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Taxpayers allowed to change their entity's legal type directly

The FTA has introduced a new option allowing taxpayers to change their entity's legal type directly, without the need for deregistration and re-registration

Below is the first article under Khaleej Times' new initiative designed to offer readers expert insights about the impact of VAT and Corporate Tax on UAE’s business environment.

During VAT registration of our entity, we have chosen a legal type which was the best fit among the options available to the entity. However, during corporate tax registration, FTA has rejected the application for having the wrong entity type. What should we do?

I assume that there has not been any change in the ‘legal type’ of your entity. If there is any change in your entity “legal type” after the initial VAT registration then the amendment has to be done through VAT amendment. In some cases, FTA may ask you to deregister and reregister with new entity type.

If there has not been any change to the ‘legal type’ of your entity, then you can apply for change entity type under amend taxable person. Before this amendment, entities registered under the wrong legal type had to deregister and re-register, leading to a new Tax Registration Number (TRN). This required updates to the business documents and accounting software, often causing operational disruptions and potential penalties for non-compliance.

The process can be done as under:

The FTA has introduced a new option allowing taxpayers to change their entity's legal type directly, without the need for deregistration and re-registration, in cases of incorrect VAT registration. This simplifies the process and reduces time and complications.

The following are the required documents for Legal type change

• A proof of a change in your entity type

• If you are changing your entity type to “Natural person”

- Emirates ID/Passport of the taxable person

- Trade licence

• If you are changing your entity type to “legal person or partnership”

- Certificate of incorporation

- Trade license

- Emirates IDs, Passports and Trade licenses of owners/partners

If your entity is registered with the wrong legal type in the Emaratax portal, it's crucial to act quickly. The recent VAT amendment by the FTA offers a convenient way to update the legal type directly in the portal, but this option is available only for cases of initial mistakes in registration. Advisable to seek professional advice.

We are in the business of consumer retail with retails outlet stores spread across UAE and the distribution of the merchandise is conducted through a distribution centre based in a UAE Free Zone though the management is done by our head quarter based in Dubai. Within our operations we have entities which are clubbed as VAT groups and other independent entities. We frequently cross charge group entities as these entities are not as part of the VAT group. One of the group entities (A) erroneously raised the invoice and charged VAT to another entity in the group (B) while actually the invoice should have been raised from Entity (C) to entity (B).

Based on the above invoicing, entity (A) paid VAT to FTA while Entity (B) took VAT Input Credit. Later, on detection, Entity (A) raised the credit note to Entity (B) and Entity (C) raised the correct invoice to Entity (B). However, when the Credit Note was passed by Entity (A), it has a VAT receivable position, because it has already deposited VAT with FTA while filing initial erroneous VAT return.

We applied to the FTA for a refund but the same was rejected. Entity (A) will not be generating taxable income in the future. What is the recourse available for getting VAT refund in Entity (A)?

The entity can either setoff the VAT refund position against future VAT or claim for a refund. Since the entity did not generate taxable income in the future and your refund claim has been rejected the entity should consider to file VDS. Such VDS should be accompanied by proper explanations and support documents. In our view the following can be done:

Entity(A) needs to file two VDS applications, one for correcting original return and another for correcting the credit note wrongly posted in other tax period. Once the VDS application is approved by the FTA, then Entity (A) may apply for a VAT refund.

VDS application needs to be well drafted with facts and figures to be supported by necessary working papers. VDS application lists the errors in the original return and reasons of the same. FTA may seek clarifications and documents before it grants approval for VDS.

It should be noted that VDS and refund applications are 2 separate processes. Advisable to seek professional advice.

About the expert:

Atik Munshi is a thinker, leader and author of several books and acted has board member in some reputed UAE companies. He has over 30 years working experience in various senior positions and currently serves as the managing partner for FinExpertiza UAE which is the global top 30 accounting network.

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