VAT Registration in the UAE: Do Businesses Need a New TRN When Converting Entity Type?
As the UAE continues to offer an attractive business environment, many local and international companies are restructuring their operations to align with the country's long-term growth prospects.
Common changes include converting a sole establishment or partnership into a limited liability company (LLC), or transforming a UAE branch of a foreign company into a locally incorporated business.
While these changes are largely treated as seamless transitions by licensing and customs authorities, the VAT implications tell a different story — one that could lead to penalties, VAT liabilities, and operational disruptions if not carefully managed.
What Happens When You Change Your Business Entity Type?
Licensing authorities in the UAE typically allow a smooth transition during entity type conversions. The trade licence often retains the same number and issue date, and customs authorities update their records to link the new entity to the existing customs code. Banks also permit the continued use of existing accounts, subject to internal record updates.
However, when it comes to VAT, the Federal Tax Authority (FTA) has historically treated a change in entity type as a change in the taxable person. This has required businesses to:
Deregister the old VAT Tax Registration Number (TRN)
Register the newly formed entity for VAT afresh
This separation between the old and new entities for VAT purposes can create unintended consequences.
VAT and Administrative Penalties
A delay in deregistering the old TRN or registering the new entity can attract administrative penalties. More importantly, since these conversions are often treated as a Transfer of a Going Concern (TOGC), they are assumed to be outside the scope of VAT. However, TOGC relief applies only if the new entity is already VAT registered or has applied for registration at the time of the business transfer.
This presents a practical challenge. In most cases, the new entity comes into legal existence at the moment of conversion and cannot apply for VAT registration beforehand because it lacks a business licence. This can expose the transfer to VAT liability on the value of the business being converted, in addition to possible penalties.
Operational Challenges and VAT Credit Issues
Until a new TRN is issued, businesses face uncertainty. Can they continue charging VAT on ongoing supplies? If invoices are raised under the old TRN, will the recipient still be able to recover input VAT?
The transition also creates issues with VAT refunds. Input VAT accumulated under the old entity remains tied to the previous TRN, and only the deregistered entity can initiate a refund process. This results in a working capital burden on the new company.
Further complications arise with import VAT reporting. Customs codes must be delinked from the old TRN and relinked to the new one. Delays here can result in import data being pre-filled in the VAT returns of the previous entity, which may no longer be operational.
What About IPO-Related Conversions?
For companies preparing to go public, such as converting from a private company to a public joint stock company (PJSC), the issue of VAT TRN continuity becomes even more critical. Currently, the FTA treats private and public companies as distinct entity types. If a new TRN is required, can the input VAT on IPO-related expenses still be recovered?
Corporate tax rules are more aligned in this regard. The system automatically generates a new corporate tax TRN for the new entity and requires a final tax return from the old entity up to the date of conversion. VAT compliance, on the other hand, still lacks a similar streamlined mechanism.
Emaratax Update: A Step in the Right Direction
In September 2024, the Emaratax platform introduced a new feature allowing businesses to update their entity type within their tax profile. While this is a welcome step towards preserving the existing TRN, the feature currently seems limited to correcting historic data errors, rather than facilitating real-time conversions.
What Should Businesses Do?
Until the FTA issues further clarity or expands the Emaratax functionality, businesses undergoing structural changes should:
Consult a tax advisor before initiating any legal conversion
Consider applying for VAT registration of the new entity as early as possible
Ensure timely deregistration of the previous TRN to avoid penalties
Maintain close coordination with banks, customs, and licensing authorities
Prepare for the possibility of temporary VAT mismatches and cash flow pressures
Final Thoughts
VAT is a tax on the supply of goods and services, not on the legal structure of a business. A change in entity type does not alter the commercial nature of supplies, yet the current VAT rules do not fully reflect this principle. Until VAT registration rules are aligned with business realities, UAE companies must remain cautious and well-informed when making structural changes.
At Zyla Accountants, we help businesses in Dubai and across the UAE navigate these complex transitions with confidence. If your company is considering a change in entity type, speak to our VAT experts to ensure you stay compliant and avoid unexpected tax costs.