Value-added Tax (VAT) is an indirect tax charged by a company on supplies of goods and services at each step where added value appears – from manufacturing to sale to a final consumer. A customer pays VAT charged on the cost of goods or services to the supplier. The difference between VAT collected by the company and VAT paid for the acquired goods or services is payable to the state or subject to recovery.
VAT in the United Arab Emirates has been in force for over six years. It had been enacted even earlier than the corporate tax introduced in the Emirates only in 2023. Therefore, it is essential to remember that setting up a company in the UAE, subject to its turnover and nature of business, can soon require registration for VAT, regular submission of VAT returns and tax payment.
Federal Decree-Law No. 8 of 2017 on Value Added Tax entered into force on 1 January 2018 (the Law). Provisions of the Law are interpreted in the Cabinet Decision No. 52 of 2017 (Decision No. 52) as amended.
VAT was introduced in the UAE as part of the Gulf Cooperation Council (GCC) initiative. The member states of the GCC are Bahrain, Qatar, Kuwait, UAE, Oman and Saudi Arabia. However, only four (the UAE, Bahrain, Oman and Saudi Arabia) have recently introduced VAT.
VAT for the UAE companies
The following supplies are subject to VAT in the UAE:
- supply of goods or services;
- import of goods.
A taxable supply means a supply of goods or services for consideration by a person conducting business in the UAE (except supplies exempt from VAT).
A supply of goods means the transfer of ownership of the goods or the right to use them to another person or entry into a contract providing for such transfer in future.
The supplier charges VAT on the cost of goods or services he supplied, payable by the customer. Subsequently, when calculating the tax payable (recoverable) for the tax period, the taxpayer subtracts the total amount of “input” VAT (that is, paid by him for purchased goods or services) from the total amount of “output” VAT. Input VAT deduction is claimed through the tax return for the relevant period (generally three months). The ordinary VAT rate in the UAE is 5 per cent.
VAT-taxable persons in the UAE
A taxable person is any person (UAE resident) who is registered or obligated to register for VAT purposes under the Law.
The responsibility for VAT is borne by:
- taxable persons who make the supply of goods or services;
- importers of goods;
- those who acquire goods (the “reverse charge” on supplies of hydrocarbons to resell or to produce energy where a customer, not a supplier, charges VAT).
The supply of goods or services by an agent acting in the name and on behalf of the principal is considered a supply made by the principal. If an agent acts in his name, the agent is considered a supplier.
Registration for VAT in the UAE
The duty to register for VAT arises when the company reaches the established turnover threshold for taxable transactions. If, during the previous 12 months, a person (UAE resident) has made taxable supplies totalling more than AED 375,000 (approx. US$ 102,000), or if the total amount of supplies is expected to exceed a specified threshold within the next 30 days, such person is required to register for VAT (art. 7 of Decision No. 52).
A person may register for VAT voluntarily if the supplies in the previous 12 months exceeded AED 187,500 (approx. US$ 51,000) or will exceed this threshold in the next 30 days.
A person registered for VAT is assigned a Tax Registration Number (TRN). It must be indicated in all tax returns, tax invoices and other documents when communicating on VAT issues.
If a taxpayer has ceased to carry out VAT-taxable supplies and its total amount for the 12 consecutive months is less than the threshold for voluntary registration, it may apply to the tax authority to terminate VAT registration.
VAT return and payment of VAT in the UAE
The standard tax period for VAT is three months. It applies if the company’s annual turnover does not exceed 150 million dirhams. The company reports on VAT monthly if the turnover equals or exceeds this amount.
Taxpayers must file VAT returns with the tax authority within 28 days after the end of the relevant tax period or on another date established by the tax authority.
For correct reporting, a taxpayer must keep documentation of all supplies of goods or services, import and export operations, and all issued and received tax invoices, adjustments and other documents.
A tax invoice is a written or electronic document that reflects the VAT taxable supply and its necessary details. A taxpayer registered for VAT in the UAE and carrying out a taxable supply must issue an original tax invoice within 14 days from the transaction date and send it to the recipient of the goods or services (art. 65, 67 of the Law).
If the transaction is made in foreign currency (other than UAE dirhams), the amount indicated on the tax invoice must be converted into UAE dirhams at the rate established by the UAE Central Bank on the transaction date.
Failure to issue a tax invoice to the customer or failure to include VAT in the price of a taxable supply entails penalties imposed by the tax authority. The use of VAT mechanisms by a person who does not have the right to do so, particularly in the absence of VAT registration, is also considered a tax offence.
The taxpayer must pay the tax payable stated in the tax return by the date of filing the return, using the payment methods specified by the tax authority. Tax payment is made online via local or international bank transfer or using a debit or credit card.
Place of supply of goods
As a general rule, if a supply was made in the UAE and does not include export or import, the place of supply (and payment of the tax) is the UAE.
If goods are exported from the UAE to other countries (except GCC member states), the place of supply is the UAE.
If goods are exported from the UAE to a GCC member state to a recipient registered for VAT in that state, the place of supply will be the state of the recipient of the goods.
If goods are imported into the UAE from abroad (except GCC countries), the place of supply is the UAE.
Import of goods
Import means the arrival of goods into the UAE from abroad or receiving services from outside the UAE. When importing goods, the place of supply will be the state where the goods are consumed.
If a UAE company imports goods or services into the UAE for its business that would not be exempt from tax if supplied within the UAE, then the importer is deemed to have made a taxable supply to itself and is liable for the calculation and payment of VAT in the UAE (art. 48(1) of the Law).
The goods are not treated as imported in the UAE (art. 47 of the Decision No. 52):
- in case of their a) temporary admission, b) placing in a customs warehouse, c) transit, or d) importation for further re-export by the same person, provided that these goods are subject to customs procedures under the GCC Common Customs Law, and subject to providing a financial guarantee or a cash deposit equal to the value of the tax due (if requested by the tax authority); or
- in case of their importation to a Designated Zone from a place outside the UAE.
Where a person imports goods to the UAE through another GCC member state, the import of these goods will not be subject to VAT if the tax authority establishes that VAT is due on the supply of goods in that other state.
Place of supply of services
The place of supply of services for the purposes of VAT in the UAE is the place of residence of the supplier.
If the recipient of the services has a place of residence in another GCC country and is registered for VAT there, the place of supply of the services will be the country of the recipient of the services.
If a company has a place of residence in the UAE and receives services from a foreign supplier, the place of supply of services will be the UAE.
For the supply of services related to immovable property, the place of supply will be where the property is located.
For the supply of telecommunication and electronic services, the place of supply will be the place of the use and enjoyment of the services.
A “place of residence” of a person can be a place of establishment (the place where a business is legally established, in which significant management decisions are taken or central management functions are conducted) or a fixed establishment (a place where a person regularly conducts business having sufficient resources for the supply and acquisition of goods and services).
Zero-rated and VAT-exempt supplies in the UAE
A zero VAT rate applies, among others, to the following transactions:
- export of goods and services to outside the UAE and GCC countries;
- international transportation of goods and passengers which starts or ends in the UAE or passes through the territory of the UAE, including related services;
- supply or import of investment precious metals;
- first sale or lease (in whole or in part) of residential buildings within three years after completion;
- supply of crude oil and natural gas;
- supply of educational services;
- supply of medical services and others.
The following transactions are exempt from VAT in the UAE:
- financial services;
- sale or lease of residential buildings (except sales or leases subject to a zero-rate);
- sale of bare land (land without buildings or engineering constructions);
- supply of local passenger transport.
VAT regime in Designated Zones in the UAE
Designated zones are the territories considered as areas outside the UAE for VAT purposes. These zones often correspond with widely known free zones that provide unique investment and tax conditions (there are more than 40 free zones in the UAE). However, a free zone is not necessarily a designated zone for VAT purposes. Designated zones involve customs control and monitoring the movement of persons and goods into and out of their territory.
Goods imported in the designated zone from abroad are not considered imported in the UAE.
The transfer of goods between designated zones shall not be subject to VAT if the following two conditions are met:
- if the goods are not released, used or altered in any way during the transfer between the designated zones;
- if they are transferred under the customs rules of GCC Common Customs Law.
The tax authority may require the owner of the goods to provide a financial guarantee for the payment of VAT, which that person may become liable for should the above conditions not be met.
At the same time, if services were supplied in a designated zone, the UAE would be considered a place of supply. Persons registered or residing in a designated zone are considered UAE residents.
The list of designated zones can be found in the Cabinet Decision No. 59 of 2017 and amendments to it. Currently, there are 25 designated zones for VAT purposes in the UAE.
Summary
- The UAE has introduced a value-added tax on the supply of a wide range of goods and services since 2018.
- Upon reaching the established threshold, the UAE resident companies making taxable transactions (supply of goods or services, import) must register for VAT and submit VAT reporting for each 3-month tax period.
- The VAT rate for most cases is 5%. Some supplies are taxed at 0% or are exempt from VAT.
- There are specifics of the application of VAT with the involvement of GCC countries or designated zones in the UAE.
- Each supply of goods and services potentially subject to VAT in the UAE requires separate analysis, considering the route of movement, place of supply, parties’ VAT registration and other circumstances.
- Proper administration of VAT at a company level, including correct paperwork, tax calculation and reporting, may require professional accounting services.
