The Importance of Staying VAT-Compliant in the UAE

Since the introduction of Value Added Tax (VAT) in the UAE in 2018, businesses have adapted to this new layer of financial and operational responsibility. VAT plays a critical role in generating public revenue for the UAE, supporting infrastructure, healthcare, education, and much more. As businesses here continue to grow and evolve, it’s vital to stay updated with the latest VAT requirements to avoid penalties, manage expenses effectively, and remain competitive in the market.

The Federal Tax Authority (FTA) has updated the UAE VAT law through Cabinet Decision No. 100 of 2024, which changes some rules from Cabinet Decision No. 52 of 2017. These updates will take effect on November 15, 2024. Below is a summary of the main changes and what they mean for businesses and taxpayers.

Key Amendments and Their Implications in various fields.

Financial Services

Article 1: Definition of Virtual Assets
Virtual Assets are now defined as "digital representations of value that can be digitally traded or converted and used for investment purposes." This definition explicitly excludes digital representations of fiat currencies and financial securities, distinguishing virtual assets from traditional forms of money and regulated securities.

Article 42: Tax Treatment of Financial Services

Article 42(2) has been amended to expand the scope of financial services, adding the following:

• Investment Fund Management Services: Providing fund management services independently for a fee. These services must be for funds licensed by a competent UAE authority and include tasks such as managing fund operations, handling investments on behalf of the fund, and monitoring or improving fund performance.
• Virtual Assets Transactions:
  • Transfer of Ownership: Includes the transfer of virtual assets, such as virtual currencies.
  • Conversion of Virtual Assets: Covers converting one virtual asset into another or into fiat currency.
  • Custody and Management: Involves the safekeeping of virtual assets, managing them, and enabling control over these assets by their owners.

These inclusions reflect the evolving nature of digital finance and the growing importance of virtual assets in the financial ecosystem.

Article 42(3) introduces VAT exemptions for specific financial services, applied retrospectively from January 1, 2018:

• Transferring Ownership of Virtual Assets: Transactions involving the transfer of virtual currencies or other virtual assets.
• Conversion of Virtual Assets: Any process that converts virtual assets into different forms, including fiat currency or other digital assets.

Impact

This amendment clarifies that transactions involving virtual assets, including virtual currencies, are exempt from VAT, aligning with global practices and reducing ambiguity for businesses and investors dealing in digital assets.

New VAT Exceptions for Government Transactions

Effective January 1, 2023, the amendment introduces exemptions for certain supplies involving government entities:

• Transfer of Ownership or Disposal Rights of Government Buildings: Transactions involving the transfer of ownership or rights to dispose of government buildings between government entities.
• Real Estate Assets: Includes the transfer of ownership or rights to dispose of real estate assets between government entities.
• Right to Use or Exploit Assets: Covers transactions granting rights to use or exploit these government assets.

Impact

These changes significantly affect government transactions. Transfers, leases, or other disposals of these specified assets between government entities will no longer be considered supplies under VAT regulations. As a result, such transactions will not be subject to VAT, simplifying compliance and reducing costs for government-related operations.

Overall Impact
These amendments provide greater clarity and predictability in VAT application, particularly in emerging areas like virtual assets and government transactions. For businesses, it ensures consistent tax treatment, while government entities benefit from reduced tax burdens on intra-government transactions.

Deemed Supply

Article 5: Exceptions Related to Deemed Supply

The scope of exceptions related to deemed supply has been expanded to include transactions where:

• Both the supplier and recipient are either government entities or charitable organizations.
• The total value of the supply does not exceed AED 250,000 per supplier within a 12-month period.

Deemed Supply Context
A deemed supply generally refers to a situation where, even though no physical supply of goods or services has taken place, VAT is still imposed. This typically occurs in cases such as when assets are transferred for no consideration or used for private purposes by a business.

However, with this new exception, certain transactions involving government entities and charitable organizations will be excluded from deemed supply regulations, which typically would have been subject to VAT.

Impact
This amendment reduces the VAT burden on transactions between government entities and charitable organizations. By exempting certain supplies, it streamlines administrative processes, encourages greater collaboration, and facilitates resource sharing. These organizations can now focus on their core activities without the added complexity of VAT, promoting more efficient operations in the public and charitable sectors.

Overall Impact
The changes align with the UAE's broader goals of fostering collaboration and supporting social initiatives. By exempting qualifying transactions from VAT, the amendment simplifies the financial and operational aspects of public sector and charitable activities, making it easier for these entities to work together, drive efficiency, and serve the public more effectively.

Article 14: Tax Deregistration
Clause 9 introduces a key clarification: even after a person is deregistered for tax purposes, they remain responsible for complying with the provisions of the Decree-Law and this Decision. If the individual later meets the requirements for tax registration, they must submit a new tax registration application. This ensures that deregistration does not permanently relieve an individual or entity of their tax obligations.

Article 14 (bis): Tax Deregistration to Protect the Integrity of the Tax System
A newly added provision gives the tax authority the power to deregister a person for tax purposes if it is determined that maintaining their registration could compromise the integrity of the tax system. The authority can take this action under the following conditions:

• The registrant no longer meets the tax registration criteria.
• The registrant has not submitted a tax deregistration application, or has initiated an application but has failed to complete it.

This new provision provides the authority with a mechanism to protect the system by removing those who are no longer compliant or have not properly initiated the deregistration process.

Impact
The amendment ensures greater compliance with the tax system by holding individuals and businesses accountable even after deregistration. It prevents potential misuse of the system by allowing the authority to remove non-compliant entities. Additionally, it reinforces the need for businesses and individuals to stay up to date with their tax obligations, ensuring that only those who meet registration requirements remain in the system. This provides a more transparent and efficient tax system, enhancing its integrity.
 

Article 29: Profit Margin Scheme
Article 29 has been amended to define "Purchase Price" as including all costs and fees incurred when purchasing goods. This clarification ensures that, for the purposes of the profit margin scheme, all associated costs—such as shipping, handling, and other acquisition-related expenses—are factored into the calculation of the profit margin.

Impact
This update provides clarity on VAT calculations under the profit margin scheme by confirming that the total cost of acquiring goods, including all associated expenses, must be considered. This ensures a more accurate and transparent calculation of VAT liabilities for businesses using the scheme.

Proof for Export of Goods

Article 30: Zero-Rating the Export of Goods

The Federal Tax Authority (FTA) has provided specific guidelines on the documents required for zero-rating the export of goods, ensuring a clearer understanding of the process. These documents must confirm the export transaction and demonstrate that the goods have been removed from the UAE or have reached their destination.

Required Documents for Zero-Rating:

1. Custom Declaration and Commercial Evidence
The export of goods can be zero-rated if the following are provided:

• A Custom declaration that confirms the goods have been exported.
• Commercial evidence such as shipping or transport documentation proving that the goods have been exported.

2. Shipping Certificate and Official Evidence
The FTA has specified the types of official and commercial evidence acceptable to prove export:

• Official Evidence:
  • A certificate of export issued by UAE customs or an Exit Certificate confirming that goods have left the country.
  • Alternatively, an Entry Certificate issued by the destination country’s competent authorities confirming the goods have arrived at their destination.
• Commercial Evidence:
  • Documents provided by the transport or shipping company such as:
    • Airway Bill or Air Cargo Manifest
    • Bill of Lading or Sea Cargo Manifest
    • Land Transport Bill or Land Cargo Manifest
  • These documents act as proof of the transportation of goods from the UAE to outside the country.

3. Clarification of "Shipping Certificate":
The term “Shipping certificate” is clarified to mean a certificate issued by shipping or air transport companies or agents. This certificate serves as equivalent to commercial evidence and can be used when other documents, like airway bills or bills of lading, are not available.

Documents for Zero-Rating the Export of Goods (Before 15th November 2024):

• Option 1:
  • Freight certificate, Custom declaration, and Airway bill or Bill of Lading.
• Option 2:
  • Custom declaration showing customs suspension (if goods are under customs suspension).

Documents for Zero-Rating (From 15th November 2024):

• Option 1:
  • Custom declaration, and Bill of Lading or Airway Bill.
• Option 2:
  • Exit Certificate or Entry Certificate from the destination country, along with the Shipping Certificate.
• Option 3:
  • Custom declaration with customs suspension (if goods are under suspension).

Impact

This amendment provides greater clarity for exporters on the documentation needed to apply zero-rating to exports, reducing uncertainty and streamlining the VAT process. By clearly defining the acceptable forms of evidence and offering multiple options for compliance, the FTA helps businesses avoid potential issues with VAT claims on exports. The updates ensure that only genuine exports are zero-rated, enhancing transparency and supporting fair tax practices. This will make the process of claiming VAT refunds for exporters more straightforward and manageable, ultimately benefiting businesses involved in international trade.

Article 31: Zero-Rated Services

Amendments have been made to the zero-rating of specific services. Under the revised provisions, services that were previously considered as zero-rated exports of services will now be subject to the standard rate of VAT if the place of supply is within the UAE. This applies to services listed in clauses 3 to 8 of Article 30 and Article 31 of the VAT Decree Law.

Key Services Affected

1. Installation Services:
   • Services related to goods supplied by others will be taxed at the place where the service is performed.
2. Transport Services:
   • Services provided to lessees who are not taxable persons will be taxed at the location where the means of transport are made available.
3. Hospitality Services:
   • Restaurant, hotel, and catering services will be taxed at the location where the service is performed.
4. Cultural and Educational Services:
   • Taxed at the location where the service is provided.
5. Real Estate Services:
   • Taxed based on the location of the real estate.
6. Transportation Services:
   • Taxed at the location where the transportation begins.
7. Telecommunications and Electronic Services:
   • Taxed based on where the services are enjoyed, which generally refers to the location of the recipient.

Impact

This amendment brings certain services that were previously zero-rated back into the scope of the standard VAT rate when provided within the UAE. The new provisions make it clear that, even if these services are considered exports in some contexts, they will be taxed based on the place of supply within the UAE. This helps ensure consistency and fairness in the VAT system while clarifying the tax treatment for service providers across various sectors, including installation, transport, hospitality, real estate, and telecommunications. The change may lead to increased VAT compliance for businesses providing these services in the UAE.

Article 35(1)(b): VAT Treatment for Repair, Maintenance, and Conversion Services of Means of Transport

The recent amendment clarifies VAT treatment for services related to means of transport:

1. Repair Services: VAT applies if performed onboard the transport, covering repairs made during transit or at designated locations.
2. Maintenance Services: Includes onboard activities like inspection, testing, and cleaning, which ensure operational standards.
3. Conversion Services: Modifications must comply with Article 34 conditions post-conversion for VAT classification.

Impact
These clarifications offer better understanding of VAT application, distinguishing between onboard and offsite services. Businesses can accurately assess tax liabilities, improve compliance, and streamline VAT planning. Moreover, the transport sector benefits from clear rules, ensuring proper tax treatment for repairs, maintenance, and conversions, supporting cost-effective and efficient service delivery.

Article 38: Zero-Rating of Buildings for Charities

This amendment removes the definition of “Relevant Charitable Activity” from the VAT Decree Law. This change simplifies the process of applying zero-rating to buildings designed for charitable purposes, regardless of the specific nature of the charitable activities conducted within them.

Impact
By eliminating this definition, the amendment broadens the scope of zero-rating for charitable buildings, reducing ambiguity. This ensures that charitable organizations can focus on their operations without concern for VAT implications related to their facilities.

Article 46: Tax on Multi-Component Supplies

The amendment outlines VAT treatment for supplies comprising multiple components where no single component can be considered principal. In such cases, the VAT will be applied based on the overall nature of the combined supply, rather than assessing each component individually.

Example:
A business offers a home office setup package including:

• Goods: A desk and chair
• Services: Delivery and assembly

Previously, VAT might have been applied separately (goods taxed as standard-rated, services taxed as standard-rated). Now, the entire package could be taxed as a single supply based on its overall nature, simplifying tax calculations.

Impact
This change provides businesses with clear guidelines for handling composite supplies, simplifying VAT calculations. It reduces ambiguity, ensuring that bundled transactions are taxed appropriately, leading to better compliance and streamlined tax reporting.

Article 55 – Apportionment of Input Tax

The amendment to Article 55 focuses on specific circumstances when the tax year for a taxable person or group is altered, ensuring that input tax apportionment remains consistent with the updated tax year. These changes address three key situations:

1. Tax Deregistration:
   • If a taxable person applies for deregistration, the tax year will end on the last day they were registered as a taxable person. This ensures that any input tax paid up until that point is correctly accounted for.
2. Joining a Tax Group:
   • If a taxable person becomes part of a tax group, the tax year will end on the day before they join the group. This adjustment ensures proper apportionment of VAT in the transitional period, making sure the person’s VAT obligations are properly aligned with the tax group’s status.
3. Leaving a Tax Group:
   • If a taxable person leaves a tax group, the tax year ends on the last day they were part of the group. This prevents any overlap or confusion regarding input tax apportionment when a member transitions out of the group.

Shorter Tax Year
In cases where the tax year is less than twelve months (due to deregistration, joining, or leaving a tax group), the AED 250,000 threshold mentioned in Clause 11 will be calculated proportionally to match the duration of the shorter tax year.

Impact

• These clarifications simplify VAT reporting and compliance for businesses experiencing changes in their tax status, such as deregistration or group membership changes.
• By proportionally adjusting the AED 250,000 limit, the amendment ensures that businesses are not unfairly penalized or provided excess recovery for shorter periods.

Article 58 – Adjustments under the Capital Assets Scheme

The amendment to Article 58 introduces Clause 17, which specifies that the first tax year for a self-developed capital asset will be the year in which the asset is first used.

Example

A company develops its own machinery (a self-developed capital asset) in 2024, but the machinery is not used until January 2025.

According to Clause 17, the first tax year for the self-developed machinery will be the year it is first used, which is 2025. Therefore, the company would begin making VAT adjustments and reporting VAT on the asset starting in 2025, the year it starts using the machinery.

Impact

This change provides clarity and ensures that the business aligns its VAT calculations with the actual use of the capital asset, avoiding errors in tax filings and improving compliance.

Article 59 – Tax Invoices

The amendments to Article 59 introduce significant updates regarding the timeline and conditions for issuing tax invoices:

1. Simplified Tax Invoices:
   • For transactions up to AED 10,000, businesses must issue a simplified tax invoice on the date of supply. This simplifies the invoicing process for smaller transactions, ensuring prompt VAT reporting.
2. Regular Tax Invoices:
   • For transactions over AED 10,000, businesses have 14 days from the end of the calendar month in which the supply occurred to issue the tax invoice. This provides businesses with a reasonable timeframe to generate invoices and manage administrative tasks.
3. Agent as Registrant:
   • When a registered agent supplies goods or services on behalf of a principal, the agent may issue a Tax Invoice for that supply as if they were the supplier. In such cases, the principal must not issue a separate Tax Invoice. This is subject to the following conditions:  

- The agent must maintain adequate records to identify the principal’s name, address, and Tax Registration Number.  

- The principal must keep sufficient records to identify the agent’s name, address, and Tax Registration Number.  

1. Authority’s Directive:
   • The UAE Federal Tax Authority (FTA) has the discretion to mandate the issuance of a tax invoice in specific circumstances, even when a simplified invoice is allowed.

Impact
These amendments help streamline VAT compliance by clarifying the invoicing process for businesses, particularly when dealing with agents. The extended timeline for issuing tax invoices reduces pressure on businesses to issue invoices immediately. Additionally, by requiring agents to maintain sufficient records, the system fosters better transparency and reduces the risk of non-compliance.

Article 69 – Foreign Governments

Under Article 69, foreign governments, international organizations, diplomatic bodies, and missions must submit VAT refund requests within 36 months from the date the tax was incurred. Alternatively, they may follow the timeline specified in relevant international treaties or agreements applicable in the UAE.

Impact
The amendment introduces a clear timeline for VAT refund applications, promoting transparency and ensuring timely compliance. This change provides greater clarity and operational efficiency for eligible entities. Businesses should review their VAT processes to align with the updated regulations and avoid potential delays or non-compliance issues.

Conclusion: The Importance of Staying Updated and Compliant

With these amendments, businesses across the UAE have new guidelines to follow, affecting everything from digital assets to health insurance. Staying VAT-compliant isn’t just about avoiding fines—it’s about maintaining trust, optimizing financial practices, and securing a strong market position. For personalized support and to navigate these changes effectively, consider reaching out to VAT advisory services that can help your business remain compliant and competitive. Filing Buddy is here to support businesses in UAE compliance.