Mergers and acquisitions (M&A) are strategic tools for business growth, diversification, and consolidation. In the United Arab Emirates (UAE), where the business landscape is rapidly evolving and becoming more regulated, Value Added Tax (VAT) plays a critical role in the structuring and execution of M&A deals. Since the implementation of VAT in the UAE in 2018, understanding the tax implications of M&A transactions has become essential for minimizing costs and ensuring compliance.
This comprehensive blog explores how VAT affects M&A transactions in the UAE, the distinction between asset sales and share sales, transfer of going concern (TOGC) rules, due diligence, and compliance best practices.
Understanding VAT in the Context of M&A
VAT is a transaction-based tax levied at 5% on most goods and services in the UAE. In the context of M&A, the way a deal is structured—whether as an asset sale or a share sale—determines how VAT applies. This distinction is crucial because incorrect treatment can result in significant tax liabilities and penalties from the Federal Tax Authority (FTA).
Asset Sale vs. Share Sale: Key Differences in VAT Treatment
1. Asset Sale
In an asset sale, the buyer purchases individual assets and liabilities of the business. VAT implications arise depending on the type of assets transferred:
- Tangible assets (e.g., equipment, inventory) are typically subject to 5% VAT.
- Intangible assets (e.g., brand names, patents) are also usually taxable.
- Real estate transfers are subject to special rules, including exemptions and zero-rating for residential properties.
If the asset sale constitutes a transfer of a going concern (TOGC), the transaction may be outside the scope of VAT, provided specific conditions are met (discussed further below).
2. Share Sale
In a share sale, the buyer acquires the shares of a company, effectively gaining ownership of the entire business. Since the transaction involves the transfer of ownership in a legal entity (not a taxable supply of goods or services), it is generally outside the scope of VAT.
However, associated professional fees, legal charges, and advisory services in connection with the share purchase may be subject to VAT at the standard rate.
Transfer of a Going Concern (TOGC)
One of the most important VAT considerations in M&A transactions is whether the deal qualifies as a TOGC. A TOGC is treated as outside the scope of VAT and can lead to significant tax savings. For a transaction to qualify as a TOGC under UAE VAT Law:
- The transaction must involve the transfer of an entire business (or part capable of operating independently).
- The buyer must be a VAT-registered person or become registered as a result of the transfer.
- The assets must be used by the buyer to carry on the same business.
If these conditions are not met, VAT may be applicable on the sale of individual assets. It is advisable to obtain written confirmation and maintain clear documentation to support TOGC treatment.
Promotional Note: Ensure TOGC Compliance with PEAK BCS
PEAK Business Consultancy Services provides expert VAT advisory during mergers and acquisitions. From evaluating TOGC eligibility to structuring transactions for optimal tax efficiency, our team ensures compliance with FTA rules and mitigates unnecessary VAT burdens. Visit www.peakbcs.com to schedule a consultation with our M&A tax specialists.
Due Diligence: VAT Red Flags to Watch Out For
VAT due diligence is a critical component of any M&A transaction. The buyer must thoroughly assess the VAT position of the target entity or business to identify hidden liabilities. Common VAT red flags include:
- Incorrect VAT filings or missing returns
- Unreconciled input VAT claims
- Failure to apply the reverse charge mechanism
- Pending VAT penalties or audits
- Non-compliance with invoicing and documentation requirements
Failure to uncover such issues during due diligence can result in post-deal liabilities that fall onto the buyer.
VAT on Professional Fees and Advisory Costs
Professional services related to M&A transactions, such as legal advice, valuation, auditing, and consultancy, are generally subject to VAT at the standard 5% rate. These costs may be recoverable as input VAT, provided:
- The buyer is VAT-registered
- The expenses are linked to taxable business activities
- Proper tax invoices are obtained
Incorrect classification of these expenses can affect the recoverability of VAT.
Post-Acquisition VAT Considerations
After an M&A transaction is completed, the following VAT-related actions may be required:
- VAT deregistration of the seller (if applicable)
- VAT registration or group registration for the buyer
- Updating VAT records, contracts, and tax invoices
- Ensuring continuation of taxable supplies without disruption
- Revising systems to reflect changes in the business structure
PEAK BCS can assist with post-transaction compliance to ensure smooth VAT transitions for both buyer and seller.
Joint and Several Liability in M&A Transactions
Under certain circumstances, both the buyer and the seller may be held jointly and severally liable for unpaid VAT relating to the transferred business. This is especially true in asset sales or when TOGC status is misapplied. Indemnity clauses in sale agreements can help protect against such risks but must be supported by professional legal and tax advice.
PEAK BCS: Strategic VAT Advisory for M&A
Whether you’re buying, selling, or merging businesses, VAT implications must be addressed from the early stages of the deal. PEAK Business Consultancy Services works alongside legal and financial teams to evaluate transaction structures, perform VAT due diligence, and ensure that FTA regulations are followed.
Learn more about our transaction advisory services at www.peakbcs.com and speak with a tax expert today.
Conclusion
VAT has a significant and sometimes overlooked impact on mergers and acquisitions in the UAE. The distinction between asset sales and share sales, the treatment of TOGCs, due diligence findings, and post-deal compliance all determine the financial and operational success of a transaction. Proper planning, documentation, and expert advisory support are essential for minimizing VAT risks and maximizing value.
Trust PEAK Business Consultancy Services to support your business through every phase of an M&A deal with expert VAT guidance. Visit www.peakbcs.com to schedule your VAT and M&A advisory consultation today.
