Indirect tax - United Arab Emirates

Value-Added Tax (VAT) is the principal indirect tax in the UAE apart from Excise on some products such as tobacco and Customs duty on imports of selected goods.

VAT is a tax on consumption which is applied on the supply of most goods and services in UAE. It is also applied to goods, when imported into the country.

Although VAT is ultimately borne by the consumer by being included in the price paid, the responsibility for charging, collecting and paying it to the tax authority at each stage of the supply chain rests with the business (including individuals) making the supply.

A business registered for the tax will charge VAT (output tax) on its sales/services, and incur VAT (input tax) on its purchases (including any VAT paid at importation). The difference between the output tax and the deductible input tax in each accounting period will be the amount of VAT payable by the business to the tax authority. Where the input tax exceeds the output tax, the excess recoverable tax can be carried forward to subsequent tax periods and can be used to offset against payable tax and/ or penalties, or one can apply for a refund at any point in time.

A transaction is within the scope of UAE VAT if the following conditions are met:

• it is either a supply of goods or services for consideration or a scenario of deemed supply. The term ‘supply’ and
  ‘deemed supply’ has been defined separately for goods and services in the legislation
• the place of supply is in the UAE
• it is made by a taxable person conducting business in the UAE. For these purposes, a taxable person is a person or entity who is registered for VAT in the UAE, or has a liability to become registered.

There are two rates of VAT that are applied to goods and services in UAE; the standard rate and the zero rate. In addition, some goods and services are exempt from VAT.

Businesses that makes exempt supplies are unable to claim the input tax they incur, so the VAT paid to the suppliers will be a ‘real’ cost.

All goods imported into the UAE from outside the UAE are generally subject to VAT. Registered businesses are eligible to discharge the liability under reverse charge mechanism.

However, non-VAT registered businesses need to pay VAT at the time of importation.

There are special rules governing transactions related to a Designated Zones (‘DZ’) in UAE. Any supply of goods within a DZ is outside the scope of VAT (subject to certain conditions and restrictions). Further, any goods procured from outside UAE in a DZ is not considered as import and therefore no Customs duty or VAT is applicable. However, when goods move from a DZ to mainland in UAE, it is treated as an import transaction and Customs duty and tax is levied at that stage. No concession is provided to services provided from and to the DZ.

However, legislation has been amended to allow qualified shipping and delivery services within a DZ to be outside the scope of VAT in certain instances.

 
VAT in the UAE is an intricate subject developing alongside the country’s vision to grow as an economic hub. The FTA has issued over 50 Public Guides and Clarifications since VAT was implemented in 2018 to assist taxpayers in determining their VAT obligations.

In addition to VAT, excise tax is another prominent indirect tax which was implemented in the UAE in October 2017 and expanded in December 2019. This “sin tax”, as it is colloquially known, is levied on specific goods that have been identified as harmful to human health or the environment including the following:

• tobacco and tobacco products – 100% tax (since 2017)
• electronic smoking devices and associated liquids – 100% tax (since 2019)
• energy drinks – 100% tax (from 2017)
• carbonated drinks – 50% tax (from 2017)
• sweetened drinks – 50% tax (from 2019)

There is no threshold for excise tax. Thus, producers, importers, and stockpilers must register for excise tax if their business is involved with any excise product. Goods released from a DZ may also be subjected to excise tax. Producers and importers of excise products are specifically required to generate a Retail Selling Price (RSP) list of excise goods when registering for excise tax.

Registered entities must file excise returns by the 15th day of each month to report the excise liability arising from the prior month. Similar to VAT, the final consumer will ultimately bear the excise cost as the excise tax is inclusive in the final price of the product. 

A taxable person who either makes or intends to make taxable supplies of goods and services in the course of a business must register for VAT if the total value of all supplies exceeds the mandatory registration threshold of AED 375,000 in the previous 12 months period or that it is anticipated that total value of all supplies will exceed the mandatory registration in the next 30 days. A specific provision in the law specifies the supplies that should be considered for the purpose of threshold.

A taxable person who does not qualify for registration as per the above threshold can opt for voluntary registration as well, if he proves that the total value of supplies or expenses which are subject to tax exceeded AED 187,500 in the previous 12-month period or will exceed the said threshold in the next 30 days.

Two or more persons conducting businesses in UAE may apply for Tax Registration as a Tax Group if all the following conditions are satisfied:

• each member has a Place of Establishment or Fixed Establishment in the UAE
• each member shall be related parties, where the definition of related parties is further explained in VAT Law
• one or more persons conducting business in a partnership shall control the others.

A person cannot be treated as a member of more than one VAT group at a time. Further, an individual cannot be part of a VAT Group.

The main advantage of VAT group registration is that any supply of goods or services by a member of the group to another member of the group is disregarded for VAT purposes. This reduces the risk of VAT being accidentally omitted on supplies between separately registered connected companies.

However, there are some disadvantages and any decision on whether to take group registration should be taken with care. For example, all VAT group members (including former members) are jointly and severally liable for the VAT debt of the   group during the period of their membership.

A penalty may be imposed by the tax authority if a business     fails to register at the correct time.

A Taxable Person making only zero-rated supplies may be excepted from mandatory tax registration. 

No. There is no threshold for non-resident businesses to obtain VAT registration when they make taxable supplies in the UAE and no other person is obligated to pay tax. In other words, where a non-resident business makes supplies in UAE and there is no other person to account for tax, the said overseas business needs to obtain registration in UAE, irrespective of the value of supplies.

Supplies of electronic/digital services are covered by special place of supply provisions of Telecommunication and Electronic services. The place of supply for such services is determined by the actual use and enjoyment of the services, regardless of the place of contract or payment. Accordingly, for electronic or digital services, the place of supply is in UAE, to the extent that the use and enjoyment of the services is within UAE. The place of supply is outside of UAE, to the extent of that the use and enjoyment of the service is outside of UAE.

For B2B transactions, local businesses will have to account for the tax due under the Reverse Charge Mechanism as it is considered an importation of services.

For B2C transactions, where the private consumer is not obligated to pay tax, a non-resident supplier who does not have a place of residence in UAE or in other implementing state and is not registered for tax, shall be required to register on mandatory basis.

No. However, further clarity is awaited on this aspect.

What is Tax (VAT) Group & who can apply for Tax Group? 

Two or more persons conducting Businesses may apply for Tax Registration as a Tax Group if each shall have a place of establishment or fixed establishment in the State, are related parties who have common control.

In UAE, standard tax period is three calendar months. However, the tax authority may at its discretion, assign a different tax period – monthly.

Businesses may also request that the Tax Period ends with a month as requested by it and the tax authority may accept such a request at its discretion.

All VAT returns must be submitted online to the tax authority by 28th day of the subsequent month (or the next working day in case of a weekend or a public holiday) following the end of the relevant tax period or by any other date as may be notified. Where the payment is due to the tax authority, it must be paid by the same deadline. Where the due date of the submission of the VAT Return and the corresponding payment falls on a weekend or a national holiday, the deadline for filing the VAT.

Return or making a payment is extended to the first business day thereafter.

Penalties may be imposed by the tax authority if VAT returns are not submitted on time, or the related tax is not paid by the due date.

When the return is not submitted to the tax authority by the due date, a fine of 1,000 AED is imposed for the first time, and 2,000 AED in case of repetition with 24 months.

When there is delay in payment of VAT to the tax authority, following penalties can be levied:

1. 2% penalty of the unpaid tax due immediately once the payment of the Payable Tax is late
2. a further 4% penalty is due after one month following the deadline for payment, on the amount which is unpaid
3. The taxable person shall be obligated to pay the penalty applicable of the Payable Tax to a maximum of 200%. 

No.

Yes. A range of penalties can be imposed when businesses do not comply with VAT Law and Rules.

Penalties can be applied for non-compliance with the tax procedures such as failure to keep adequate records, failure to obtain registration within prescribed timelines, failure to provide  information (including additional disclosures) and failure to comply with the decree law and regulation requirement.

Yes, the business visitor refund scheme allows business visitors to recover VAT, provided that all the required conditions specified in the Law are satisfied. One such condition requires that the country in which the overseas business is resident offers a reciprocal refund to UAE businesses when visiting that country.  

A valid tax invoice must show:

• the words ‘Tax Invoice’ clearly displayed
• the name, address and TRN of the Registrant making the supply
• the name, address and TRN of the Recipient where he is a Registrant
• an invoice number which is unique and sequential
• the date of issuing the Tax Invoice
• the date of supply if different from the date the Tax Invoice is issued
• a description of goods or services supplied
• for each goods or services, the unit price, the quantity or volume supplied, the rate of Tax and the amount payable expressed in AED
• the amount of any discount offered
• the gross amount payable expressed in AED
• the tax amount payable expressed in AED together with the rate of exchange applied where the currency is converted from a currency other than the UAE dirham
• where the invoice relates to a supply under which the Recipient of Goods or Services is required to account for Tax, a statement that the Recipient is required to account for Tax and a reference to the relevant provision of the Decree Law.

Where a business makes supplies of goods or services to a recipient that is non-registrant, or that the value of the consideration for the supply of goods or services does not exceed AED 10,000 to the recipient who is a registrant, a simplified tax invoice may be issued.

The following must be included in simplified invoices:

• The words “Tax Invoice” clearly displayed on the invoice.
• The name, address, and Tax Registration Number of the Registrant making the supply.
• The date of issuing the Tax Invoice.
• A description of the Goods or Services supplied.
• The total Consideration and the Tax amount charged. 

Tax invoices can be issued in electronic format and there is no need to obtain prior approval from the tax authority (provided the conditions as prescribed by the tax authority are fulfilled). Electronic invoices must contain the same information as paper invoices.

No. However, eInvoicing is expected to be introduced in the UAE from July 2026.

How long do businesses need to retain their Tax records ?

The FTA has prescribed the business records that must be maintained by the taxpayers. Records must be kept for five (5) years, or seven (7) years in the case of Real Estate records which can be further extended in case of the FTA Audit.