Do UAE companies need new VAT registration when converting operations?

Many UAE businesses - domestic and foreign - are repositioning themselves to be a part of UAE growth story.

Business owners are converting their sole establishment or partnership into an incorporated company. Foreign businesses are also opting to convert their UAE branch into a local company.

The licensing authorities treat such conversions as a change of ownership.

The same license number and license issue date - as mentioned on the earlier license – is continued on the license issued to the newly formed company. The custom authorities also update their records and allow the new entity to continue with the existing custom code.

The banks permit the new entity to use the existing bank accounts by updating their records instead of requiring a new bank account.

The Value Added Tax (VAT) compliance for such conversions are however resulting in a Catch-22 situation for businesses.

For conversions post January 1, 2018, businesses are being advised to deregister the existing tax registration number (TRN) and separately register the newly formed company.

Administrative penalties are attracted for the delay in submitting the de-registration application as also the new registration application.

The concept of separate VAT registration and inability to continue under the existing VAT TRN - despite the same license number - could result in unintended financial implications.

VAT and penalty arrears

Such conversions essentially involve transfer of an ongoing business in exchange for the shares of the newly formed company. It is often assumed that such a conversion is outside the scope of VAT as a Transfer of Going Concern (TOGC). Such VAT-free treatment mandates that the transferee should be either VAT registered or has applied for VAT registration.

When a licensing authority approves a conversion, the transferee - i.e., the new company - is formed instantaneously. Such newly formed transferee could neither be VAT registered nor apply for VAT registration at the time of conversion/business transfer.

Even if a company is incorporated beforehand, it cannot demonstrate intention to do business required for VAT registration without a business license, let alone meeting the expense/turnover thresholds.

The separate VAT registration requirement could thus trigger a massive VAT liability on the value of the businesses so converted and corresponding penalty arrears.

Business disruptions

Till a new TRN is obtained, a question arises if the business should stop charging VAT on the on-going supplies? And if tax invoices are issued under the earlier TRN, can the recipient recover input credit on such tax invoices?

The inability to use the accumulated VAT credit by the newly formed company further creates a working capital strain as the erstwhile entity alone could initiate a VAT refund process.

Import VAT reporting requires the existing custom code to be first delinked from earlier TRN and then linked to the new TRN. The time elapsed in the process results in the auto-population of the import data in the VAT returns of the erstwhile entity which has technically ceased to exist.

Impact on IPO plans

The tax records on Emaratax contains a profile of the taxable person, including the ‘entity type’ such as sole establishment, partnership, branch of a foreign business, UAE private company etc. The conversion entails a change in the ‘entity type’. 

Presently, ‘Public Joint Stock Company’ and ‘UAE Private Company’ are two distinct categories of ‘entity type’. Private companies - aiming to tap the growing UAE financial markets - needs to examine if they would be required to deregister from VAT upon conversion into a public joint stock company.

If yes, can the company recover input credit on the expenses incurred relating to the public issue under the existing TRN?

Ensuring business continuity and tax compliance

VAT is a tax on the supplies/imports of goods and services, and not on an entity’s income. A change in an entity’s type does not impact the VAT implications on such supplies.  However, corporate tax is a tax on an entity’s income. Each ‘entity type’ will have distinct corporate tax implications.

In September 2024, Emaratax introduced a feature to change the ‘entity type’ in the tax records. Businesses welcomed the feature as a pragmatic step to maintain business continuity under the existing tax registration number (TRN).

It appears that the feature is presently intended only to correct historic data errors, if any.

A similar feature requiring the erstwhile entity to submit a corporate tax return up to the date of conversion and automatically generate a new corporate tax TRN could ensure corporate tax compliance.

Akin to the licensing authority and the custom authorities, the change in ‘entity type’ upon conversion could be treated as any other update of the tax records such as entity’s name, owners’ details, addition/deletion of branch etc.

Allowing businesses to continue under the same VAT TRN would significantly facilitate the business operations and mitigate potential VAT liabilities on the transfer of business.