The Federal Government of the UAE will introduce Value Added Tax (VAT) Law (“the Law”) with effect from 1 January 2018. VAT is a form of indirect tax and applies to the majority of transactions. A levy is imposed on all taxable supplies (including deemed supply) as well as imported goods meaning they shall be subject to VAT.
What are the tax rates?
The standard rate is 5% and will be imposed on the supply of goods and services as well as imported goods, including what is deemed supply. The exception to the standard rate is where zero-rate will apply as well as exemptions.
What will be exempt?
Selected supplies in sectors such as transportation, sale/lease of residential properties subsequent to first supply, financial services will be completely exempt from VAT. For example, the supply of bare land, local passenger transport and margin based financial products ie without explicit fees, commission, rebate, discount or similar.
What supplies are zero-rated?
Educational services (excluding higher tertiary education), basic healthcare services, export of goods and services, transportation, investment metals, crude oil and gas.
What about VAT registration?
The Executive Regulations provides that registration is mandatory where the value of goods and services supplied exceeds (or is expected to exceed) AED 375,000 in a twelve (12) month period or a business anticipates making taxable supplies of AED 375,000 in the next thirty (30) days. This will mean that where a business has a turnover of AED 375,000 or more is required to register their business for VAT. The failure of a taxable person or business to submit a registration application is liable for AED 20,000 fine. There is a voluntary registration threshold of AED 187,500 – AED 375,000 meaning you can register for VAT voluntarily if your business falls within this category. Two or more persons conducting business in the UAE may register as a “Tax Group” where the parties are subject to common control.
Any person or business entity that makes, receives and/or supplies goods and/or services should seek advice promptly as to whether or not they need to register for VAT.
How does VAT work?
Once you have registered for VAT, the person or business will have to charge VAT, known as output tax, on the supplies unless exempt or zero-rated and complete a tax return to be submitted to the Federal Tax Authority (FTA). VAT may be reclaimed where you pay to your suppliers, known as input tax, by completing the tax return and providing the relevant tax invoice or equivalent and have paid the VAT claimed for. The FTA is also the body to which complaints and/or challenges can be submitted should the entity have grounds for objection.
Free Zones are deemed to be outside the UAE. Goods may be transferred between Designated Zones without being subject to VAT, as the Designated Zones will be treated as being outside the UAE. However, certain ringfenced Free Zones will be treated as Designated Zones and it is important to note a Designated Zone is not automatically linked to all Free Zones.
***Please note that the information published above is for general information only and may be subject to change. It should not be substituted for specific legal advice on VAT***
Naila Sarwar is a UK qualified solicitor working with TWS Legal Consultants in Dubai, who specialises in commercial and private client matters, including employment matters.
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