UAE holding companies gotten their acts together on VAT.

The Federal Tax Authority in the UAE has been actively addressing VAT-related issues since its implementation in January 2018. Among on-going discussions is the VAT treatment of activities conducted by holding companies, which remains a complex area even after five years of VAT introduction.

                                  In the UAE, the structure of a 'holding company' is widespread, typically involving a limited liability company holding shares in related entities. These holding companies vary: some solely hold shares and generate income through dividends, capital gains, and interest, while others provide additional support services. These services may include cross-charging expenses incurred on behalf of subsidiaries or handling visas/work permits, even though the employees work for the subsidiaries.

In certain cases, the holding company covers salaries that are later recovered from its subsidiaries, while in others; subsidiaries directly pay the salaries without involvement from the holding company. The complexities in VAT treatment arise from these diverse scenarios, posing challenges for accurate application and compliance.

Misunderstandings often arise due to the belief that holding companies are exempt from VAT when they lack taxable activities. This misconception leads to both anticipation and concern.

Upon closer examination, pure holding companies engage in activities that fall into various categories of tax treatment.

Firstly, they generate income exempt from VAT, such as capital gains from selling shares within the UAE and interest earned on loans to subsidiaries or third parties. Secondly, they earn zero-rated income from gains achieved by selling shares to specific recipients outside the UAE. Lastly, they acquire out-of-scope income from dividends, which lies beyond the scope of VAT regulations.

Pure holding companies often encounter issues with VAT registration obligations, especially when, alongside holding shares, they sporadically engage in transactions with overseas suppliers. The VAT registration threshold considers both zero-rated transactions and imports, potentially triggering a requirement for VAT registration when combined, a detail often overlooked.

Complications arise when holding companies conduct activities beyond mere shareholding. Based on our experience with the FTA, the activities of a holding company usually fall into two categories:

Firstly, when the holding company provides support services that assume the nature of a taxable supply.

Additionally, the second category involves services aimed at safeguarding the interests of subsidiaries, like internal audits or creating group HR policies. The FTA often perceives these services as benefiting the holding company rather than directly aiding the subsidiary.

 Hence, accurately categorizing each activity of the holding company becomes pivotal in determining the appropriate VAT treatment.

 Salary Payout

Regarding salary payouts and visa/work permit arrangements, when a holding company secures work visas/permits under its name, disburses salaries, and the employees work for other subsidiaries, the VAT treatment becomes intricate.

                                        If a company possesses work visas/permits and allows its staff to work for another entity, it falls into the realm of seconding or loaning individuals. Consequently, this action constitutes providing a taxable service subject to a 5% VAT charge.Cross charges from the holding company will also incur a 5% VAT charge, yet they are deemed supplies if not recovered by the holding company.

Even when subsidiaries directly pay employee salaries, these payments might resemble third-party considerations for the holding company, subject to a 5% VAT charge. It's crucial for holding companies to identify such transactions and ensure the correct application of VAT treatment.

Another area where incorrect VAT treatment occurs is in the cross-charging of expenses by the holding company, whether on behalf of subsidiaries or incurred independently. Determining whether such expenses qualify as a reimbursement (subject to 5% VAT) or a disbursement (considered out-of-scope) requires meticulous analysis.

While discrepancies are observed on the output side of transactions, errors also arise on the input side. Holding companies often fail to recover the rightful share of input VAT, which is recoverable due to taxable supplies from cross charges. Additionally, erroneous VAT recovery on ineligible transactions is also noticed.

The complexity of VAT issues persists, presenting on going challenges. The intricate relationship between corporate tax and VAT indicates that these issues are unlikely to be resolved swiftly.