Key takeaways

We have seen an increased trend in the GCC region with various multinational companies undertaking large corporate reorganizations due to acquisitions of competitive businesses, in preparation of a sale, buyout, merger or ownership transfer, as a way to streamline costs and increase operational efficiencies across the global structure, reduce debt obligations, or to benefit from global tax regimes.

While the local GCC regulators mitigate the administrative burden by allowing corporations to update their trade licenses and change bank accounts with ease as part of larger reorganizations, we have noticed that the local tax frameworks in the GCC region currently lack specific guidelines for handling unusual or nonstandard restructuring arrangements. This has resulted in significant time being spent by taxpayers on liaising with the local tax authorities to try to obtain practical solutions and allow for business continuity.

We have outlined below a few of the common tax challenges faced by taxpayers who have undergone corporate restructurings that impacted their GCC operations.

In more detail

1. Sale of shares

The sale of shares is exempt from VAT in terms of the local VAT regimes, resulting in any directly attributable costs incurred in the pursuit of the sale of shares being denied as input tax recovery. We note that this position has not been contested by taxpayers, and no guidance has been provided by the tax authorities to suggest that any costs incurred may be subject to a partial input tax recovery claim or full input tax recovery claim, subject to the "intention" behind the issuance of shares and funding exercise. We understand that this may differ from certain EU tax jurisdictions and prevailing case law, where input tax recovery is permitted when the intention behind the restructuring and issuance of shares is to increase or expand taxable business operations. This position has not been adopted in the GCC region and, therefore, may increase the VAT costs of restructurings.

2. Sale of assets and contracts

Where a transfer of going concern relief (discussed below) is not applicable to a sale of a business or assets, the default position applies and each asset transferred needs to be evaluated in isolation to ensure that it is correctly subjected to VAT within the ambit of the local VAT legislation. Careful consideration and inclusion as to who bears the VAT cost on the asset transfers need to be clearly included in any sale agreement.

3. Transfer of going concern (TOGC)

The UAE, KSA and Bahrain VAT laws and regulations do not specifically address or provide specific reliefs for many popular forms of group reorganizations, for example, the conversion from a branch to a company, mergers or integration of multiple group companies at the local level. For most of these types of reorganizations, companies rely on TOGC reliefs that are available in the UAE, KSA and Bahrain.

In the UAE, VAT law offers a relief on TOGC under Article 7(2) of the UAE VAT law according to which, "the transfer of whole or an independent part of a Business from a Person to a Taxable Person for the purposes of continuing the Business that was transferred" is not considered a supply.

The challenge of applying the TOGC relief in the UAE is that the UAE VAT law does not discuss or provide clarity on the conditions that are required to be met for the relief to apply. In response to uncertainties and gaps in the VAT law, the UAE Federal Tax Authority (FTA) issued a VAT Public Clarification on the Transfer of a Business as a Going Concern ("Public Clarification"), in which it discussed the conditions for the relief in more detail.

The FTA places special focus on the main criterion of TOGC, being that the transfer must effectively give the recipient the possession of the whole of a business, or part of a business where that part is capable of separate operation. As part of the transfer, all of the goods and services that are necessary for the continued operation of that business or a part of a business must be supplied to the recipient. Depending on the facts, this may include, among other things, goodwill, licenses, premises, machinery and equipment, employees, ongoing contracts and liabilities. Moreover, to qualify as a TOGC, the transferred business must be operational before and at the time of transfer. The mere transfer of personnel and assets may not be sufficient to qualify for the TOGC exception. It is generally recommended to assess the applicability of the TOGC relief on a case-by-case basis.

In addition, the Public Clarification states that there is no requirement for the minimum period for which the transferred business must be operational under the recipient's ownership, but the intention to continue the business must be genuine and the supplier should satisfy itself that the recipient intends to continue the business as a going concern. Where the FTA considers that the supply has been incorrectly treated as a TOGC, VAT may be retrospectively due on the supply. The Public Clarification does not specifically clarify how the transfer should be formalized (including the intent) or the acceptable forms of transfer (i.e., sale transaction, conversion transaction, etc.).

For this reason, it is generally recommended that potential sellers and buyers should maintain supporting documentation that would cover the entire reorganization transaction, for example: a statement of mutual intent of the parties that the transfer is a TOGC; that the recipient of the business will continue the business without substantial change to the business operations; scope of the transfer that would point to the fact that all necessary elements are transferred for the purposes of continuing the business; explanation of the transaction, etc.

The KSA VAT Implementing Regulations provide a similar mechanism whereby a transfer by a taxable person of goods and services forming a part of their economic activity (defined in the VAT law) is not viewed as a taxable supply and is, therefore, not subject to VAT, if all of the following conditions are met:

1. The goods and services transferred are capable of being operated as an economic activity in their own right, and the recipient immediately following the transfer uses those goods and services to carry on that same economic activity.
2. The recipient is a taxable person or becomes a taxable person as a result of the transfer.
3. The supplier and the recipient agree in writing that they wish the transfer to be viewed as the transfer of an economic activity for the purposes of the KSA VAT Implementing Regulations. 

Unlike in the UAE, according to the KSA VAT provisions, there is a requirement to provide a notification to the tax authority within 30 calendar days of the transfer date in cases where the transfer of an economic activity results in the supplier or recipient of that economic activity being required to register or deregister. Essentially, this gives the KSA competent authority a better visibility of the transfer of economic activity and ensures a better transition from a VAT perspective between the supplier and recipient. In addition, the supplier of an economic activity must provide copies of all business records relating to that activity, which are required to be retained by the recipient of that economic activity.

Under the KSA, the concept of TOGC results in the recipient taxable person assuming the place of the supplier for any rights and obligations that will arise in the future for the purposes of KSA VAT, where a transfer on the contractually agreed date of an economic activity takes place. This is a more beneficial mechanism as compared to the UAE TOGC, which does not regulate on the legislative level the transfer of VAT related rights and obligations as a result of TOGC taking place on a specific date.

In Bahrain, TOGC is regulated by Article 11 of the Bahraini VAT law, "Assignment of the Economic Activity," according to which:

A Taxable Person's assignment of Economic Activity, or part thereof, for the benefit of another Taxable Person in the Kingdom shall not be considered a Supply for the purposes of applying this Law, whether the assignment was executed with or without Consideration.

Further details on this mechanism are provided in the Bahraini VAT Regulations and cover the following conditions:

1. The transfer must cover parts of a business that enable the purchaser to engage in an economic activity that was surrendered in full or in part by the seller.
2. The transferee of the economic activity must be registered for VAT purposes in Bahrain.
3. The purchaser of the economic activity must be registered for VAT purposes in Bahrain or become obliged to register following the transfer.
4. The purchaser must immediately upon the transfer use the goods and services acquired to conduct an economic activity.

The conditions listed above are essentially not very different from those provided in the UAE or the KSA.

The parts of a business for the purposes of Bahraini TOGC include tangible assets such as fixed assets, rights and other intangible assets, as well as liabilities of the business.

Both the seller and the purchaser must independently notify the Bahrain Tax Bureau on a form prepared by the National Bureau for Revenue for this purpose. Such notification must be filed within 30 calendar days of the date of the disposal. Where a notification is not formally submitted within the prescribed period, the transfer will not be considered a surrender and will be deemed to be subject to VAT.

4. Practical considerations

Reorganizations often lead to a change in ownership in local companies, without a change in the actual operational part of the business. In this context, the UAE and the KSA require that the existing VAT profiles and VAT registration details, of the business being sold or transferred, are updated to reflect the new ownership details. In the UAE, for example, the change in ownership of a VAT-registered payer prompts a VAT registration amendment to be submitted to the FTA within 20 business days from the occurrence of such circumstances (i.e., the effective date of transfer to new owners).

Merging of foreign entities and head offices: impact on local branches

We note that local branches of non-residents often face significant problems with corporate reorganizations and changes where their foreign head office ceases to exist (e.g., due to its merger with another entity). As branches do not have a separate legal identity from their foreign head office, they are registered for VAT purposes in the name of the offshore entity. Accordingly, in cases where the foreign head office merges with another legal entity and ceases to exist in its individual capacity, the local UAE branch will need to update its VAT registration details to reflect the new foreign head office details. In the UAE, KSA and Bahrain, this is possible, and tax authorities are usually willing to change the registration of the branch. However, as this is outside the normal VAT registration amendment scope, the change often requires several email communications with the relevant personnel from the local tax authority to explain the circumstances surrounding the need for the change in VAT registration details, resultant implications for the local branch's businesses activities and proving that there is no TOGC for all intents and purposes. This is a practical challenge faced by taxpayers as there is no clear guidance and consideration of unique reorganization scenarios contemplated in the local VAT legislation and guidance issued.

Local integration of multiple entities and branches

In cases of global M&A transactions taking place outside of the GCC region, multinational groups may end up with multiple entities or branches in the GCC jurisdictions, where both parties to the M&A transaction already have a local presence. During the local integration phase, redundant entities are normally liquidated while their business or parts of their business are transferred to the chosen surviving entity of the newly established group. There is usually a period between when the business is transferred to a surviving entity and liquidation of the redundant entity or branch from which the transfer was made. In this context, the issue of assumption of VAT liabilities and obligations (including filing VAT returns, payment of VAT liabilities and claiming VAT refunds) by a surviving entity at the local level is quite often not addressed in the local Middle East and North Africa (MENA) VAT laws.

In the UAE, for example, until its VAT deregistration, a branch or entity would still have to ensure that it submits "nil" VAT returns by the respective due date even when there are no business transactions for the tax period. It would still be obliged to issue compliant tax invoices (or credit notes, where applicable) for any transactions that take place before it deregisters for VAT purposes. As there can be delays in receiving tax invoices from suppliers relating to expenses incurred prior to the VAT deregistration of a branch or entity, it remains uncertain whether any such tax invoices are recoverable for the surviving entity through its VAT registration with the FTA.

Corporate reorganizations also pose questions at the stage when the redundant entities or branches should submit VAT deregistration applications to the local tax authority. The trigger date for VAT registrations is subject to a VAT assessment on a case-by-case basis after analyzing the details of the reorganization from a legal perspective. MENA VAT laws do not clarify whether updating the ownership information of redundant entities or branches is required before the VAT deregistration application is submitted. However, based on the overall purpose of this requirement, it is often regarded that such amendments are not necessary.

VAT registration and deregistration applications

We note that where VAT registrations and VAT deregistration may be required for newly established entities or branches, as well as where changes may be required for existing entities in the GCC region, the actual process of registration and deregistration is often cumbersome and challenging due to the required information and supporting documentation that needs to be submitted to the competent authority.

The most notable challenges for corporate reorganizations that we have observed in the GCC region include the following:

1. VAT registration requires a power of attorney to be submitted for the authorized signatory, which is both notarized and legalized. However, depending on where an entity is established, this may not have been necessary for local incorporation purposes. This may delay the VAT registration process by 20 to 40 business days if this requirement is overlooked during the reorganization planning phase.
2. VAT registration requires proof of taxable business activities in the form of customer contracts, supplier contracts, sale invoices and purchase invoices. We understand that it may not always be possible to provide these in the correct name of the entity or branch as part of reorganization activities. Often the parent of the newly established local entity will settle all local expenses, as the newly established entity may not have a bank account set up at the start, or no sales will occur for a particular period. This will inhibit the registration process, as the local tax authorities will often reject applications if no financial information can be provided. Consideration should be made to issue intercompany invoices to or from the newly established entity where services are being provided between group entities.
3. VAT deregistration applications require that no outstanding VAT liability is due or VAT refund owing to the taxpayer. Where this is the case, the necessary payment or VAT refund claim needs to be submitted by the taxpayer ahead of the deregistration application. This should be done when the taxpayer is operational, and the VAT-registered bank account is still open and active. The local tax authorities will not make any payment of the VAT refund claim to a non-registered bank account.
4. VAT registration application requires that the liquidation certificate is submitted to prove that the taxpayer has ceased its operations, or a board resolution on the conversion of a branch into a limited liability company, without which, the deregistration application will not be approved. This would mean that nil VAT returns will be required to be submitted on a regular basis until such time that the deregistration is approved and effective.

It has become more important than ever for taxpayers to loop in their tax advisers at the planning stage of any corporate restructuring activity that may impact the GCC region to identify and discuss the potential tax implications of restructurings and determine the various administration and tax compliance activities that may be required to update their various tax profiles, existing tax registrations and undertake any other necessary compliance activities that may be required to allow for minimal business interruptions. Sufficient time should be included in any corporate restructuring step plans to accommodate the tax timelines, ranging from 20 to 60 business days. This will include the processing of any tax profile amendments, submitting any necessary tax registrations, deregistration or fulfilling any other compliance requirements.

The collaboration between the taxpayer's internal corporate, finance, tax and legal teams and external tax and legal advisers is crucial to ensuring business continuity and minimal business interruption. At Baker we are experts at dealing with complex tax and legal issues and have a wide range of experience with corporate restructuring in the GCC region and elsewhere. Please reach out to your local Baker contact to discuss your restructuring plans.