United Arab Emirates VAT

The United Arab Emirates published its value added tax (VAT) decree law on August 27, 2017, paving the way for the introduction of the indirect tax on January 1, 2018.

The standard VAT rate is 5%, with a nil rate for certain goods. VAT provides the UAE with a new source of income, reducing its dependence on oil and other hydrocarbons. It’s used to fund public services.

VAT is a consumption tax (not a sales tax) that applies to most transactions in the UAE. There are few exemptions.

VAT-registered businesses and traders will charge VAT to their customers at the relevant rate and incur VAT on goods and services they purchase from suppliers. Businesses can reclaim the difference between the two from the UAE government.

VAT-registered businesses operating in the UAE must:

• Charge VAT on all taxable goods and services they supply
• Keep records to prove they are charging, collecting, and paying the correct amounts. Records include:

  • Financial records detailing every supply and import of goods and services

  • All received tax invoices, tax credit notes, and corresponding documents

  • All issued tax invoices, tax credit notes, and corresponding documents

  • Details of goods and services that were used or disposed of for non-business purposes, including the taxes that were paid on them

  • Information on purchases of goods and services for which input tax was not claimed

  • Logs of supply of goods and services that have been exported

  • Documentation of any modifications or amendments to accounts or tax invoices

  • Documentation pertaining to any tax accounting frameworks employed

• Calculate the total VAT paid on purchases
• Regularly report the amounts of VAT charged and paid

Businesses can reclaim Input Tax (a VAT refund) by reclaiming any VAT paid on business-related purchases. This is done by deducting the VAT paid on purchases from the VAT collected on sales, then remitting the balance to the UAE government.

Certain financial services are exempt from VAT in the UAE. These include investment management and custodian services, insurance-related activities such as insurance premiums, interest payments made on deposits held by banks or other financial institutions regulated by the Central Bank of UAE (CBUAE), interest received on loans given to individuals for non-business purposes, and certain credit card services.

Businesses must register for VAT in the UAE if their taxable supplies and imports exceed AED 375,000 per annum. Non UAE-based businesses making taxable supplies in the UAE must register for VAT, regardless of the value of their supplies. Businesses with revenue above AED 187,500 can opt for voluntary registration.

Businesses can register for VAT through the eServices section on the Federal Tax Authority (FTA) website.

Once businesses have created an account on the e-Services section of the FTA website, they must fill out a VAT registration form. This includes providing detailed information about their business, including:

• Legal name
  

• Nature of business activities
  

• Projected revenue
  

• Copy of the trade licence
  

• Passport (or Emirates ID for UAE residents)

  
  

If the FTA approves the application, businesses will be sent their VAT registration certificate.

Although there is no income tax or plans to implement an income tax system in Dubai, its VAT system broadly replicates that of the UAE. The VAT threshold in Dubai is AED 375,000. It’s charged at 5% for most goods and services, with a zero-rate for certain items and services.

Non-resident providers of electronic and digital services (including marketplaces) must follow UAE VAT compliance requirements. There is no VAT registration threshold for these providers, and they must register immediately with the FTA. Electronic and digital services are defined in the UAE as:

• Streaming or download media (including video and music)

• Apps

• Online gaming

• Advertising

• Cloud software and storage

The UAE may impose penalties on any business or person proven guilty of tax evasion. Penalties consist of a prison sentence (sometimes of up to seven years) or a monetary penalty. This penalty does not exceed five times the amount of evaded tax.

The FTA has established a range of penalties for VAT offences:

• Late VAT registration — up to AED 10,000
  

• Late VAT de-registration — up to AED 10,000
  

• Late VAT return filing — up to AED 1,000 (and up to AED 2,000 for repeat offences)
  

• Incorrect tax return — up to AED 1,000 (and up to AED 2,000 for repeat offences)
  

• Late VAT payment — 2% of the unpaid tax (plus a 4% monthly penalty after one month from the due date of payment)
  

• Failure to keep proper records — up to AED 10,000 (increasing to AED 20,000 for repeat offences)

The tax point (time of supply) for a transaction in the UAE is the date on which taxes are levied on the goods and services. For transported goods, the tax point is the date the goods are removed. For non-transported goods, the tax point is when the goods are made available to the customer. If the supply requires assembly or installation, the tax point is the date assembly or installation is completed.