Key Insights: UAE VAT Executive Regulation amendments

The UAE introduced VAT as part of its initiative to diversify its revenue streams, aiming to reduce reliance on oil. The Federal Decree-Law No. 8 of 2017 established the VAT framework, which has undergone several amendments since its implementation. This guide to the VAT Executive Regulation, offering insights for businesses, tax professionals, and individuals from UAE VAT new amendment (Cabinet Decision No. 100 of 2024 – Issued 6 Sept 2024 (Effective from 15 Nov 2024)).

VAT Amendments and Updates (Cabinet Decision No. 100 of 2024)

The VAT regulation has seen several amendments since 2017, including adjustments to registration thresholds, tax rates on certain goods and services, and procedural changes in VAT administration. Businesses must regularly review updates to ensure compliance and take advantage of any new provisions.

Notable Amendments

• Cabinet Decision No. 100 of 2024 (Effective from 15 Nov 2024): Introduced updates on financial services, zero-rated services, and adjustments to tax group registration.
• Article Amendments: Specific articles have been amended to clarify the treatment of certain supplies, enhance compliance procedures, and outline new administrative requirements.

VAT Registration Requirements

Mandatory Registration

• Threshold: Businesses must register for VAT if their taxable supplies or imports exceed AED 375,000 over the past 12 months or if they anticipate exceeding this threshold within the next 30 days.
• Non-Resident Registration: Non-resident businesses making taxable supplies in the UAE must also register, even if they do not have a physical presence in the country.

Voluntary Registration

Threshold: Businesses with annual supplies or expenses exceeding AED 187,500 can voluntarily register for VAT. This option is beneficial for businesses expecting to incur significant taxable expenses or those planning to grow their operations.

Deregistration Process

Businesses that no longer meet the taxable supply threshold must apply for deregistration within 20 days. However, they must still settle any outstanding VAT obligations and file final tax returns.

Penalties for Non-Compliance

• Late Registration: Businesses failing to register for VAT on time may face penalties, including backdated tax obligations from the date of exceeding the threshold.
• Failure to Apply for Deregistration: If a business does not deregister when it no longer meets the threshold, it may incur penalties for non-compliance.

Supply of Goods and Services

Definition of Supply

• The regulation defines the supply of goods as the transfer of ownership or the right to use goods. This includes sale, leasing, or any agreement where ownership is transferred.
• The supply of services refers to any supply that is not a transfer of goods, such as licensing rights, consulting, or management services.

Categories of Supply

• Goods: Physical items that can be transferred, including raw materials, finished products, and real estate.
• Services: Any action performed for a fee that is not a sale of goods, such as consultancy, management, and leasing services.

Exceptions for Government Entities

The regulation specifies that transfers of government buildings and assets between government entities are not treated as supplies for VAT purposes, promoting intergovernmental cooperation without tax implications.

VAT Rates and Treatment

Standard Rate

The standard VAT rate is set at 5%, applicable to most goods and services supplied in the UAE.

Zero-Rated Supplies

• Exports of Goods: Goods exported to a destination outside the Implementing States (GCC) are zero-rated, provided they are physically exported within 90 days of supply. The supplier must retain customs declarations and shipping documents.
• Export of Services: Services provided to a non-resident recipient are zero-rated if the recipient has no place of establishment in the UAE and the services are not related to UAE real estate or goods.
• Healthcare Services: Medical services necessary for the treatment of a patient are zero-rated if provided by licensed healthcare providers.
• Educational Services: Zero-rating applies to tuition fees and educational materials provided by accredited institutions. Non-educational items like uniforms and extracurricular activities are excluded.
• International Transport: Transport of goods or passengers across borders is zero-rated, including related services such as insurance and catering on international flights or ships.
• Investment Precious Metals: Gold, silver, and platinum of 99% purity or higher, traded in global bullion markets, are zero-rated.

VAT Exemptions

Exempt Goods and Services: Certain supplies are exempt from VAT, meaning businesses do not charge VAT and cannot recover input VAT. Key exemptions include:

• Financial Services: Activities related to loans, equity securities, and insurance contracts are exempt unless specific fees are charged.
• Residential Property: Long-term leases (more than 6 months) of residential properties are VAT-exempt. The first sale of newly constructed residential buildings is also zero-rated.
• Local Passenger Transport: Services related to local transport of passengers, including buses, taxis, and metro services, are exempt from VAT.

Treatment of Exempt Transactions: Businesses making exempt supplies must monitor their annual turnover closely, as it affects their VAT registration and recovery of input VAT. Input VAT on expenses related to exempt supplies cannot be recovered.

Zero-Rating and Exemptions

• Real Estate Development: Developers must understand the VAT treatment of different types of properties. While residential leases are exempt, commercial properties are subject to 5% VAT. Developers selling new residential units should take advantage of the zero-rating on first sales within three years of completion.
• Exports and International Trade: Direct and Indirect Exports: Exports of goods are zero-rated, whether arranged by the supplier (direct export) or by the overseas customer (indirect export). Businesses must keep detailed records, including customs documentation, shipping certificates, and export declarations, to support zero-rating claims.
• In-Kind Donations: Charitable organizations and government entities are granted VAT exemptions on certain in-kind donations valued up to AED 5 million. This aims to promote philanthropy and public welfare.
• Healthcare and Education: Healthcare providers should ensure that their services qualify for zero-rating by maintaining proper licenses and proving that the services are necessary for medical treatment. Educational institutions should verify that their supplies, such as textbooks, are directly related to the curriculum to benefit from zero-rating.

Taxable Persons and Groups

Related Parties

Businesses that are economically or financially linked (e.g., having common ownership) must be aware of VAT implications. Transactions between related parties are subject to market value adjustments, and artificial separation of business units to avoid VAT will be scrutinized.

Tax Groups: Registration and Benefits

Tax Group Registration: Related businesses can form a tax group, allowing them to file VAT returns jointly. This simplifies compliance and reduces administrative costs.

Benefits of Tax Grouping: Intra-group transactions can be disregarded for VAT purposes, enhancing cash flow management and reducing VAT liabilities for group members.

VAT Invoicing and Records

Invoicing Requirements

VAT invoices must include the following:

• Name, address, and VAT registration number of the supplier.
• Details of the goods or services supplied.
• VAT amount charged, shown separately.
• Total amount payable, including VAT.
• Invoice date and the date of supply (if different).

Record-Keeping Obligations

Businesses must retain VAT-related records, including invoices, receipts, and import/export documents, for 5 years (or 15 years for real estate transactions). Failure to maintain proper records can lead to penalties and complicate audits.

Digital Records and Software

Digital records are acceptable, but businesses must ensure they are easily accessible, readable, and secure. VAT compliance software is recommended to automate invoicing and record management.

Profit Margin Scheme

Eligibility and Application

• Businesses dealing in second-hand goods, antiques, or collectibles can apply the Profit Margin Scheme. Under this scheme, VAT is calculated only on the margin (i.e., the difference between the purchase price and sale price), not the full sale price.
• Eligible goods include tangible movable property that is suitable for further use or repair, antiques (over 50 years old), and collector’s items like stamps and coins.

Record Keeping for Profit Margin Sales

Businesses must maintain detailed records of purchases, including the original VAT paid (if applicable), to substantiate their use of the profit margin scheme. This includes issuing invoices that clearly indicate the application of the scheme.

Financial Services and VAT

Treatment of Financial Services: Certain financial services, such as issuing loans, credit, or currency exchange, are exempt from VAT if no explicit fee is charged. However, services provided for an explicit fee or commission are subject to VAT.

Islamic Finance Products: Islamic financial arrangements are treated similarly to their conventional counterparts for VAT purposes. For example, Murabaha (cost-plus-financing) contracts simulate the economic impact of a loan and are treated like conventional loans for VAT purposes.

Virtual Assets

• The transfer and conversion of virtual assets, including cryptocurrencies, are exempt from VAT. This exemption has been applied retrospectively from January 1, 2018.
• This change is expected to stimulate the growth of the digital economy in the UAE and provide clarity for businesses operating in the cryptocurrency space.

Advisory Recommendations

• For Fund Managers: It is crucial for fund managers and the funds they serve to analyze whether their services qualify for the VAT exemption. They should evaluate the implications on their VAT recovery position and consider any necessary adjustments.
• For Cryptocurrency Businesses: Companies dealing in virtual assets should assess the impact of these exemptions on their retrospective VAT positions, especially concerning input tax recovery. Some businesses may need to file voluntary disclosures to correct historic returns.

Real Estate: Special VAT Rules

Treatment of Commercial Properties

• All commercial real estate transactions, whether sales or leases, are subject to the standard VAT rate of 5%. This includes office spaces, retail outlets, and warehouses.
• New Commercial Developments: Developers must factor in VAT costs when pricing commercial properties, ensuring compliance and proper VAT recovery on construction costs.

Residential Property Transactions

• First Sale: Zero-rated if the property is sold within three years of completion.
• Subsequent Sales: Exempt from VAT unless the property is redeveloped and qualifies as a new building.
• Mixed-Use Buildings: Properties with both residential and commercial spaces must apportion the VAT accordingly. Residential spaces are exempt or zero-rated, while commercial portions are subject to VAT.

VAT Penalties and Violations

Common Violations and Penalties

• Late Registration: Businesses failing to register within the required timeframe may face penalties, including fines and interest on unpaid VAT.
• Incorrect Returns: Filing incorrect VAT returns can result in significant penalties, particularly if the mistake led to underpayment. Businesses must ensure accurate reporting to avoid audits and financial penalties.
• Non-Compliant Invoicing: Issuing invoices that do not meet VAT requirements (e.g., not showing VAT separately) can lead to penalties.

Mitigation Strategies

• Businesses can avoid penalties by maintaining proper VAT records and staying informed of changes in regulations. In cases of errors, immediate correction and notification to the FTA may mitigate potential fines.
• Implementing strong internal controls and staff training on VAT compliance can significantly reduce the risk of errors and subsequent penalties.

Strategic Business Insights

1. Cash Flow Management
   • VAT-registered businesses can claim input VAT on purchases, improving cash flow. Timely and accurate VAT filings can reduce the burden of VAT payments and avoid penalties.
2. Cross-Border Transactions
   • For businesses engaged in international trade, proper documentation of exports is essential for claiming zero-rating. This includes not only shipping documents but also maintaining compliance with GCC customs laws.
3. Real Estate Developers
   • Developers can leverage VAT exemptions for residential properties and should structure sales within the zero-rated window (first sale within three years of completion). Careful planning ensures VAT recovery on construction costs.
4. Financial Institutions
   • Financial institutions should clearly identify which services are exempt and ensure proper documentation for any taxable supplies made, particularly when fees are involved.
5. Regular Training and Updates
   • Continuous education for staff on VAT regulations and updates is crucial to maintain compliance. Engaging with tax consultants or legal advisors can provide insights into best practices.
6. Tax Compliance Obligations
   • Businesses must submit VAT returns to the FTA, typically on a quarterly basis. The return must include total sales, total purchases, and the net VAT due. Filing must be done electronically through the FTA’s e-services portal.
7. Input Tax Recovery
   • Businesses can recover input VAT incurred on purchases related to taxable supplies. However, input tax cannot be reclaimed on expenses related to exempt supplies.
   • For mixed-use properties, businesses must apportion the input VAT based on the proportion of taxable versus exempt usage.
8. Special Treatment for Certain Industries
   • Tourism and Hospitality: The tourism sector, including hotel accommodation and restaurant services, is subject to standard VAT. However, promotional activities, like offering discounted rates to residents or packages for tourists, can have specific VAT implications.
   • Healthcare: Healthcare providers must ensure they are registered and compliant with the Ministry of Health and Prevention’s regulations to qualify for zero-rating or exemptions.
9. Designated Zones
   • Designated Zones are specific areas where VAT is not applied in the same manner as in the rest of the UAE. Transactions occurring within these zones may not be subject to VAT, which can be beneficial for businesses engaged in storage, logistics, or trading operations.
   • Businesses operating in designated zones must understand the specific VAT rules that apply to their transactions, including how goods are imported, stored, and exported.
10. Cultural Services: Cultural services provided by approved organizations, such as museums and galleries, may also qualify for zero-rating. This can encourage cultural tourism and support local cultural initiatives.
11. Intermediary Transactions
    • Intermediaries, such as agents or brokers facilitating sales, may have specific VAT obligations. They must ensure they issue proper invoices to their clients and may be required to charge VAT on their service fees.
12. VAT Treatment of Discounts and Vouchers
    • Discounts provided to customers should be considered when calculating VAT. If a business offers a discount after a sale, the VAT payable should be adjusted accordingly.
    • Vouchers can have complex VAT implications, depending on whether they are treated as consideration for the goods/services or a discount on future purchases. Businesses should ensure proper categorization of vouchers to comply with VAT rules.
13. Record Keeping for Compliance
    • Businesses must maintain detailed records for all VAT transactions. These records should include invoices, credit notes, bank statements, and any correspondence related to VAT compliance.
    • For businesses using digital tools, it’s crucial to ensure that these tools align with FTA requirements for electronic record-keeping.
14. Audit and Verification
    • The FTA has the authority to conduct audits to verify compliance with VAT regulations. Businesses should be prepared for audits by keeping thorough records and having clear processes for VAT calculation and reporting.
    • During an audit, the FTA may review past transactions, invoicing practices, and the overall compliance of VAT returns filed.
15. Advisory Services
    • Businesses may benefit from consulting with tax advisors or legal professionals specializing in VAT. These experts can provide tailored guidance on compliance, strategic tax planning, and optimizing VAT recovery.
16. Potential Legislative Changes
    • Businesses should stay informed about potential legislative changes that may affect VAT regulations. Engaging with professional bodies, trade associations, or tax consultants can provide insights into upcoming changes.
17. Impact of Global Economic Changes
    • Global economic trends, including trade agreements and changes in international tax laws, can impact VAT regulations in the UAE. Businesses should be aware of how these changes could affect their operations and VAT obligations.

In this evolving landscape, continuous education, strategic planning, and consultation with tax professionals will be essential for effectively navigating VAT obligations and maximizing potential benefits. By doing so, businesses can ensure their sustained success in the UAE’s dynamic market environment while contributing to the broader economic goals of the nation.