The Federal Tax Authority (FTA) has issued a public clarification with regard to sale of a business or transfer of a business on 20th August 2019 vide clarification No: VATP015.
As per Article 7(2) of the Federal Decree-Law No(8) of 2017, the transfer of the whole or an independent part of a business from a person to a taxable person for the purpose of continuing the business that was transferred shall not be considered as a supply. It means that if the buyer is registered under VAT and is continuing the business after the purchase, then the consideration paid for such sale/transfer will not be taxable.
The detailed discussion of the public clarification contains-
- The explanation of differences between share sale and business sale.
- Difference between sale of assets and sale of business.
- Transfer of the whole of independent part of a business.
This Public Clarification discusses the conditions that have to be met for a transfer to qualify as a transfer of a going concern under Article 7(2) of the Decree-Law. There are three conditions to be satisfied:
- There must be a transfer of the whole or an independent part of a business;
- The transfer must be made to a taxable person; and
- The recipient intends to continue the business which was transferred.
1. There must be a transfer of the whole or an independent part of a business:
“For a transfer to be subject to Article 7 of the Decree-Law, there must be a transfer of a business, and a mere transfer of assets will not qualify as a TOGC”.
For VAT purposes, it is important to distinguish between a normal sale of assets and a sale of assets as part of TOGC. Normally, a sale of assets by a taxable person is treated as a taxable supply subject to VAT at the appropriate rate. In some limited situations – for example, where there is a sale of bare land or residential property – the supply may be exempt for VAT purposes.
In contrast, where assets are sold as part of a transfer of a business as a going concern, the transfer is not a supply at all and therefore no VAT is charged.
For example, a manufacturer selling its factory building on its own is a supply of a good and is subject to VAT at 5%. On the other hand, the manufacturer selling the factory building together with manufacturing equipment, and employment and supply contracts may be a transfer of business as a going concern, and therefore not a supply for VAT purposes.
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. 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. Depending on the facts, this may include, among other things, goodwill, licenses, premises, machinery and equipment, employees, ongoing contracts, and liabilities.
2. The transfer must be made to a taxable person:
For a TOGC to take place, the recipient must be a taxable person at the time of transfer.
This means that the recipient should be:
- Registered for VAT or
- is required to be registered under the mandatory registration rules and has applied for registration to the FTA or
- has applied for voluntary VAT registration and the FTA has accepted the application.
It should be noted that there is no requirement for the supplier to be registered for VAT for a TOGC to take place. The transfer of a business as a going concern does not relieve the supplier from its tax obligations incurred during its ownership of the business and the underlying assets. For example, where the supplier has incorrectly omitted to register for VAT and charge VAT on its supplies during its ownership of the business, the supplier will remain liable to the FTA in respect of these violations & it will be liable if any fines or penalty comes for the transactions happened before the said sale or transfer.
3. The recipient intends to continue the business which was transferred.
The final condition for a transfer to be categorized as going concern (TOGC) is that the recipient should have acquired the business for the purpose of continuing the same kind of business.
For the purposes of a TOGC, it is irrelevant whether the new owner will operate the transferred business separately from, or as part of, any other businesses that he is already operating.
Although there is no requirement for the minimum period for which the transferred business must be operational under the recipient’s ownership, the intention to continue the business must be genuine.
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:
As discussed above, for a TOGC to take place, the recipient must intend to continue the business which was transferred. As a consequence, prior to treating the transfer as a non-supply under Article 7(2) of the Decree-Law, the supplier should satisfy themselves that the recipient intends to continue the business as a going concern. Where the supply has been incorrectly treated as a TOGC, VAT may be retrospectively due on the supply. The parties should consider the potential consequences of any such errors when entering into contractual arrangements.
Whether the transfer of ownership in a company by the sale of shares could be considered as the transfer of a business as a going concern?
The public clarification makes it clear that, when the shares in a company are sold, the ownership in the company got transferred from the seller to the buyer. In such cases, there is no transfer of business from one person to another. Only the owner of the company which holds the business is getting transferred. The company itself is not involved in the transaction and the business will remain with the company itself. Therefore, the transfer of ownership of a company by the sale of shares shall not be a transfer of a business as a going concern.
We will be happy to help you if you require any further assistance regarding public clarification with regard to sale of a business or transfer of a business.