Foreword by Andrew Chilvers
For ambitious companies eager to expand into overseas markets, often the conventional route of organic business development is simply not fast enough. The other option to invest in or buy a business outright is far quicker but often fraught with unforeseen dangers. And even the biggest, most experienced players can get it badly wrong if they go into an M&A with their eyes wide shut.
If you search for good and bad M&As online the Daimler-Benz merger/acquisition with Chrysler back in 1998 is generally at the top of most search engines on how NOT to undertake a big international merger. Despite carrying out all the necessary financial and legal measures to ensure a relatively smooth deal, the merger quickly unravelled because of cultural and organisational differences. Something that neither side had foreseen when both parties had first sat down at the negotiating table.
These days the failed merger of the two car manufacturers is held up as a classic example of the failure of two distinctly different corporate cultures. Daimler-Benz was typically German; reliably conservative, efficient, and safe, while Chrysler was typically American; known to be daring, diverse and creative. Daimler-Benz was hierarchical and authoritarian with a distinct chain of command, while Chrysler was egalitarian and advocated a dynamic team approach. One company put its value in tradition and quality, while the other with innovative designs and competitive pricing.
Alfred Strolla discussed The Art of Deal Making: Using External Expertise Effectively as part of the Tax chapter.
Describe a typically tax-efficient deal structure in your jurisdiction? Any examples.
Considering that the income tax law in the UAE has yet to be enforced, the typical tax-efficient deal is the deal that meets the following conditions:
1. Does not bear foreign tax liabilities;
2. Cannot be challenged as an artificial set up to avoid the tax in another taxable jurisdictions across the globe;
3. Minimise the indirect tax obligations, specifically the Value Added Tax (VAT).
The UAE is considered as a “low or no tax jurisdiction” except for branches for foreign banks and international oil companies. Therefore, a deal that may result in consolidation, elimination, or addition of non-UAE or non-GCC ownership may attract the attention of the tax authority of the country from which the owner comes. Additionally, where the new business structure (post- deal structure) results in a tax residency in the UAE without “or even with a limited” business operations, such a structure can be challenged by the foreign tax authorities as BEPS practice, i.e. deliberately established to avoid tax by tax planning.
From an indirect tax perspective, a merger or an acquisition deal that results merely in assets acquisition without a transfer of liability may prove to be an inefficient deal. Transfer of ownership of a business as a going concern, i.e. without immediate change or alteration to the business assets, operations, or liabilities, is considered as outside of the scope of VAT in the UAE and as a result such a deal will not result in VAT impact. However, other types of deals can constitute supplies subject to VAT at standard rate of 5%, and although this is relatively a low tax rate, given that the amount at stake in business deals is significant, the VAT implications cannot be neglected in such circumstances.
What elements of a structure or deal could prevent a client from implementing your recommendations? For example, holding companies, trusts, exemptions, withholding tax.
As a tax haven jurisdiction, there are a number of large organisations that are studying the market to set up their holding companies or trust companies in the UAE to avoid excessive tax payments.
Benefits include the location of the UAE, ease of doing business and attracting cost effective talent from the subcontinent (e.g. India, Pakistan, and Philippines) and efficient infrastructure, accommodation and communications. Most of the companies that come and register for doing business in the UAE present a transfer pricing study based on which they can re-allocate certain types of costs including ERPS systems, highly technically skilled engineers and field experts, management and reporting systems to their operations in the UAE.
How would you minimise the VAT risks on a deal of acquisition of real estate property?
Here’s a scenario: a client investing in properties in the UAE had a complex VAT issue where he wanted to minimise his VAT exposure on a certain transaction. The third party was willing to buy two floors of a property owned by our client in one of his large buildings; not directly from our client as an individual but through special purpose vehicle to be sold by a Sale and Purchase Agreement (SPA).
The first step taken for our client was to sell the floors to one of his investment companies together with its current tenant agreements for the investment company to be entitled for the rental income. As a result, the transaction was classified as outside the scope of VAT.
Conditions for the transfer of business as going concern:
- The UAE VAT public clarification on the transfer of business as a going concern states that for the sale of a business to qualify as a transfer of a business as a going concern, it should meet all the following conditions:
• The supply should consist of a business or an independent part of a business;
• The recipient of the supply should be a taxable person;
• The acquired business should continue operating after its transfer.
As an answer to the question whether the real estate property of the investment company may qualify as a transfer of a business or an independent part of a business, we examined whether it met the below definition of the business as stipulated by the VAT Law:
“Any activity conducted regularly, on an ongoing basis and independently by any person, in any location, such as industrial, commercial, agricultural, professional, service or excavation activities or anything related to the use of tangible or intangible properties.”
The property under consideration consisted of 2 floors that were regularly rented out for commercial purposes. Renting out of floor spaces for commercial tenants is an activity related to real estate property that does not require integration with the other business activities.
On that basis, although the rental of commercial floors certainly does not constitute the entire business of the investment company, it can be considered as an independent part of the business since it can be conducted regularly and independently.
However, the tax authority also requires that for the transferred business to qualify as a transfer of going concern, it shall be operating prior to its sale, i.e. it shall not be newly founded or developed. Furthermore, the transfer shall also include the underlying assets of the business as well as its related liabilities based on which the continuity of the business after its sale is granted.
Pursuant to the SPA the floors are occupied by commercial ten- ants when it is sold to the third party. The expiry dates of tenancy contracts of the concerned floors vary between March 2020 and February 2029. Consequently, the floors of the Investment company shall be considered as operating at the time of its supply.
Based on the above, although the commercial real estate property under consideration can be considered as an independent part of the business of the Investment company since it can be operated independently to earn rental income; nonetheless, the SPA agreement explicitly specifies whether the continuing lease agreements with current tenants, other assets or liabilities that attached to the floors under consideration will also be transferred to the third party as part of the sale. Accordingly, the subsequent sale to the third party may also meet the first condition of the transfer of business as a going concern.
As a second condition, although it is not necessary for the supplier to be registered or obligated to register for UAE VAT; yet the tax authority requires that in order for a sale of a business to qualify as a transfer of going concern business, the buyer or the recipient of supply shall either be registered or obligated to get registered for VAT purposes in the UAE VAT. The third party is registered for VAT, irrespective of the fact that investment is currently not registered for VAT, the second condition is deemed to be met.
The last condition is related to the intention of the recipient of the supply with respect to the future of the business which it acquires. For a sale of a business to qualify as a transfer of going concern, the customer shall intend to continue operating the business which it acquires to conduct the same economic activity and generate income.
From the information which we have obtained, we concluded that the intention of the third party with respect to the future of the concerned property is to continue rent out the floors. Therefore, the third condition of the going concern criteria is also met.
As a conclusion, the sale of the real estate property of the investment company may qualify as a transfer of business as a going concern and there is no VAT to be charged.
For an overview of the taxation system in the United Arab Emir- ates please visit the following webpage – https://www.irglobal. com/article/overview-of-the-taxation-system-in-the-united- arab-emirates/