How VAT legislation will change business set up models in the UAE

One of the most important points arising from the recent briefings on VAT by the Ministry of Finance is the proposed rules regarding ‘group registrations’.

These ‘group registrations’ will allow companies within the same group to register as one ‘enterprise’ for VAT purposes with one VAT registration number, and thus have only one joint return having to be filed each quarter.

It also appears that a lot of latitude will be granted to companies wanting to register under this concession. The big advantage is the use thereof to bundle cash positive businesses with cash negative businesses to immediately recover the amount of input VAT of the cash negative business instead of having to carry and wait for the credit to be repaid to the said company by the relevant tax authority. The waiting period is uncertain at this stage and will probably not be effected before an audit is conducted by the tax authority.

The prime example that comes to mind is to register a cash positive business such as a retail store – which receives payment on sale – with a cash business such as a property developer.

The latter will only start receiving output VAT upon sales of the property units, while still being liable to pay suppliers and the input VAT during the building process without any means to set such input VAT off against output VAT received.

In the UAE business landscape, group companies have generally used a diverse number of different company structures with different shareholders in order to achieve their ultimate business objectives.

It is usual practice for businesses to set up separate legal entities with different legal ownership for their overall purpose. By using consolidated accounts all these businesses are grouped together as one whole. With the introduction of VAT this will become more difficult and business groups will have to be split in line with VAT registration requirements and rules.

To take advantage of the ‘group registration’ concession, certain limitations must have been complied with. The limitations that have been imposed on ‘group registrations’ are firstly that the companies must be under the same ownership and secondly that the businesses must be in the same GCC country.

As of yet there do not appear to be any further restrictions, such as that the businesses within the group must conduct the same type of business. However, further rules may change the landscape even more. Nonetheless, the cashflow advantage that can be obtained by group registrations is self-evident and is a must to pursue and consideration must be had to restructuring the group businesses in order to do so.

John Peacock is a senior associate at BSA Ahmad Bin Hezeem & Associates LLP