Overview of VAT

The Federal Government of the UAE has introduced VAT and the implementation thereof is effective from 1 January 2018.

VAT is an indirect tax and is collected incrementally at each step of the supply chain – import, manufacture and point of sale. The proposed rate of tax in the UAE is 5% and will be applied to the majority of goods and services and imported goods. As similar to other countries, end consumers generally bear the VAT while businesses within the supply chain must collect and account to the Ministry of Finance for the VAT.

Basic Principles of VAT
While the standard rate of VAT of 5% is applicable on most goods and services. Some goods and services are exempt from VAT; while others are zero-rated.

Exempt Supply
If a good/service is exempt then there is no VAT payable on the good or service. Certain supplies are exempt, for example, supply of local public transport, the sale of residential property (second sale onwards), lease of residential property and certain financial services.

Zero-rated supply
Where an item is zero-rated, VAT is not payable on the sale of those goods and services, however those parties in the supply chain can recover VAT during the supply and manufacturing process which ensures prices of certain essential goods and/or services remain low. The goods and services that are zero-rated are for example, basic healthcare, tuition fees up to higher education, international transport of passengers and goods, the first sale of residential property, investment in gold, silver and platinum, crude oil & natural gas etc.

Compliance Requirements under VAT
The law requires compulsory registration where the annual turnover of the company is more than AED 375,000 and it is mandatory for the company to register under UAE VAT before the end of 2017.
The threshold is calculated on the total value of supplies made by a taxable person during a twelve (12) month period or where a business anticipates a total value of supplies in the subsequent 30 days on which the business is applying for VAT registration. To arrive at the mandatory threshold, the value of exempted supply will not be considered.

Where the annual turnover of the company is between AED 187,500 and AED 375,000, it is optional for the company voluntarily register under UAE VAT law. Further, the company need not register under this law where the annual turnover falls below AED 187,500.

Record Keeping
It is mandatory for every taxable person to maintain books of accounts under UAE VAT law. In addition the Federal Tax Authority (FTA) can request for additional documents such as, annual accounts, general ledger, purchase day book, invoices issued, invoices received, credit notes, debit notes, VAT Ledger etc. Under the UAE VAT law the books of accounts and records are to be maintained for five years.

Next Steps
As there is a short time frame to be VAT ready, it is important that all businesses initiate a VAT implementation plan to comply with UAE VAT regulations. The impact of VAT will affect key areas such as finance and accounting, IT and systems, Tax and compliance and supply, legal structure and contracts.

To obtain more information about VAT, please contact our legal team on or call +971 4 448 4284.