When a company decides to sell or merge, the transfer of its operations isn’t just a simple hand‑over of assets. In the UAE, the Value‑Added Tax (VAT) system treats a going‑concern transfer in a very specific way, and getting it wrong can cost you thousands in penalties or missed refunds. This guide walks you through the VAT rules you need to know, why they matter, and how to keep your transition smooth and compliant.
Pro tip: Even if your business is small, a VAT‑aware transfer avoids a costly “tax audit” surprise. Keep reading to make sure you’re ready.
Why VAT Matters When You Transfer a Business
The Basics of UAE VAT
UAE VAT, introduced on January 1 , 2018, is a 5 % consumption tax on most goods and services. Unlike sales tax, VAT is levied at each stage of the supply chain, allowing businesses to recover the tax they’ve paid on inputs through input tax credits.
When a business changes hands, the VAT treatment hinges on whether the transaction is treated as:
A sale of assets (the usual scenario) – taxable supply.
A transfer of a business as a going concern– potentially tax‑exempt under the going‑concern rules.
Getting the classification right changes the amount of VAT you owe, the credits you can claim, and the administrative paperwork you must file.
The Going‑Concern Doctrine
A going‑concern is a business that is expected to continue operating after the transfer. The UAE VAT law, particularly the VAT Rules on the Transfer of a Business as a Going Concern, provides a framework to determine:
Whether the transfer qualifies as a going‑concern.
How to apply for the tax‑exempt status.
What documentation you need to support your claim.
It’s a nuanced process, so let’s unpack each element.
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1. Eligibility Criteria for a VAT‑Exempt Going‑Concern Transfer
Criterion
What it Means
Typical Example
Continuity of Operations
The business must keep its operations uninterrupted after the sale.
A bakery that continues to bake and sell pastries after the new owner takes over.
Transfer of Assets
All major assets (or at least the core ones) must change hands.
Transfer of equipment, inventory, and intellectual property.
Employment Maintenance
Existing staff generally stay on or are offered equivalent roles.
Employees are retained under the same contract terms.
No Significant Change in Business Model
The buyer is not fundamentally changing what the business does.
A restaurant buying another restaurant that serves the same cuisine.
Written Agreement
A formal contract indicating a going‑concern transfer is required.
A signed purchase agreement that lists all assets and obligations.
If you meet all these points, you’re on the right track. Missing even one can trigger a full VAT charge.
2. The Application Process
Step 1: Prepare the Transfer Documentation
Asset list – include machinery, inventory, lease agreements, and IP.
Employment contracts – prove staff retention or transfer.
Financial records – show continuity of revenue and expenses.
Purchase agreement – clearly label the transaction as a going‑concern transfer.
Step 2: Submit the Application to the Federal Tax Authority (FTA)
Online portal: Use the FTA’s e‑services platform.
Form details: Complete the VAT Exemption Application on Transfer of a Business as a Going Concern.
Attachments: Upload the documents prepared in Step 1.
Step 3: Await Approval
The FTA typically reviews applications within 30 days.
Be ready to provide additional information if requested.
Step 4: Record the Transfer in Your VAT Returns
Once approved, the transfer is treated as a zero‑rated supply for VAT purposes. This means:
No VAT is charged on the sale.
You can claim input tax credits for assets transferred.
You must still declare the transfer in your subsequent VAT returns for record‑keeping.
3. Common Pitfalls and How to Avoid Them
Pitfall Why It Happens Fix
Incomplete Asset List
New buyers want a snapshot of everything.
Double‑check with accounting to ensure every item is listed.
Overlooking Employee Transfer
Employees may be reassigned or let go.
Include clauses in the contract that guarantee staff retention.
Misreading the “Business Model” Rule
Changing suppliers or product lines can trigger a taxable supply.
Keep the core product/service line unchanged, or consult before making changes.
Timing Issues
Applying too late after the transfer can delay VAT exemption.
Submit the application as soon as the transfer agreement is signed.
Failure to Update VAT Registration
The buyer must register if they were not already registered.
Coordinate with the buyer’s compliance team early.
4. Practical Real‑World Example
Case Study: “Sands Bakery”
Scenario: Sands Bakery, a family‑owned bakery in Dubai, was sold to a new investor.
Action: The seller transferred ovens, inventory, lease, and employee contracts.
Outcome: By submitting a comprehensive VAT‑exemption application, the new owner avoided a 5 % VAT charge on the €500,000 sale. Additionally, the buyer claimed input tax credits on the transferred equipment, saving €25,000.
Had they treated the sale as a regular asset transfer, the buyer would have paid €25,000 in VAT and lost the credit opportunity.
5. LSI Keywords & Related Topics
- UAE VAT – The overarching tax system that covers all transfers.
- Tax Implications – The financial impact beyond VAT.
- VAT Registration – Required for the buyer if they’re not already registered.
- Transfer of Business – The broader legal process.
- Input Tax Credit – The refund mechanism for VAT paid on inputs.
6. Frequently Asked Questions
Question
Short Answer
Can I claim VAT on a going‑concern transfer if I’m not registered? |
No – both parties must be VAT‑registered at the time of transfer.
What if I only transfer part of the business?
Partial transfers are treated as regular supplies; VAT applies.
Do I need a tax consultant?
Highly recommended to navigate documentation and compliance.
Are there any special rules for free‑zone companies?
Yes, free‑zone entities may have different registration rules; check FTA guidelines.
What if the buyer fails to register?
The buyer can still apply for exemption, but the transfer may be subject to VAT until registration.
7. What Happens If You Get It Wrong?
- Penalties: The FTA can levy up to 200 % of the VAT due.
- Audit: A VAT audit can take months and disrupt operations.
- Cash Flow Impact: Immediate VAT payment on a large transfer can strain finances.
- Avoid these headaches by following the steps we outlined.
Conclusion: Stay Ahead of the VAT Curve
Transferring a business as a going concern in the UAE isn’t just a legal formality—it’s a VAT‑sensitive operation that can either save you money or cost you a fortune. By understanding the eligibility criteria, submitting a thorough application, and staying vigilant about common pitfalls, you can secure the tax‑exempt status that keeps your balance sheet healthy.
VAT Registration UAE
Talk to our experts:30+ years of expertise.
Trusted advice.
Take Action Today
- Audit Your Transfer Plan: Check if your upcoming sale meets the going‑concern criteria.
- Prepare Documentation Early: Gather assets, contracts, and financials ahead of time.
- Seek Professional Guidance: A qualified VAT consultant can spot hidden risks.
Ready to make your next business transfer VAT‑friendly? Contact us for a free consultation and let’s turn compliance into a competitive advantage.