GCC VAT rules for transfer of going concern (TOGC)

In brief

A TOGC is the sale of a business including assets, which is treated as outside the scope of VAT under the VAT legislation, subject to meeting certain conditions. This generally results in a cash flow savings for both the seller (transferor) and the buyer (transferee), which is critical in the current environment where companies are focusing on creating efficiencies in their business

Based on guidance issued by the relevant tax authorities in the GCC, we hereby provide an overview of the key considerations and requirements for a transaction to qualify as a TOGC. In this document, we highlight the relevant rules applicable in each of the United Arab Emirates (UAE), the Kingdom of Bahrain (Bahrain), the Kingdom of Saudi Arabia (KSA) and Sultanate of Oman (Oman) and analyse the key differences across the various systems.

Considering the nature of business operations in the GCC, we have noted below some of the key areas for businesses to consider when undertaking a proposed TOGC transaction:

A. Transfer of business between members of the same VAT group

Members of the same VAT group are treated as being one taxable person for VAT purposes. As such, any inter-group supplies are considered as out of the VAT scope and in any case would not qualify as a TOGC on the basis that there is no transfer for VAT purposes.

B. Transfer of Capital Assets as part of a TOGC

Where capital assets are transferred as part of a TOGC, the capital assets are not considered to be sold for the purposes of the Capital Assets Scheme (CAS). Once the capital assets have been transferred, the obligation for applying the CAS passes to the transferee.

C. Transfer of business to a VAT group

In order for a transfer of business to a VAT group to qualify as a TOGC, the assets must be used to make supplies to persons outside the VAT group and are not consumed within the same VAT group, unless it is used to make supplies to other VAT group members who will then make supplies to persons outside the VAT group.

The transfer of individual assets to separate standalone entities would not qualify as a TOGC on the basis that generally the transfer of  individual assets would not be sufficient to conduct a business/economic activity. 

However, where individual assets are transferred to different members of a VAT group (which formed together would be the whole business of the transferor), the transfer may qualify as a TOGC on the basis that transferred business would continue to be operated by the members of the VAT group (a single taxable person). The intention of the VAT group members to continue the business transfers would need to be evidenced in order to substantiate the application of the TOGC provisions.

D. Transfer of assets over a period of time

Usually, when a business is transferred, the business assets and any related liabilities would be transferred at the same time. However, there may be instances where assets and liabilities are transferred over a period of time. This does not prevent the transfer from being a qualifying TOGC. Where assets and liabilities are transferred over a period of time, the transferor will need to consider whether each transfer is a separate supply or forms part of the TOGC.

E. TOGC supporting documentation 

When a transfer satisfies the conditions of a TOGC, then this transfer will be treated as being outside the scope of VAT and will not be subject to the normal record-keeping requirements under the VAT legislation in each respective jurisdiction. 

The Tax Authorities in each jurisdiction may scrutinise whether the conditions of a TOGC are duly satisfied by the transferor. It is important that both the transferor and transferee keep documentation which could be used to substantiate that the conditions of a TOGC have been satisfied (such as any agreements or contracts for the transfer of the business). The supporting documentation should include details such as (but not limited to):

• Detailed description of the transaction;

• Identification of the VAT registration status of the recipient, as the transfer must be made to a taxable person;

• Confirmation from both parties that the transfer is of TOGC and that the recipient intends to continue the business which was transferred;

• Statement listing the party/parties liable for VAT and penalties in case of breaching the terms.

F. Input VAT deduction

Although a TOGC is not a supply for VAT purposes, this does not prevent the deduction of input VAT on related expenses (such as consultancy fees and legal fees which are considered to be a general overhead of the Transferor’s business) in accordance with the normal input VAT recovery rules. However, this needs to be assessed based on the recoverability position of the transferor / transferee. 

G. Potential customs considerations

It is important to bear in mind that in cases where the sale of assets implies a cross-border movement, customs duty implications should be assessed. Assets may be exported from one territory to another, and consequently export and import rules must be observed, including the potential customs duty liability and the formalities associated with the shipments.

A case that is of particular interest is when assets sold are placed under a customs suspension arrangement, such as temporary admission. In these situations, depending on the local rules and practice, the sale may not be allowed unless the customs duty payment that was suspended by virtue of the temporary admission relief is settled with the local customs authorities. This may generate a significant cost to the transaction, which needs to be managed and mitigated where possible. If the sale of these goods implies an export from the territory where they were originally temporarily imported, the payment of the customs duty may not be required, but an authorization from the local customs authority to terminate the temporary admission may be necessary.