non-employees can include customers, potential customers, officials, shareholders, owners or investors.

Note that entertainment services include hospitality of any kind, including providing accommodation, food and drinks which are not provided in the normal course of a meeting and access to shows or events or trips provided for the purpose of pleasure or entertainment.

For example: Ali Automobiles provides 3 days accommodation to its client during their visit to the business premises. The hotel tariff for 3 days accommodation was AED 1,000, on which VAT @ 5%, amounting to AED 50 was paid by Ali Automobiles. Ali Automobiles is not eligible to recover input VAT recovery on this, as the service amounts to entertainment services provided to non-employees.

Note that catering and accommodation services provided by a transport service operator to non-employees will not be treated as entertainment service, such as an airline providing accommodation to passengers whose flight has been delayed.

3. Motor vehicles used for personal use

If a registered business has purchased, rented or leased motor vehicles for use in the business but it was used for personal use by a person in the business, then the tax paid on purchase, rent or lease of the motor vehicle cannot be recovered.

Note that here, motor vehicle means a road vehicle designed or adapted for the conveyance of not more than 10 people, including the driver. Trucks, forklifts, hoists or similar vehicles are not included.

A motor vehicle used in the business will not be treated as being available for personal use in the following cases:

• a. It is a taxi licensed by a competent authority within UAE
• b. It is registered and used for the purpose of an emergency vehicle, including by police, fire, ambulance or similar emergency service.
• c. It is used in a vehicle renting business, where it is rented to a customer

For example: Ali Automobiles in Dubai purchases 10 cars from the manufacturer, Omar Cars, in Dubai. Out of the 10 cars purchased, 1 car was used by the owner for his personal use. In this case, Ali Automobiles cannot recover input tax paid on purchase of the 1 car used for personal use.

4. Goods or services purchased for use by employees

Registered businesses cannot claim input tax recovery paid on goods and services purchased for use by employees, for which no charge is paid by the employees and it is for their personal benefit.

However, input VAT recovery can be claimed on such goods and services in the following cases:

• a. Where it is a legal obligation to provide the goods or services under an applicable labour law in UAE or the Designated Zone.
• b. Where it is a contractual obligation or documented policy to provide the goods or services for the employees to perform their role and it can be proven to be a normal business practice in the course of employment.
• c. Where the provision of goods or services is a deemed supply

For example: Ali Automobiles purchased gym equipment for use by its employees. The equipment is made available to employees as part of their employee benefits and is free of charge. VAT paid on purchase of the gym equipment is AED 2,000. Ali Automobiles is not eligible to claim input tax recovery on this purchase as the gym equipment is purchased for use by its employees.

Hence, businesses registered under VAT in UAE should make careful note of these supplies on which they will not be eligible to recover the input tax paid. It is important that input tax is recovered only on supplies which are eligible for input VAT recovery.

Input tax is the tax paid by a person on purchases or inward supplies. A major element of VAT in UAE is the provision to recover the tax paid on inputs. This means that a person can reduce the value of input tax eligible for recovery from the tax payable and only pay the balance amount as tax. This ensures that tax is paid only on the value added at each stage in the supply chain. Hence, the amount of input tax eligible for recovery plays an important role in the cash flow and operating expenses under VAT.

Let us first understand how input tax recovery works.

Process of input tax recovery

Example: In January ’18, Jehan & Co, in Abu Dhabi purchases 10 desktop computers @ AED 1,000 each. On this purchase, Jehan & Co. pays VAT @ 5% of AED 500. In the same month, Jehan & Co. supplies 20 desktop computers @ AED 2,000 to a consumer. VAT @ 5% is collected by Jehan & Co. on the supply, amounting to AED 2,000.

Here, output tax payable by Jehan & Co. for the month of January ’18 is AED 2,000.

Input tax recoverable for the month of January ’18 is AED 500

Tax payable = Output tax payable – input tax recoverable

Hence, tax payable by Jehan & Co. for the month of January, ’18 is AED 2,000 (Output tax payable) – AED 500 (Input tax recoverable) = AED 1,500.

Here, as you can observe, the tax paid on purchase by Jehan & Co. can be used to reduce their output tax payable. Only the balance tax payable is required to be remitted to the Government.

Conditions for input tax recovery

A registered business can recover the VAT paid on purchase of goods and services used for business purposes and subject to certain conditions. These conditions to be satisfied are:

a. Should be used to make Taxable supplies

The supplies on which tax is liable to be paid are called taxable supplies (i.e. supplies made at 5% or zero-rated supplies). Input VAT recovery is allowed to be claimed only on inputs used to make taxable supplies, not exempt supplies.

For example: Jehan & Co. purchases 20 units of Item A @ AED 50, for value of AED 1,000. Out of the 20 units purchased, 10 units are used to manufacture Item B, which is taxable and 10 units are used to manufacture Item C, which is exempt.

Hence, Jehan & Co. can claim input VAT recovery only for value of input used to make taxable supplies, i.e. 10 units used to manufacture Item B @ AED 50, which is AED 500.

b. Recipient receives and keeps the Tax Invoice

The recipient claiming input tax recovery on a supply should ensure that the Tax Invoice pertaining to the supply is received and kept in the records. The Tax Invoice should show the details of the supply related to the input tax recovery being claimed.

c. Recipient pays the consideration for the supply

The recipient claiming input tax recovery should pay or intend to make the payment of consideration for the supply within 6 months after the agreed date of payment for the supply.

Hence, the provision for input tax recovery is a very important component of VAT in UAE. Businesses need to ensure that they are able to correctly identify supplies on which input tax can be recovered, ensure that they fulfil the conditions for claim of input VAT recovery and claim the input VAT recovery on time. This will help in ensuring optimum cash flow and working capital in the business. All this work can be made easier by the use of a VAT software which will help automate each of these tasks with respect to input tax credit and leave you with enough time and resources for you to focus on your business.

How VAT rates applicable to Education Sector in UAE ?

Education is a very important sector in the UAE. With the introduction of VAT in UAE, the education sector has also been impacted with the additional VAT to be levied on certain goods and services supplied by educational institutions. Let us see a ready reckoner for the VAT rates applicable to the education sector:

Hence, under VAT, a concept of ‘qualifying educational institutions’ has been introduced. The educational services supplied by a qualifying educational institution will be zero rated. These qualifying educational institutions are:

a.Nurseries, preschools and schools.

b.Higher educational institutions owned or funded by the Federal or local Government.

These institutions should not charge VAT on the educational service they provide. They will also be able to recover VAT paid on related costs at the time of return filing. Further, the books and digital reading material supplied by these institutions will be also be zero rated.

For example: Abdul School in UAE is registered under VAT. As it is a school, it is a qualifying educational institution. Hence, Abdul School will not charge VAT on the tuition fees charged to students. Also, books provided as part of the course will also not be subject to VAT.

The educational services provided by any institution other than the qualifying educational institutions will be subject to VAT @ 5%.

For example: A private college, Azra Medical College, is registered under VAT. Since this college is not a qualifying educational institution, the course fees charged by Azra Medical College will be subject to VAT @ 5%. Also, the books and reading material provided by Azra College will also be subject to VAT @5%.

However, note that certain services provided by educational institutions, even if they are qualified educational institutions, will be subject to VAT @ 5%, such as school uniforms, electronic equipment, food and beverages, field trips for recreation and extracurricular activities.

For example: Abdul School is registered under VAT. Since it is a qualifying educational institution, the tuition fees charged by Abdul School are zero rated. Nevertheless, the school uniforms provided by Abdul School to its students will be subject to VAT @ 5%.

Also, the provision of transportation to students will be exempt, which means that the institutions will not charge VAT for providing school transportation. At the same time, they will not be able to recover VAT paid on related costs at the time of return filing.

For example: Abdul School which is registered under VAT provides transportation to its students to and from the school. As school transportation is exempt under VAT, VAT will not be charged on the school transportation provided by Abdul School. However, Abdul School will not be able to recover VAT paid on related expenses, such as uniforms for the driver and conductors.

Hence, educational institutions in UAE should note the tax rates applicable to the services provided by them and accordingly conduct their business activities.