UAE Businesses Seeking ‘Entity Type’ Change Will Benefit from Unified VAT Treatment
Many businesses in the UAE, both local and international, are realigning their legal structures to align with the country’s evolving economic landscape. This includes converting sole establishments or partnerships into
Licensing authorities typically view such changes as a transfer of ownership. However, they often allow the retention of the original license number and issue date. Similarly, customs authorities update their records and permit the new entity to continue using the existing customs code. Banks also accommodate such transitions by updating account details instead of requiring new accounts.
However, complications arise regarding Value Added Tax (VAT) compliance.
VAT Challenges During Entity Conversions
For business conversions occurring after January 1, 2018, the Federal Tax Authority (FTA) has been advising that the existing Tax Registration Number (TRN) must be canceled, and a new TRN be obtained for the newly formed entity. Failure to timely deregister and re-register can result in How old.
This requirement, despite the same license number being retained, can expose businesses to unintended VAT liabilities and disrupt operations.
Misunderstanding Around VAT-Free Transfers
These restructurings are generally considered as Transfers of Going Concern (TOGC) — which are typically VAT-exempt. However, for this VAT-free treatment to apply, the recipient company must already be VAT registered or have applied for VAT registration at the time of the transfer.
In reality, licensing authorities create the new company instantly, and at that point, it cannot be VAT registered yet due to the absence of a business license. Even if the company existed earlier, it cannot demonstrate business intent — a key criterion for VAT registration — without proper licensing or operational thresholds.
As a result, a fresh VAT registration requirement can generate significant tax liabilities and penalties on the value of the transferred business.
Operational and Financial Strains
Until the new TRN is secured:
- Can the business legally issue tax invoices or charge VAT?
- Can clients claim input VAT on invoices issued under the old TRN?
- What happens to accumulated VAT credits that the new entity cannot access?
Moreover, import VAT reporting becomes problematic. Customs must first unlink the old TRN and then link the new one — a time-consuming process. This delay leads to the import data being reported under the TRN of an entity that has technically ceased to operate.
Implications for IPOs and Public Listings
The Emaratax system categorizes entities by type (e.g., sole establishment, partnership, branch, private or public company). When a business converts from a private to a public company in preparation for an IPO, this triggers a change in ‘e
Current procedures may require VAT deregistration and re-registration. This raises questions:
- Will input VAT on IPO-related expenses still be recoverable under the original TRN?
- Can VAT continuity be maintained to avoid disruptions?
Moving Toward Simplification and Continuity
While VAT is based on supplies, not income — and hence shouldn’t be affected by entity type — corporate tax is based on income, and each entity type may have unique implications.
In September 2024, Emaratax introduced a feature allowing changes to entity type in tax records. Businesses have welcomed this development as a step toward maintaining continuity under the same TRN. However, this functionality currently seems limited to correcting historical data.
To truly support business continuity and compliance, a system that allows TRN retention while facilitating corporate tax returns up to the date of conversion — and issuing a new TRN automatically for corporate tax purposes — could offer a practical solution.
Much like licensing and customs authorities treat such changes as record updates, the FTA could consider viewing a change in entity type similarly — without requiring VAT deregistration. Doing so would reduce administrative burdens, prevent unnecessary penalties, and ensure a smoother transition for businesses restructuring for growth.
