Nimish Goel (Dhruva) on VAT treatment at the holding level

25 September 2023 4 min. read
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The UAE’s Federal Tax Authority has made significant strides in resolving various VAT-related matters since its introduction in January 2018. The VAT treatment of holding companies’ activities however remains a persistent topic of discussion, writes Nimish Goel, partner at Dhruva Consultants.

A ‘holding company’ structure is common in the UAE that involves a limited liability company holding shares in related entities. Typically, there are the ‘pure’ holding companies that hold shares of subsidiaries and earn income by way of dividends, capital gains and interest.

In the second, holding companies apart from having shares also provide support services, including cross charging of expenses incurred on behalf of their subsidiaries. Some holding companies are also engaged in issuing visas/work permits, but the employees work for their subsidiaries.

Nimish Goel, Partner, dhruva

The holding company either pays the salary and recovers it from its subsidiary, or the salary is paid directly by that entity without there being a charge from the holding company.

What we have observed is a lack of understanding in applying the correct VAT treatment because the general perception is that in the absence of any taxable activity, there is no VAT on holding companies. This is where the excitement and anxiety begin.

If one carefully analyses activities carried out by pure holding companies, they earn income classifiable in all the possible categories of tax treatment.

First, income exempt from VAT that includes capital gains on sale of shares (in UAE) and interest earned on loans to subsidiaries/third parties. Second is the zero-rated income earned from gains from sale of shares to an identified recipient (outside UAE). Third, is the out-of-scope income earned as dividends.

Pure holding companies generally falter in the VAT registration obligation typically when they, in addition to holding shares, also occasionally enter into purchases with overseas suppliers. Since the VAT registration threshold includes both zero-rated and imports, on a combined basis a breach of the threshold potentially leads to a VAT registration obligation.

This aspect generally goes unnoticed.

Complication also arises when the holding company is engaged in activities in addition to purely holding shares. It has been our experience with the Federal Tax Authority that activities of the holding company should typically be in two categories – one, where the holding company is providing support services that takes the character of a taxable supply.

And second, where the services are carried out to protect the interest of the subsidiaries such as internal audit, formulating group HR policies, etc. In this case, the Federal Tax Authority typically believes them to be benefitting the holding company and, consequently, not a service to the subsidiary.

The correct classification of each activity of the holding company, therefore, becomes crucial to determine the correct VAT treatment.

Salary payout

Where a holding company gets work visas/permits for employees in its own name, pays them salaries, and the employee works for other subsidiaries, the VAT treatment is complex.

Any company that owns the work visa/permit and allows the staff to work for another company can said to be engaged in the business of seconding/loaning people. Consequently, providing a taxable service VAT-able at 5 per cent.

Any cross charges from the holding company will be VAT-able at 5 per cent, but considered a deemed supply when there is no recovery by the holding company.

Even when the subsidiary pays salaries directly to the employees, such payments could take the color of third-party consideration in the hands of the holding company and VAT-able at 5 per cent. It is important that holding companies should identify if such transactions are happening and apply the correct VAT treatment.

The third category where we have observed incorrect VAT treatment is cross-charge of expenses incurred by the holding company either on behalf of subsidiaries or incurred in its own account. Whether such expenses qualify as a reimbursement (subject to 5 per cent VAT) or a disbursement (considered out-of-scope) needs careful analysis.

While we have observed irregularities on the output side, errors have been noticed on the input side of transactions where the holding companies have either missed recovering the due share of input VAT, recoverable on account of having a taxable supply from cross charges. Or have erroneously recovered VAT on ineligible transactions.

VAT treatment of holding companies’ activities still is a point of attention in the UAE, as companies continue to grapple with different cases and situations. With an interplay of corporate tax, VAT issues are not going to be settling soon.