The UAE VAT framework includes several special VAT schemes and clarifications designed to simplify tax treatment in complex commercial scenarios such as business transfers, resale of used goods, and compensation payments.

Understanding these provisions is critical for UAE businesses involved in mergers, acquisitions, resale markets, asset transfers, or settlement payments. Improper application can result in unexpected VAT liabilities, penalties, and compliance risks.

This article explains the VAT treatment under the following Federal Tax Authority (FTA) clarifications and guides:

• VATP015 – Transfer of a Business as a Going Concern
• VATP002 – Profit Margin Scheme (Eligible Goods)
• VATP001 – VAT Treatment of Compensation-Type Payments
• VATGPM1 – Profit Margin Scheme Guide (January 2026)

Transfer of Business as a Going Concern (VATP015)

What is a Transfer of Business as a Going Concern (TOGC)?

A Transfer of Business as a Going Concern (TOGC) occurs when a whole business or independent part of a business is transferred to another taxable person who intends to continue operating it.

Under UAE VAT law:

• Such a transfer is treated as not a supply for VAT purposes
• Therefore, no VAT is charged on the transfer
• This rule applies only when specific conditions are met

This provision prevents unnecessary VAT charges when businesses change ownership but continue operating.

Key Conditions for TOGC Treatment

To qualify as a TOGC under VATP015, all of the following must be satisfied:

1. Transfer of the Whole or Independent Part of a Business

The transfer must include everything necessary to operate the business, such as:

• Assets (machinery, equipment, inventory)
• Licenses and permits
• Premises
• Employees
• Contracts
• Goodwill and customer relationships

The transferred part must be capable of operating independently and must be able to function as a business immediately upon transfer, not merely a collection of assets.

2. Transfer Must Be Made to a Taxable Person

The recipient must be:

• VAT registered, or
• Required to register, or
• In the process of registering for VAT

This ensures VAT compliance continuity after the transfer

3. Recipient Must Intend to Continue the Business

The buyer must genuinely intend to:

• Continue the same business activity
• Operate it as a functioning business

This should be the same or a similar kind of business activity as carried on by the seller.

If it is later determined that the TOGC conditions were not actually met at the time of transfer, the transaction may be reclassified as a taxable supply and VAT may become payable.

Examples of TOGC vs Non-TOGC

Qualifies as TOGC:

A manufacturing company sells:

• Factory building
• Machinery
• Workforce
• Contracts
• Inventory

→ Business continues uninterrupted.

Result: No VAT charged.

Does NOT Qualify:

A company sells only:

• One building
• No employees
• No contracts

Result: Treated as asset sale → VAT applies.

Share Sale vs Asset Sale vs Business Sale

VATP015 also distinguishes:

Type	VAT Treatment
Share Sale	Outside the scope of VAT as there is no supply of assets by the business itself (and not governed by TOGC provisions)
Asset Sale	Taxable supply (VAT applies)
Business Sale (TOGC)	Outside VAT scope

This distinction is critical during mergers and acquisitions.

Profit Margin Scheme – Eligible Goods (VATP002)

What is the Profit Margin Scheme (PMS)?

The Profit Margin Scheme allows VAT to be calculated only on the profit margin, rather than the full selling price.

It applies mainly to:

• Second-hand goods
• Antiques
• Collectors’ items
• Certain goods with blocked input VAT

This prevents double taxation (VAT cascading) during resale transactions.

Eligible Goods Under VATP002

Typical eligible goods include:

• Used vehicles
• Used electronics
• Furniture
• Antiques (over 50 years old)
• Collectors’ items (coins, stamps)

 

Goods must:

• Be acquired under conditions where input VAT was not recoverable
• Be purchased from:
  • Non-registrants, or
  • Suppliers who did not charge VAT, or
  • Suppliers applying the Profit Margin Scheme

Goods purchased before 1 January 2018 generally do not qualify.

Eligibility depends on the nature of acquisition and documentation rather than whether VAT was previously charged on the goods.

How VAT is Calculated

Under PMS:

Profit Margin = Selling Price − Purchase Price

VAT applies only to the profit margin, not the full sale value.

This significantly reduces VAT burden for resellers.

When PMS Cannot Be Applied

The scheme does not apply if:

• VAT was recoverable on purchase
• Goods were imported and VAT was reclaimable
• Proper documentation is unavailable

Documentation is mandatory to prove prior VAT exposure.

VAT Treatment of Compensation-Type Payments (VATP001)

What Are Compensation Payments?

Compensation-type payments are amounts paid:

• For damages
• For contract termination
• For loss or breach
• As penalties

These payments must be assessed carefully for VAT purposes.

VAT Treatment Depends on Nature of Payment

VATP001 distinguishes between:

1. Compensation Not Linked to Supply → No VAT

Examples:

• Damages for breach of contract
• Compensation for loss
• Penalty payments

These are outside VAT scope because they do not relate to a supply.

This applies only where there is no direct link between the payment and any supply of goods, services, or rights.

2. Compensation Linked to Supply → VAT Applies

Examples:

• Cancellation fees
• Early termination charges
• Service modification fees

These represent payment for a supply or right.

Therefore:

VAT applies at the standard rate (5%).

In practice, businesses must assess whether the payment is in substance consideration for a supply (including agreeing to tolerate an act or situation), even if it is labelled as “compensation.”

Importance for UAE Businesses

Compensation payments are common in:

• Construction contracts
• Lease agreements
• Supply contracts
• Service termination agreements

 

Misclassification can result in:

• Underpaid VAT
• Financial penalties

Profit Margin Scheme Guide – VATGPM1 (January 2026)

Overview of VATGPM1

In January 2026, the UAE Federal Tax Authority issued the first comprehensive guide on the Profit Margin Scheme.

This guide clarified:

• Eligibility criteria
• VAT calculation methodology
• Documentation requirements
• Reporting rules

The scheme remains optional, but compliance requirements are strict.

Once applied to a transaction, the scheme must be used consistently and cannot be applied selectively without proper basis.

Eligible Goods Under VATGPM1

The 2026 guide confirms eligibility for:

• Second-hand goods
• Antiques
• Collectors’ items
• Article 53 goods (i.e., goods on which input VAT recovery is blocked under UAE VAT law)

 

These goods must:

• Have been previously subject to VAT
• Be supported with documentary evidence

Failure to maintain proof invalidates PMS use.

Key Calculation Rule

VAT applies only to the profit margin, defined as:

Selling Price − Purchase Price

VAT is calculated using:

VAT fraction = 5/105

If goods are sold at a loss:

No VAT is payable.

Losses cannot offset profits on other goods.

The Profit Margin Scheme is applied on a transaction-by-transaction basis, and losses on one item cannot be offset against profits on another.

Tax Invoice Requirements

Invoices issued under PMS must:

• State VAT is charged under Profit Margin Scheme
• NOT show VAT amount separately
• Maintain full transaction records

Incorrect invoicing invalidates the scheme.

VAT Return Reporting

Businesses must:

• Select PMS checkbox in VAT Return
• Report transactions in the appropriate output and input fields in accordance with FTA VAT return requirements.

This ensures proper VAT accounting.

Practical Implications for UAE Businesses

These special VAT provisions significantly impact several industries.

Industries Commonly Affected

• Automotive resale businesses
• Electronics dealers
• Auction houses
• Art and antique traders
• Manufacturing companies
• Retail businesses
• M&A advisory firms

Key Compliance Risks

Businesses often face risks due to:

• Incorrect classification of TOGC
• Improper VAT treatment of compensation
• Incorrect PMS invoicing
• Lack of supporting documentation
• Misclassification of transactions due to absence of “direct link” analysis or inadequate assessment of substance over form

 

Such mistakes may result in:

• VAT reassessment
• Administrative penalties
• Audit exposure

Strategic VAT Planning Opportunities

Proper use of these provisions can create significant benefits.

TOGC Benefits

• No VAT payable on business transfer
• Reduced cash flow pressure
• Simplified asset valuation

PMS Benefits

• Lower VAT liability
• Improved resale profitability
• Competitive pricing advantages

Compensation VAT Planning

Proper classification ensures:

• No unnecessary VAT payments
• Correct contractual structuring

Best Practices for Businesses

To ensure compliance, UAE businesses should:

Maintain Strong Documentation

Include:

• Contracts
• Transfer agreements
• Purchase invoices
• Evidence of prior VAT

• Detailed records supporting eligibility under the Profit Margin Scheme, including supplier status and acquisition conditions

Review Transactions Carefully

Before applying:

• TOGC treatment
• PMS eligibility
• Compensation classification

Train Finance Teams

Ensure staff understand:

• Special VAT rules
• Reporting obligations
• Invoicing requirements

Common Mistakes to Avoid

Businesses frequently:

• Treat asset sales as TOGC
• Apply PMS without eligibility
• Show VAT incorrectly on PMS invoices
• Misclassify compensation payments

Avoiding these mistakes prevents costly penalties.

How German Fintax Consultancy Can Help

At German Fintax Consultancy, we assist UAE businesses in navigating complex VAT provisions, including:

• Transfer of Business VAT structuring
• Profit Margin Scheme eligibility reviews
• VAT treatment of compensation payments
• VAT compliance and reporting support
• FTA audit preparation
• Transaction structuring for mergers and acquisitions

Our VAT specialists ensure businesses minimise risk, optimise VAT efficiency, and remain fully compliant with UAE VAT regulations.