Impact of Unpaid VAT or Corporate Tax on Company Deregistration

When a UAE business decides to close down, it is not just a question of pulling the plug and walking away. In UAE taxation, businesses must pay off all outstanding accounts like VAT in UAE and corporate tax in UAE before applying for deregistration of company with the Federal Tax Authority (FTA).

If a company tries to deregister without paying its tax arrears, the application for deregistration will be declined by the FTA, and the penalties will keep being added until paid in full.

Let us see what that means for business owners and how to stay in good standing when winding up a company in the UAE.

Why You Need to Get a Tax Clearance Prior to Deregistration

When you request deregistration of a company, the FTA looks into your tax account initially to verify that there are:

• No outstanding VAT returns, company tax returns, or penalties.
• All tax periods have been lodged and paid in the correct way.
• There are no pending audits or current tax investigations underway.

In case of differences, the deregistration request is held in abeyance until the company makes payment for all dues. This is to ensure that companies do not exit the market without settling their tax requirement amount.

Unpaid VAT and Its Impact on Deregistration

Deregistration of UAE VAT-registered companies happens only when:

• The company has stopped taxable supplies, or
• Its taxable turnover is under the threshold stipulated.

But in cases where VAT dues remain unpaid, the FTA will reject or postpone deregistration. Fines and interest under such a scenario will keep accruing until the VAT is paid.

FTA Administrative Penalties Decision (Cabinet Decision No. 75 of 2023) imposes a penalty for late filing or unpaid VAT, which may be:

• AED 1,000 for the first late return, AED 2,000 for repeated offenses.
• 2% immediate unpaid tax, 4% monthly from the first month onwards, and 300% limit for ongoing delay.

Unpaid Corporate Tax and Its Implication for Deregistration

After the UAE introduced corporate tax under Federal Decree-Law No. 47 of 2022, all taxable entities are required to pay and file corporate tax prior to closure.

In the event that a company submits an application to deregister when there are amounts outstanding for corporate tax, the FTA can refuse deregistration and continue with administrative penalties. The FTA can also issue a tax assessment or an audit to determine amounts outstanding.

It can extend liquidation and impact final clearance of the company by other government agencies such as the Ministry of Economy or free zone authorities.

Can You Deregister with Outstanding Tax Liabilities?

No. The FTA requires payment in full of all tax liability VAT, corporate tax, or penalties — prior to approval of an application for deregistration.

If you fail to:

• Deregistration will be denied.
• Late payment charges will continue to accrue.
• Your liquidation or renewal of business license procedure can be postponed.

In practice, no company can be wound down in the UAE completely without FTA tax clearance.

How to Stay Compliant Before Deregistration

Prior to: Submitting the deregistration application, see that your: 

•  Filed all VAT and corporation tax returns.
•  Paid all tax owing and penalties.
•  Cleared all outstanding FTA clarifications or audits.
•  Obtained a certificate of zero outstanding balance from the FTA.

Having a qualified tax consultant prepare your books on your behalf guarantees that your books are accurate and updated prior to lodging, thereby avoiding delay or penalties upon initiation of deregistration.

FAQs

1. What is the penalty for late VAT deregistration?
   If a business fails to submit a deregistration application within 20 business days of becoming ineligible, the FTA may impose a first delay of AED 1,000 and consecutive offenses of AED 2,000.

2. What happens if you deregister from VAT?
   Your business will stop charging and paying VAT on supplies once the approval is made. However, you will still have to pay any outstanding tax prior to deregistration taking effect.

3. Is a company deregisterable from VAT?
   Yes. Companies can de-register taxable supplies fall below the voluntary threshold or the business closes in the UAE.

4. Can VAT be recovered following deregistration?
   No. Following deregistration, you are no longer able to claim input VAT on future purchases. You may, however, recover outstanding input VAT before your final return filing.

5. Can a company close, which is VAT indebted?
   No. The FTA will not approve company closure until VAT liabilities and penalties are paid.

6. Can I set up another company to avoid VAT?
   No. The FTA tracks company structures and entities. Setting up a new company to avoid VAT or corporation tax can lead to fines or criminal prosecution under UAE tax law.