Value-Added Tax (VAT) was introduced in the UAE on the 1st January 2018 and is the principal indirect tax in the UAE in addition to Excise tax on some products and Customs duty on imports of selected goods.
VAT is a tax on consumption that 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 Federal Tax Authority (“FTA”) at each stage of the supply chain rests with the registered 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 FTA. Where the input tax exceeds the output tax, the excess recoverable tax can be carried forward to subsequent tax periods and used to offset against payable tax and/ or penalties, or one can apply for a refund at any point in time.
A transaction falls within the scope of UAE VAT if the following conditions are met:
There are two rates of VAT that are applied to goods and services in UAE; the standard rate of 5% and the zero rate. In addition, some goods and services are exempt from VAT or outside the scope of VAT.
Businesses that make 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 defer the liability under reverse charge mechanism until the time of filing the return.
However, non-VAT registered businesses need to pay VAT at the time of importation.
There are special rules governing transactions related to Designated Zones (‘DZ’) in the UAE. A qualified supply of goods within a DZ is outside the scope of VAT (subject to certain conditions and restrictions). Further, any goods procured from outside the UAE into a DZ is not considered as an import and therefore no Customs duty or VAT is applicable. However, when goods move from a DZ to the Mainland in the UAE, it is treated as an import transaction and Customs duty and VAT is levied at that stage. Until recently, there was no concession given to services provided from and to a 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:
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 it is anticipated that the total value of all supplies will exceed the mandatory registration threshold
in the next 30 days. Article 19 of the VAT Law specifies the supplies that should be considered to calculate the threshold.
A taxable person who does not qualify for registration as per the above threshold can opt for voluntary registration as well, if the total value of supplies, or expenses which are subject to tax, exceed 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 business in UAE may apply to register as a Tax Group if all the following conditions are satisfied:
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 related parties.
However, there are some disadvantages and any decision on whether to register as a tax group should be carefully assessed. 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 of AED 10,000 may be imposed by the FTA if a business fails to register for VAT or excise tax within 30 days of being required to register (i.e., breaching or expecting to breach the threshold).
A Taxable Person making only zero-rated supplies may be excepted from mandatory tax registration if the Authority accepts the exception request.
No. There is no threshold for non-resident businesses to obtain a 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 (usually via the reverse-charge mechanism), the overseas business needs to obtain registration in UAE, irrespective of the value of the supplies.
Supplies of electronic/digital services are covered by special “place of supply” provisions for 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 the UAE where the use and enjoyment of the services is within UAE. The place of supply is outside of the UAE where the use and enjoyment of the service is outside of the 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, an unregistered non-resident supplier must register on a mandatory basis.
No
In the UAE, the standard tax period is three calendar months as prescribed by the Authority. However, the FTA may at its discretion assign a monthly tax period.
Businesses may also request to amend the Tax Period assigned to it, which the FTA may accept at its discretion.
All VAT returns must be submitted online to the FTA by 28th day of the month following the end of the relevant tax period or by any other date as may be notified. Where the payment is due to the FTA, 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 FTA if VAT or excise returns that are not submitted on time or the related tax is not paid by the due date.
When the return is not submitted to the FTA 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 or excise tax to the FTA, following penalties can be levied:
The maximum late payment penalty cannot exceed 300% of the Payable Tax.
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 the prescribed timelines, failure to provide information (including additional disclosures) when requested by the Authority in the requested language, and failure to comply with the Decree Law and Executive Regulation requirements.
Cabinet Decision No. 49 of 2021 has recently been issued to amend the penalties levied for noncompliance with the Law. The Decision alleviates taxpayers by reducing the majority of the penalties and rewarding those who quickly disclose their errors by way of a voluntary disclosure.
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:
Where a business makes supplies of goods or services to a recipient that is a non-registrant, or 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 instead. The following must be included in simplified invoices:
Tax invoices can be issued in an electronic format without prior approval from the Federal Tax Authority (provided the conditions as prescribed by the Federal Tax Authority are fulfilled). Electronic invoices must contain the same information as paper invoices.
No. However, this has been implemented in Saudi Arabia and is expected to be introduced to the UAE and other GCC countries soon.
For further information on indirect tax in United Arab Emirates please contact:
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Steve Kitching |
Value-Added Tax (VAT) was introduced in the UAE on the 1st January 2018 and is the principal indirect tax in the UAE in addition to Excise tax on some products and Customs duty on imports of selected goods.
VAT is a tax on consumption that 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 Federal Tax Authority (“FTA”) at each stage of the supply chain rests with the registered 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 FTA. Where the input tax exceeds the output tax, the excess recoverable tax can be carried forward to subsequent tax periods and used to offset against payable tax and/ or penalties, or one can apply for a refund at any point in time.
A transaction falls within the scope of UAE VAT if the following conditions are met:
There are two rates of VAT that are applied to goods and services in UAE; the standard rate of 5% and the zero rate. In addition, some goods and services are exempt from VAT or outside the scope of VAT.
Businesses that make 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 defer the liability under reverse charge mechanism until the time of filing the return.
However, non-VAT registered businesses need to pay VAT at the time of importation.
There are special rules governing transactions related to Designated Zones (‘DZ’) in the UAE. A qualified supply of goods within a DZ is outside the scope of VAT (subject to certain conditions and restrictions). Further, any goods procured from outside the UAE into a DZ is not considered as an import and therefore no Customs duty or VAT is applicable. However, when goods move from a DZ to the Mainland in the UAE, it is treated as an import transaction and Customs duty and VAT is levied at that stage. Until recently, there was no concession given to services provided from and to a 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:
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 it is anticipated that the total value of all supplies will exceed the mandatory registration threshold
in the next 30 days. Article 19 of the VAT Law specifies the supplies that should be considered to calculate the threshold.
A taxable person who does not qualify for registration as per the above threshold can opt for voluntary registration as well, if the total value of supplies, or expenses which are subject to tax, exceed 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 business in UAE may apply to register as a Tax Group if all the following conditions are satisfied:
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 related parties.
However, there are some disadvantages and any decision on whether to register as a tax group should be carefully assessed. 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 of AED 10,000 may be imposed by the FTA if a business fails to register for VAT or excise tax within 30 days of being required to register (i.e., breaching or expecting to breach the threshold).
A Taxable Person making only zero-rated supplies may be excepted from mandatory tax registration if the Authority accepts the exception request.
No. There is no threshold for non-resident businesses to obtain a 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 (usually via the reverse-charge mechanism), the overseas business needs to obtain registration in UAE, irrespective of the value of the supplies.
Supplies of electronic/digital services are covered by special “place of supply” provisions for 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 the UAE where the use and enjoyment of the services is within UAE. The place of supply is outside of the UAE where the use and enjoyment of the service is outside of the 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, an unregistered non-resident supplier must register on a mandatory basis.
No
In the UAE, the standard tax period is three calendar months as prescribed by the Authority. However, the FTA may at its discretion assign a monthly tax period.
Businesses may also request to amend the Tax Period assigned to it, which the FTA may accept at its discretion.
All VAT returns must be submitted online to the FTA by 28th day of the month following the end of the relevant tax period or by any other date as may be notified. Where the payment is due to the FTA, 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 FTA if VAT or excise returns that are not submitted on time or the related tax is not paid by the due date.
When the return is not submitted to the FTA 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 or excise tax to the FTA, following penalties can be levied:
The maximum late payment penalty cannot exceed 300% of the Payable Tax.
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 the prescribed timelines, failure to provide information (including additional disclosures) when requested by the Authority in the requested language, and failure to comply with the Decree Law and Executive Regulation requirements.
Cabinet Decision No. 49 of 2021 has recently been issued to amend the penalties levied for noncompliance with the Law. The Decision alleviates taxpayers by reducing the majority of the penalties and rewarding those who quickly disclose their errors by way of a voluntary disclosure.
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:
Where a business makes supplies of goods or services to a recipient that is a non-registrant, or 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 instead. The following must be included in simplified invoices:
Tax invoices can be issued in an electronic format without prior approval from the Federal Tax Authority (provided the conditions as prescribed by the Federal Tax Authority are fulfilled). Electronic invoices must contain the same information as paper invoices.
No. However, this has been implemented in Saudi Arabia and is expected to be introduced to the UAE and other GCC countries soon.
