VAT Case Study: Navigating VAT in Business Acquisitions

VAT Case Study: Navigating VAT in Business Acquisitions

Disclaimer: The company names and details mentioned in this case study are fictional and have been created solely for illustrative and educational purposes. Any resemblance to real entities is purely coincidental.

Background

• Name : Apex Manufacturing LLC
• Authority : Dubai Economy and Tourism
• VAT Registration : Effective since January 2020

Apex Manufacturing LLC, a leading machinery manufacturing company in the UAE, wanted to extend their business. They found a better chance to do that by acquiring Alfain Components FZE, a smaller manufacturing company that makes special machine parts. Alfain Components FZE has a well-equipped factory, strong deals with suppliers and customers & skilled staffs. The owner Mr. Hassan, was planning to retire and wanted to sell the entire business.

Purpose of This Study

In UAE, large companies often grow by acquiring other businesses. However, if they are not aware of VAT rules, it will ended up in significant VAT liabilities that were not been anticipated or budgeted for. This almost happened to Apex manufacturing while acquiring Alfain Components FZE. But they avoided potentially huge VAT bill by understanding the smart VAT rule called “Transfer of a Business as a Going Concern" (TOGC). In this case study, let us understand how Apex manufacturing used TOGC rule to avoid VAT.

The Challenge

As Apex decided to acquire Alfain, their legal and finance team faced a challenge regarding unexpected and unbudgeted costs associated with a deal of this size. This was because, In UAE normally buying assets like buildings or machines incurs 5% VAT.  

Legal Framework: Applying the TOGC Rules

To deal with this challenge, both Apex and Alfain closely worked with a registered tax agent who after careful review of the Federal Tax Authority's (FTA) Public Clarification VATP015-Transfer of a Business as a Going Concern, explains the specific conditions under which a business transfer or acquisition can be considered as TOGC:

1. Transfer of a whole or independent part of a business?

Findings: This wasn't just a sale of building or machines. Apex acquiring Alfain’s entire business which included the factory, machinery, existing contracts, and all staff. Alfain was fully perational right up to the sale.

2. Is the buyer a taxable person?

Findings: Apex Manufacturing LLC was already VAT-registered in the UAE since January 2020. Even if they weren’t registered yet, as long as they were obligated to register or applied voluntarily and approved, this condition would still be met. Additionally, Alfain Components didn't need to be VAT-registered for this particular condition.

3. Does the buyer intend to continue the same business?

Findings: Apex had no intention to close the Alfain business and liquidating the assets. Their plan was to continue producing the same products, using same equipment and staffs and integrate the business into their existing operations. 

Since all three above conditions were met by the Apex Manufacturing, the transaction qualified as a Transfer of a Business as a Going Concern (TOGC). So as a result the acquisition would not be subject to VAT.

Effects on the Business

The tax agent’s careful review had a significant impact on the transaction. Since all three conditions were met, the acquisition successfully qualified as a TOGC under Article 7(2) of the UAE VAT Decree-Law No. (8) of 2017.

• Financial Impact: The significant effect was the complete removal of VAT on the transaction. This resulted in huge cost saving for Apex, especially considering the value of factory, equipment and ongoing contracts. These savings will allowed the company to allocate the funds towards other priorities.
• Operational Integration: Once the VAT issue was resolved, Apex was able to focus more smoothly on bringing Alfain components in to their operations, knowing that the transaction was financially sound. 
• Strategic Advantage: The VAT-efficient acquisition allowed Apex to grow their business strategically, gaining market share and specialized capabilities without incurring unnecessary financial burdens.

Tips and Guidance

Apex Manufacturing's acquisition highlights practical guidance for businesses undertaking similar transactions:

• Thorough Due Diligence: Both the companies need to carefully review and make sure the deal matched all the TOGC conditions. This wasn't a quick overview; it was a thorough analysis of business transfer details.
• Clear Intent: A clear and documented plan to continue the business was crucial. More than a verbal assurance, it had to be backed by an operational strategy.
• Expert Consultation: Appointing a qualified tax agent from the beginning is crucial. Their expertise in UAE VAT law and TOGC provisions plays a crucial role in ensuring the transaction was properly structured.

How Flying Colour Tax Consultant Can Help?

If you are going to acquire or take over the other business in UAE our tax agent can help you:

• Pre-Acquisition Assessment: Provides a detailed pre acquisition VAT assessment, identifying potential VAT liabilities and areas for tax efficiency like the TOGC provisions.
• Interpretation of Law: The principles of UAE VAT law are clear; however, their application can be complex. Our tax agent can expertly interpret FTA Public Clarifications and the Decree-Law, ensuring your specific situation complies with the legal requirements.
• Structuring the Deal: Provide guidance on structuring the acquisition agreement to satisfy the TOGC conditions, including appropriate contractual wordings and documenting the operational transfer.
• Risk Mitigation: Ensures compliance from the start and significantly reduces the risk of future VAT assessment, penalties or disputes with the FTA.
• Communication with Authorities: Act as the representative with FTA to explain the transaction details and to support application of TOGC provision.

To learn more about VAT Case Study: Navigating VAT in Business Acquisitions, book a free consultation with one of the Flyingcolour team advisors.

Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.