29 Mar 2017

VAT Law - Analysis of VAT implications on corporate group structures

Authored by: Hadef & Partners, Sector Groups

Introduction

It has been well noted that the implementation of VAT in the UAE is likely to impact every stage of the supply chain. There are a number of matters that should be considered in relation to the proposed implementation of the VAT regime in the UAE. We set out below a list of some of the key matters which may be relevant at the time of assessing an optimum corporate structure for your business.

Free Zone Tax Exemptions

Under the relevant regulations establishing a number of free zones in the UAE, there is a general tax exemption, usually for a period of 50 years. Certain businesses are presently envisaging creating free zone companies in order to avail themselves of an anticipated tax exemption at the free zone level. However, we would advise caution here as this may be premature. In our initial view, the tax exemption in the free zones relates only to business taxes. Since VAT is a consumption tax, and not a business tax, the presumption that free zone companies will be exempt from VAT is not supported by the free zone regulations currently in place. However, this can only be confirmed upon the law being issued.

Group Exemptions

Typically in a VAT system, we would expect to see a grouping scheme, which provides the ability for transactions to be exempt from VAT where they would otherwise be taxable. For supplies made between ‘related companies’, such companies may together, be deemed to be one single taxable person and accordingly the transactions themselves will be exempt from VAT.  Sometimes however, certain sectors are prohibited from benefitting from such group membership. When the law is published, business structures should be examined to establish whether a tax grouping advantage could be available.

Sector Tax Exemptions

It has been announced that goods and services in the education and healthcare industry sectors, for example, will be exempt from VAT. It was initially unclear whether this would mean they would be fully exempted or that tax would be applied on supplies at a rate of 0%, with the practical outcome varying significantly depending on the approach ultimately adopted. The distinction, practically speaking, is an important one for businesses. Where a supply is completely exempt from VAT, the entire VAT regime will have no applicability; whereas for zero rated supplies, VAT will have to be accounted for and tax returns will still be required to be made.  It has now been confirmed that supplies will be zero rated. Further clarity will be provided on what fees are zero rated and which of these will be standard rated if these are strictly beyond medical services and education. Businesses that primarily make zero-rated or exempt supplies may not be liable to register for VAT purposes. Further details will be provided in the relevant laws and regulations, which we expect to be enacted in the near future.

For more information, please contact us on sectors@hadefpartners.com