GCC Indirect Tax Weekly Digest

UAE FTA publications

FTA publishes VAT Public Clarification on Transfer of a Business as a Going Concern (TOGC)

The FTA has recently released a Public Clarification VATP015 to provide clarity on the compulsory Transfer of a Business as a Going Concern rule under Article 7(2) of the VAT Decree-Law.

In general, the transfer of a business from a person to a taxable person for the purposes of continuing the business that was transferred, also commonly known as a “transfer of a business as a going concern” or a “TOGC”, is not considered a “supply” for VAT purposes and therefore is outside the scope of VAT.

The FTA states that a TOGC is a type of asset sale, not a share sale, however the asset sale must be sold as part of a TOGC. Under Article 7(2), the following conditions must be met for a TOGC:

1. There must be a transfer of a whole or an independent part of a business;
2. The transfer must be made to a taxable person; and
3. The recipient intends to continue the business which was transferred.

As such, 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. The FTA stresses that as part of the transfer, all of the goods and services that are necessary for the continued operation of that business must be supplied to the recipient.

A mere transfer of assets will not qualify as a TOGC and subsequently will be subject to VAT at the appropriate rate. Furthermore, to qualify as a TOGC, the transferred business must be operational before and at the time of transfer.

The FTA also clarifies that the intention of the recipient to continue the transferred business will be met as long as the recipient intends to carry on the same kind of business which it acquires. This condition will not be met if the recipient has fundamentally changed, or did not use, the business after acquiring it.

Where the supply has been incorrectly treated as a TOGC, VAT may be retrospectively due on the supply. Additionally, the FTA clarifies that if the requirements of a TOGC are met, then TOGC treatment is compulsory i.e. the supply must be treated as out of scope of VAT. This means that a person selling their business is not able to simply charge VAT on the sale of their business (or part of it) as a means of attempting to reduce risk.

TOGC rules have commonly been the subject of tax litigation in other jurisdictions and the principles adopted by the UAE in respect of these transactions are similar. As a result, businesses should pay careful attention to scenarios in which TOGC may apply and take action to review the VAT liability applied.

FTA releases press release on UAE Cabinet’s decision to expand list of excise taxable products in January 2020  

On 20 August 2019, the FTA issued a press release to announce the UAE Cabinet’s decision to expand the list of excise taxable products to include sweetened beverages, sugary drinks and electronic smoking devices from 1 January 2020. The aim of the expansion is to reduce consumption of unhealthy goods and modify the consumer’s behavior.

According to a statement released by the Cabinet General Secretariat, a tax of 50 percent will be levied on any product with added sugar or other sweeteners, whether in form of a beverage, liquid, concentrate, powders, extracts or any product that may be converted into a drink.

A tax of 100 percent will be also levied on electronic smoking devices, whether or not they contain nicotine or tobacco, as well as the liquids used in electronic smoking devices. 

It is expected that an official Cabinet Decision on this expansion will be released shortly following the press release. Any business in the UAE, which is involved in making the above supplies, should start considering and preparing for future Excise Tax compliance which may include new registration obligations.

Bahrain developments

NBR releases an updated version of the VAT Real Estate Guide

The Bahrain National Bureau for Revenue (NBR) has released an updated version of the VAT Real Estate Guide (Guide).

The NBR specifically made the following updates in the Guide:  

• Section 4.3 – The NBR confirms that certain transactions are not treated as an exempt supply of real estate, which includes the provision of permission to use a specific area e.g. vending machines, shelf space etc.; short-term retail and promotional stands rented for a period of less than one month; and mooring rights for boats, ships and rental of jetties.
• Section 5.3.2 – Land reclamation is not a building for the purposes of the zero-rating of construction of new buildings. As such, any goods used during the provision of land reclamation services will also not qualify for zero-rating.
• Section 5.3.4 – Explains the circumstances in which zero-rating may apply to the provision of ready-mix concrete when supplied in relation to the construction of a new building.
• Section 5.6 – For the zero-rate to apply on construction services and associated goods in relation to a new building, a supplier must obtain a certificate (or certified copy of the original certificate) from the main contractor or property owner that the building meets the criteria of a “new building” in accordance to Article 76 of the VAT Regulations. Otherwise, the supplier should apply VAT at the standard rate on all supplies regardless of whether or not the building is new.   
• Section 5.7 – The Guide provides guidance on the application of zero-rate to advance and/or instalment payments where the full consideration received by the supplier relates to both zero-rated and standard rated supplies. In such cases, a fair and reasonable apportionment should be used and the basis of the apportionment method should be documented and retained for review by the NBR.

Based on these updates, the Guide is important for any business in Bahrain that is involved in the supply of real estate. Businesses should ensure that the VAT treatment applied is in line with the new guidance.

This digest is for information purposes only and should not be construed as advice. It does not necessarily cover every aspect of the topics with which it deals. You should not act upon the contents of this alert without receiving formal advice on your particular circumstances.