Family business owners have some re-working to do when it comes to handling their sole ownership interests. Image Credit: Pixabay

A number of family business owners in the UAE have multiple business interests out of which some are structured under a holding company format while others could be sole proprietorships/establishments of the family members.

Such non-company establishments are kept when the family members have businesses that are independent of the overall family business, leading to alienation of their personal interests. We look at two issues that have emerged for sole establishments in the last three plus years since VAT was introduced.

First, the separate VAT registration granted to independent sole establishments and, second, the issue of VAT grouping of such sole establishments with the llc entities of family business. At the time of the introduction of VAT, the UAE Federal Tax Authority allowed a large number of individual owners to VAT register each of their sole establishments as separate entities and given separate Tax Registration Numbers (TRNs).

Do way with multiple TRNs

The FTA later clarified that sole establishments are not independent of their owners and, consequently, there shouldn’t be separate TRNs issued to them. As part of one ownership, they are supposed to be given one TRN.

The FTA clearly mentioned that where separate TRNs have been issued to different sole establishments, the owner need not do anything on his own. Rather, the FTA will itself pick up such cases and instruct the owner to carry out the needed amendments.

It has been observed that the FTA advises owners having multiple sole establishments to retain a single TRN for all entities and de-register the rest. This is specifically seen in VAT registration amendment applications where the FTA has sought a declaration from the owner to confirm if he or she has other sole establishments.

A cumbersome process

Two points emerge from this issue. First, should owners wait for the FTA to come back and instruct them to make amendments to their VAT registrations, specifically when they know that such request would anyways come when any application for TRN amendment is filed with the FTA?

The second – and bigger - issue that would arise from getting one TRN for all the entities and de-register the rest is the hassle of informing vendors and customers of the new TRN (for all sole establishments), making amendments in the banking channels, potential non-recovery of VAT on invoices the vendors may issue using the old TRN. An elaborate way would have to be entered into to ensure no disruption of work.

The FTA in 2018 had also allowed the sole establishments to become part of the VAT group. Technically - and as clarified by the FTA in the VAT Guide - individual owners are natural persons and not legal persons, and natural persons are not allowed to be VAT grouped.

Legal vs. natural

So effectively, some of the sole establishments that are owned by individuals - and therefore to be treated as natural persons - have inadvertently become a part of the VAT group with other llc entities. It is possible that some of the sole establishments that are part of the VAT group could be non-functional and may not have any business activity.

In that case, there is a strong probability of the FTA imposing a penalty for continuing to have a non-functional entity registered for VAT. The imminent need for family business groups is to assess if any sole establishments are still part of the VAT group and, if yes, de-register and register it as an independent sole establishment.

While registering it as a sole establishment, it is important to ensure that the owner does not have any other sole establishment that could already be VAT registered. Similarly, the possibility of converting the sole establishments into llcs could also be explored to avoid having all the sole establishments under one TRN.