Definition & Laws
Value Added Tax (VAT) is a consumption tax levied on the value added to goods & services at each one stage of manufacture or distribution. Introduced in the United Arab Emirates (UAE) on January 1, 2018, VAT is governed by Federal Decree-Law No. (8) of 2017. The Federal Tax Authority (FTA) oversees the implementation and regulation of VAT in Dubai and the rest of the UAE.
Applicability
VAT applies to most goods and services provided within Dubai and the UAE, including imports. Businesses must register for VAT if their taxable supplies and imports exceed AED 375,000 per annum. Voluntary registration is available for businesses with supplies and imports exceeding AED 187,500. Certain goods and services, such as healthcare and education, are either zero-rated or exempt from VAT.
VAT Rates
Standard Rate
5%
Zero Rate
0% (applicable to specific goods and services like exports, certain healthcare, and educational services)
Zero-Rated Businesses under VAT in the UAE
In the UAE, certain businesses and transactions are subject to a zero rate of VAT. This means that while VAT is charged at 0%, businesses can still reclaim the input tax paid on their purchases related to these supplies. Below are the main categories of businesses and transactions that are zero-rated under VAT in the UAE:
Export of Goods and Services
- Exports of Goods: Goods that are transported outside the GCC (Gulf Cooperation Council) region are zero-rated.
- International Services: Services provided to customers outside the UAE and GCC, provided they are not consumed within the UAE.
Certain Educational Services
- Recognized Educational Institutions: Schools, nurseries, higher educational institutions that are recognized by the UAE Ministry of Education, including the provision of related goods and services.
Healthcare Services
- Recognized Healthcare Services: Preventive and basic healthcare services, along with related goods and services, supplied by recognized healthcare providers.
Investment in Precious Metals
- Precious Metals: Investment-grade precious metals such as gold, silver, and platinum, with a purity of 99% or higher and tradable in global markets, are zero-rated.
Residential Properties
- First Supply of Residential Buildings: The first supply of residential buildings within three years of their completion, including lease agreements, is zero-rated.
International Transportation
- Transport Services: International transport of passengers and goods, including related services.
Charitable Organizations
- Charitable Activities: Supplies made by designated charitable organizations.
Certain Oil and Gas Products
- Oil and Gas: Supplies of crude oil and natural gas are zero-rated.
Certain Sea, Air, and Land Means of Transport
- Means of Transport: Supply of air, sea, and land means of transport (such as aircraft and ships) used for commercial purposes, including related services and maintenance.
Telecommunications Services
International Telecommunications: Services that involve the transfer of data or communication internationally.
Supply of Goods and Services within Designated Zones
- Designated Zones: Goods and services supplied within designated zones, provided that the conditions laid out in the VAT legislation are met.
Key Considerations for Zero-Rated Businesses
- Documentation: Businesses must maintain detailed records and documentation to prove that their supplies are eligible for zero-rating.
- Registration and Compliance: Even if all supplies are zero-rated, businesses must register for VAT if their taxable supplies exceed the mandatory registration threshold.
- Input Tax Recovery: Businesses can recover the input tax paid on purchases related to zero-rated supplies.
VAT-Exempt
Certain businesses and transactions in the UAE are exempt from VAT, meaning they do not charge VAT on their supplies and cannot reclaim any VAT incurred on their purchases. Below are the main categories of businesses and transactions that are exempt from VAT under UAE law:
Financial Services
- Financial Services: Most financial services are exempt from VAT when the consideration for the service is in the form of a margin or spread. This includes services such as loans, mortgages, credit cards, and certain deposit and savings accounts.
- Life Insurance: Life insurance and reinsurance of life insurance are also exempt from VAT.
Residential Properties
Sale and Lease of Residential Properties: The supply of residential properties by way of sale or lease (excluding the first sale or lease within three years of completion) is exempt from VAT.
Bare Land
Bare Land: The supply of bare land (undeveloped land) is exempt from VAT. Bare land refers to land that is not covered by completed buildings or civil engineering works.
Local Passenger Transport
Passenger Transport: The supply of local passenger transport services by buses, taxis, and other means of local transport is exempt from VAT.
Specific Educational Services
Certain Educational Services: Education services provided by nurseries, preschools, schools, and higher education institutions recognized by the UAE Ministry of Education may be exempt in certain conditions, particularly when supplied by non-profit organizations.
Specific Healthcare Services
Certain Healthcare Services: Certain healthcare services and related goods and services that are not subject to VAT or zero-rated are exempt. This includes specific medical treatments and services that are closely related to healthcare and not predominantly for pleasure or relaxation.
Charitable Organizations
Charitable Activities: Supplies made by recognized charitable organizations that are not related to commercial activities are exempt from VAT.
Key Considerations for VAT-Exempt Businesses
- No VAT on Supplies: Businesses making exempt supplies do not charge VAT on these transactions.
- No Input Tax Recovery: Businesses making exempt supplies cannot recover the VAT paid on their purchases related to these exempt supplies.
- Compliance and Reporting: Even if making exempt supplies, businesses may still need to register for VAT if they also make taxable or zero-rated supplies that exceed the mandatory registration threshold.
- Record Keeping: Maintain detailed records of exempt supplies and related expenses to ensure accurate VAT reporting and compliance.
VAT Compliance Process in the UAE
Documents Required for Filing of VAT Return
The documents required for filing a VAT return in the UAE vary depending on whether you are a registered business or an individual. Here’s a comprehensive list of documents typically needed:
For Registered Businesses
VAT Invoices
Copies of all VAT invoices issued and received during the tax period.
Credit Notes and Debit Notes
Documentation related to any adjustments made to VAT invoices.
Import and Export Documents
Documentation related to imports and exports of goods and services, including customs declarations.
General Ledger
A summary of all business transactions, including sales, purchases, expenses, and revenues.
Trial Balance
A statement of all debit and credit balances in ledger accounts at a given date.
Accounting Records
Detailed financial records, including ledgers, journals, and supporting documents.
Bank Statements
Statements showing transactions related to VAT payments and refunds.
Contracts and Agreements
Relevant contracts, agreements, or supporting documentation for specific transactions.
Tax Calculation Worksheet
A worksheet showing the calculation of output tax (tax collected from customers) and input tax (tax paid on purchases).
Other Supporting Documents
Any additional documentation required by the Federal Tax Authority (FTA) to support the accuracy and completeness of the VAT return.
For Individuals (Non-registered Businesses)
Tax Invoices
Copies of all tax invoices for taxable supplies made.
Expense Receipts
Receipts or invoices for expenses related to VAT-registered purchases.
Income Records
Records of income generated from taxable supplies.
Bank Statements
Statements showing transactions related to VAT payments or refunds.
Other Relevant Documentation
Any additional documentation related to taxable activities or transactions.
Additional Considerations
Electronic Submission
VAT returns are typically submitted electronically through the FTA’s online portal.
Language Requirements
Documents not in Arabic or English may need to be translated by a certified translator.
Retention Period
Maintain all VAT-related records and documents for at least five years following the end of the tax period.
Compliance and Audits
Regular Audits
The FTA (Federal Tax Authority) conducts audits regularly to ensure compliance with VAT regulations. It is essential for businesses to maintain meticulous records and be prepared to furnish all requested documentation and evidence related to VAT transactions during these audits.
Penalties
Non-compliance can result in penalties, including fines and interest on unpaid VAT. Ensure timely filing and payment to avoid these penalties.