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Inland Revenue advice on conditions for change of legal entity

states that businesses registered for VAT has an obligation to inform the Director of Customs & Inland Revenue (the Director) through the VAT Office in writing of any change in the business status for its tax purposes. This includes informing the Director of change in business legal entity.

Accounting & Legal entity

For VAT accounting purposes a business is treated as a separate entity (or body) from the owner(s) and all business transactions are recorded separately from the owner’s private transactions.

A “legal entity” is the body that is responsible under law for all debts and actions of the business. Therefore it is important to note that a legal entity is recognized in law as having a separate identity to the individual members of that entity.

Accounting entities

For VAT purposes, the most common legal entities that are conducting businesses in Vanuatu are:

  • Sole trader;
  • Partnership;
  • Company;
  • Co-operative.

Given the type and nature of these accounting and legal entity, the VAT Office identifies that it is important for businesses to know the conditions as required by the VAT Office for change in legal entity given the different legal and commercial VAT implications of each entity.

For example: A sole trader is the most common type of business entity in Vanuatu. The business is owned and run by a natural person and ceases when the person ceased the business activities. Any outstanding tax obligations will be borne by the natural person thereafter. On the other hand, that would not be the case if the business is operated as a company where upon ceasing business activities, any legal obligation will be the liability of the company and the shareholders liability is limited.

Given this importance, as businesses are requesting or advising the VAT Office of changes in their business entity, the VAT Office hereby wishes to inform all on the conditions for changes in legal business entity.

VAT Conditions for Change in legal entity

The following conditions must be met before the VAT Office approves for any request to change the legal business entity from one form to another:

  • The business must write to inform the Director (VAT Office);
  • Appropriate documents from relevant agencies (Vanuatu Financial Service Commission, Vanuatu Investment Promotion Authority) must be provided;
  • The business will send in its last VAT return to VAT Office, with all the VAT due for the whole of the period shown on the form;
  • The business will pay VAT due on supplies made by the previous business entity before the change of legal entity - including any VAT on stocks and assets kept by the previous business entity;
  • The business agrees that any VAT return made by the previous business entity for a period after the date the change of legal entity took place will be treated as made by the business; and
  • The business will have no right to claim any money paid by VAT Office to the previous business entity, before the change of legal entity.

After the VAT Office has checked and confirmed that all conditions are met, it will advise of the procedure to alter the legal business entity which involves deregistering the previous entity and registering the new entity.

When applying to cancel previous entity and registering the new entity, it is important that a sales and purchase agreement between both entities is provided. The sales agreement must disclose the agreement between both entities as to the VAT treatment on the sale or transfer of assets between the two entities. This is important as the Director has to be informed of the ownership of assets that are deriving the taxable income of the entity.

These conditions also apply to change of individuals in a partnership. It has become obvious that changes in partners in a partnership are deemed as if it were individual 

running the business. This is not as partners legal obligations are separated for debts and other liabilities in the partnership. So it is equally important that partners in a partnership ensure that the conditions are also met to safe guard their legal liability in the previous partnership before engaging in a new partnership.

The VAT Office is enforcing these requirements. This aims to ensure that all legal and accounting obligations as required under the VAT Act are adhere to and to safe guard the individual tax obligation(s) in an entity.