As per article (7) of the VAT Decree Law, the transfer of whole or an independent part of business from a person to a taxable person for the purpose of continuing the business that was transferred is not considered to be a supply for VAT purposes. In this clarification FTA clarifies the conditions on the basis of which transfer of going concern(TOGC) is considered under section 7(2) of the Decree Law.
There are two methods of transfer of business has been described one is transfer through sale of shares and another is transfer through sale of assets.
Sale of shares in the process of transfer of business is considered as supply under article (7) of the VAT Decree Law and this is not considered as supply. Sale of asset independently even in the process of transfer of business is not covered under article (7) of the VAT Decree Law and considered as supply and transferor is liable to pay 5% VAT on the same. For example if a person transfer the factory building, there is liability of VAT is there but if a person transfer the business which includes sale of factory building, equipment, employment and supply contracts in consideration to going concern. Then there is no liability of VAT on such transaction.
Conditions needs to be consider for considering TOGC:
1) There must be a transfer of whole or an independent part of business:- The transfer should be transfer for business not the transfer of assets. If there is partial transfer then it should be independent part of business which is operational by recipient in going concern. Business must be operational before and at the time of transfer.
2) There must be made to a taxable person :- The recipient should be registered for VAT or the recipient is required to be registered under mandatory registration and has applied for registration or the recipient is required to be registered under voluntary registration and FTA has accepted the registration.
3) The recipient intends to continue the business which was transferred and the business which is yet to commence is not covered under TOGC. If business has ceased the operation it cannot qualify as TOGC.
4) There recipient intends to continue the business which was transferred. It has to be same business, there should not be any fundamental change of business after acquisition. It is possible that recipient can run the acquired business other than the existing business. No minimum period requirement is mentioned for which acquired business should continue but the intention to continue the same business should be there. If there is any discrepancy in TOGC, VAT will be due with the retrospective effect with interest and penalties.
Although, there are lot of clarity is there but some practical questions will be there which requires professional intelligence and experience. To know more about the VAT treatment in your business transaction, feel free to consult us.