Treatment To Related Parties and Aggregation for VAT Tax Purposes

For VAT purposes, two or more legal persons (or entities) can be declared related parties if they meet criteria around control, influence, or shared economic interest. These criteria, categorized into economic, financial, and regulatory factors, establish that the connection between these entities justifies recognition for tax purposes:

Economic Practices

Economic practices refer to the commercial relationship between two or more legal entities, and this relationship can be identified if any of the following conditions are met:

Common Commercial Objective: Both entities work towards the same business goal, meaning their operations and strategic directions are aligned to achieve mutual success. For instance, a business (parent company) and its subsidiaries work together for the benefit of their respective businesses.

• Business Benefit: Business partners means that their tasks and business objectives are oriented towards the accomplishment of the goal. For instance, a parent company and the subsidiary may engage in a cooperation program that could serve the interest of the parent and the subsidiary company equally.
• Supplying to the Same Customers: One obvious example of business connection is where two quite ‘distinct’ enterprises provide their goods or services to the same customer. Despite this, the involved businesses don’t have common ownership but overlapping customers of the businesses which causes a relationship that defines the tax implication.

Also read: VAT Deregistration in UAE

Financial Practices

Where there are financial connections between the entities; they create a related party relationship. Examples include:

• Financial Support: Financial Support can be defined as the funds offered to an individual, enterprise or an organization to be used for the meeting of his/her, its needs, or for the continuation of its activities. This can be in the form of grant, loan donation, subsidy or investment or a blend of the above. This kind of grant is essential for Start-ups, non-profit organizations and people who have lost their source of income. For example, an investment company that offers funds for its acquirers could be considered as having related party transactions.
• Financial Viability: In organization, Financial Sustainability addresses the concept of the financial feasibility of an organization or project in generating enough income to support expense requirements as well as the operation of the organization on the longer term. It determines its ability to continue as a going concern, or function properly in its business environment. Elements of financial feasibility include; source of income, cost control, market forces and the general business environment.
• Common Financial Interest: Related parties’ businesses have a financial stake in the same revenue, like when they are partners in a joint venture or have a partnership in which the profits are divided.

Regulatory Practices

Entities can also be related if they share regulatory oversight, management, or employees, including:

• Common Management: – This applies when management teams or executives are related. For instance, is a CEO manages operations in two separate companies; in the end, these companies can be regarded as affiliated under legal activities.
• Common Shareholders or Ownership: – Related businesses can be defined as two businesses in which one company has an ownership interest in the other or they are part owned by the same people. For example, when one person or organization controls a large proportion of shares.

Aggregation of Related Parties

The VAT law ensures that when businesses or legal entities are connected, they can’t use their structure to avoid tax obligations. This rule applies when connected businesses haven’t registered as a tax group and are operating in ways that reduce or avoid tax liabilities.

Artificial Segregation of Businesses

Some businesses split their operations into multiple entities to stay below the Mandatory or Voluntary Registration Thresholds for tax purposes. This kind of artificial segregation allows them to avoid tax registration. Article 13 gives the tax authorities the power to aggregate the taxable supplies of related entities to prevent businesses from escaping their obligations.

 Example: – When two companies run by the same group but registered separately to stay under the purview of mandatory tax registration. The tax authority, under Article 13, can treat them as a single business and apply the appropriate taxes, ensuring they don’t avoid tax obligations.  

Tax Revenue Loss Due to Segregation

Even without the deliberate intent to avoid taxes, fragmented business operations can impact tax collection. When this happens, tax authorities can evaluate the related entities together to see if their combined transactions meet the registration threshold for taxes.

Tax Registration for Aggregated Businesses

If the tax authorities determine that multiple related businesses should have been treated as one entity, each business will be considered as contributing to the total taxable supplies of the group. As a result, if the combined supplies of these related businesses cross the mandatory or voluntary registration thresholds, every entity in the group will be obliged to register for tax, regardless of individual performance. 

Example: Suppose Business A and Business B are linked and, together, their taxable supplies exceed AED 375,000. Even if Business A’s individual supplies fall below the threshold, both companies will still need to register for tax as their combined operations exceed the mandatory limit.

Seek the Expert Services of Top Tax Consultants in UAE

To effectively meet VAT requirements and ensure compliance, businesses are advised to seek the expert services of premier Tax Consultants in UAE such as Farahat & Co. Contact us today and we shall be glad to assist you.