- September 10, 2020
- Posted by: Emirates CA
- Category: Tax
VAT Treatment in Bahrain
Under the Bahrain VAT Law, when a VAT payer sells the assets of his business, such a transaction would normally be subject to VAT at the appropriate rate. However, in this blog, we shall take you through the VAT treatment, when a VAT payer surrenders his economic activity (also referred to as Transfer of a going concern) to another VAT payer.
What is the VAT treatment of TRANSFER OF GOING CONCERN as per the Bahrain VAT Law?
As per Article 11 of the Bahrain VAT Law, the transfer of going concern is out of the scope of the Bahrain VAT Law and therefore shall not be considered as a taxable supply, provided certain conditions are met.
Article 12 of the Executive Regulations of the VAT Law stipulates all of the following conditions to be met to treat TRANSFER OF GOING CONCERN as a non-taxable transaction:
- The transfer should include the surrender of parts of the business that should enable the purchaser to carry on the economic activity that was transferred by the seller in full or part.
- The seller should be a VAT registered person in Bahrain.
- The purchaser should be a tax registered person in Bahrain, or he should become liable to register for VAT following the transfer of the going concern.
- The purchaser shall immediately upon the transfer use the goods and service to conduct the same or similar economic activity.
However, it is important to note that both the seller and purchaser should separately notify the NBR within 30 days of the transfer, on a form prepared by the NBR for this purpose. If they fail to do so within the stipulated time, then the transfer shall be deemed to be a taxable supply that is, the seller will have to charge VAT on the sales and issue tax invoices to the purchaser.
What does “the part of the business” in the condition 1 above includes as per the Bahrain VAT Law?
The condition 1 requires the transfer to include those parts of the business that constitutes an economic activity which can be conducted on an independent basis by the purchaser.
This point is very important as a mere transfer of the assets of the business may not allow the purchaser to carry on the economic activity independently. For, e.g., a textile retailer sells all his goods on a clearance sale to a tailor. This cannot be regarded as a surrender of economic activity as the tailor will not be able to carry on the economic activity of the retailer independently.
The parts of the business generally include tangible asset, intangible assets such as rights and also the liabilities of the business.
Here arises a question where whether the transfer of Commercial Registration of a business would qualify for non-taxable transaction. Well, whether Commercial Registration is transferred with all or part of the business that will allow the purchaser to carry out economic activity in an independent manner is the relevant point here.
The following points are to be considered regarding the transfer of commercial registration:
- If a commercial registration is transferred along with the asset of the business it is likely to be capable of carrying out the economic activity after the transfer. Therefore, it will qualify for non-taxable transaction provided all the other conditions above are met.
- It is also possible to transfer a part of the business without transferring the commercial registration of the transferor.
- The purchaser can acquire a part of the business of the seller and carry out economic act under his current commercial registration and without the transfer of the commercial registration of the seller.
- Even in case of those businesses who may not require a commercial registration legally, the transfer of a part of business to carry out economic activity independently would qualify for non-taxable transaction.
Is it possible to recover Input VAT incurred in relation to a transfer as per the Bahrain VAT Law?
In case a sale or transfer of assets of a business qualifies for TRANSFER OF GOING CONCERN provision, then it will be out of scope of the Bahrain VAT Law. However, even in such a case it is possible to recover the Input VAT incurred on costs relating to the transfer subject to the following points discussed.
The costs incurred on transfer of a qualifying TRANSFER OF GOING CONCERN are considered to be a general Overhead of the business. The Input VAT on costs incurred by the seller and the purchaser shall be recovered subject to the following conditions:
- Whole Input VAT incurred relating to cost of transfer is recoverable if the sellers has only taxable sales subject to VAT rate of 0% or 5%.
- The seller cannot recover any Input VAT if his supplies are exempt under the Bahrain VAT Law.
- In case the seller has both taxable and non-taxable supplies, then he should apportion the Input VAT incurred between the two and claim that part of the Input VAT attributable to taxable supplies.
Also, in case the seller incorrectly charges Input VAT on transfer of a qualifying TRANSFER OF GOING CONCERN, then the purchaser is not entitled to recover this Input VAT. He should ask for a refund from the seller for the Input VAT wrongly charged.
Should the seller de-register for VAT following the TRANSFER OF GOING CONCERN as per the Bahrain VAT Law?
The seller might be obliged to de-register for VAT following the transfer of goods as he might fall under mandatory deregistration. In such a case, he should apply for de-registration within 30 days following the date on which he became eligible for mandatory de-registration.
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