FTI Consulting UAE VAT Update
Amendments to The UAE VAT Executive Relations
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November 29, 2024
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Since the introduction of Corporate Tax in the United Arab Emirates (‘UAE’), the tax landscape has been abuzz with discussions surrounding this new tax regime. Over the past year and a half, numerous updates, guides, and clarifications on Corporate Tax laws have kept tax professionals and industry experts deeply engaged. However, the Federal Tax Authority (‘FTA’) has now shifted the focus back to the Value Added Tax (‘VAT’) by releasing an important update to the UAE VAT Executive Regulations vide Cabinet Decision No. 100 of 2024 (released on 2 October 2024). Some of these updates represent significant changes in the UAE VAT landscape, while others are clarificatory in nature aiming to make clear the FTA’s position and help the taxpayers streamline compliance with the UAE VAT Law.
Effective Date of The Amendments
Majority of the amendments introduced to the UAE VAT Executive Regulations will come into effect from 15 November 2024. However, certain amendments have been made effective retrospectively, with some being applicable from as early as 2018 and others from 2023. These retroactive changes may require businesses to revisit past VAT positions and ensure that they are aligned with the updated regulations.
Analysis of The Key Amendments
Significant amendments include the granting of an exemption to fund management services and the transfer and management of virtual assets, documentation to be retained for export of goods outside UAE, provisions pertaining to the export of services, input tax recoverability on expenses incurred towards health insurance for employees, among others.
We have outlined below the key updates and amendments made by the FTA, along with our analysis of their potential impact on businesses and VAT compliance moving forward:
Particulars — Update in brief and our comments
Article 2 — Supply of Goods
Update in brief: The FTA has broadened thecope of the supply of goods clause to include real estate transactions that involve any form of disposal resulting in the transfer of ownership from one person to another.
FTI Consulting Comments:
The intention seems to be to include instances where ownership is transferred other than by way of sale / lease (such as transfer of a beneficial interest / ownership in a property) ensuring that such transactions are also covered within the ambit of the UAE VAT Law.
Article 3 (bis) — Exceptions of Supplies
Update in brief: TA new Article 3 (bis) has been inserted which outlines exceptions to the definition of supplies under the UAE VAT Law. The exceptions now include the following:
- The grant or transfer of ownership or disposal of government buildings, real estate assets and other projects of a similar nature from a government entity to another government entity; and
- The grant or transfer of the right to use, exploit or utilise the government buildings, real estate assets and other projects of a similar nature from a government entity to another government entity, including any granted or transferred right of use, exploitation, or utilisation with effect from 1 January 2023.
This Article also outlines the specific assets / projects that should be covered within the ambit of “Government buildings, real estate assets and other projects of similar nature.”
FTI Consulting Comments:
The proposed amendment is a significant development for government entities, as it streamlines the process of asset transfers by clarifying that these transactions will not be classified as supplies under the UAE VAT Law. This simplification not only reduces administrative burden but also enhances operational efficiency, allowing government entities to allocate resources more effectively. By excluding these transfers from VAT considerations, the amendment fosters a more seamless management of assets and financial transparency.
Article 5 — Exceptions Related to Deemed Supply
Update in brief: The provisions of deemed supply have been rationalised and now state that a supply shall not be considered as a deemed supply if both the supplier and the recipient are either government entities or charities and the total value of output tax payable does not exceed AED 250,000 during a period of 12 months.
FTI Consulting comments:
Transactions between government entities or charities shall not be considered as deemed supply if the same falls within the prescribed threshold.
Article 29 — Accounting for Tax on the Profit Margin
Update in brief: A new Article 29 (5) has been inserted which defines the purchase prices for the purpose of computing the profit margin. The purchase price has been defined to mean the price of the goods and it should also include any costs or fees incurred to purchase such goods.
FTI Consulting comments:
The FTA aims to eliminate any uncertainty that taxpayers faced historically regarding the inclusion / exclusion of any ancillary costs or charges associated with the determination of purchase price. This not only provides taxpayers with a more straightforward structure for computing their profit margin but also enhances compliance by ensuring a consistent interpretation of what forms part of the purchase price.
While the above amendment is welcome news, uncertainty persists as to whether post-purchase expenses, such as repairing, painting or refurbishing goods to make the goods saleable should be deducted for calculating the profit margin or not.
Article 30 — Zero-rating the Export of Goods
Update in brief: The FTA has now outlined the specific documents that a taxpayer must maintain to claim the benefit of zero-rating on the export of goods to a location outside the UAE. It further clarifies the zero-rating benefit, which can be claimed if the taxpayer possesses / keeps on record any of the following documents:
- A customs declaration and commercial evidence proving the export of the goods;
- A shipping certificate and official evidence proving the export;
- A customs declaration demonstrating that the goods are under customs duty suspension, confirming their status.
The documents mentioned above are applicable for claiming the zero-rate benefit for direct exports and indirect exports.
The definition of ‘Official Evidence’ has been amended to mean i) the export certificate issued by the customs departments in the state or a clearance certificate issued by these departments or the competent authorities in the state regarding the goods leaving the state after verifying their departure from the state, or a document or clearance certificate certified by the competent authorities in the country of destination stating the entry of the goods into the country.
Furthermore, the definition of ‘Commercial Evidence’ has also been updated to mean the document issued by sea, air or land transport companies and agents, which proves the transfer and departure of the goods from the state to outside the state, and includes any of the following documents:
- Air waybill or air manifest
- Sea waybill or sea manifest
- Land waybill, or land manifest
FTI Consulting comments:
Historically, the FTA has been placing emphasis on the retention of exit certificates (as the primary documents) to evidence that the goods had left the country, without which the zero rate benefit on export of goods was typically denied. Alternatively, the exporters had an option to apply for an administrative exception to submit alternate documentary evidence as proof of export instead of the customs exit certificate.
With the recent amendment, the FTA has eased the burden of retaining exit certificates by allowing the exporters / taxpayers to retain a certificate issued by the competent authorities in the destination country evidencing the entry of the goods into that country, as an alternate document.
The amendment essentially aligns the documentation for proof of export with recent changes in the excise legislation.
Article 31 — Zero-rating the Export of Services
Update in brief: A new exception has been introduced to the general provisions for taking the zero-rating benefit for the export of services.
This amendment provides that if the place of supply of service falls within the UAE, as determined by the special place of supply rules under Articles 30 (3) to 30 (8) and Article 31 of the UAE VAT Law, the taxpayer shall not be eligible to take the zero-rating benefit for such services.
Article 30 (3) to 30 (8) and Article 31 of the UAE VAT Law provide the basis for the determination of place of supply for such as services related to goods, the supply of means of transport, restaurant & hotel services, event-based services, real estate related services, transportation services, and telecommunication & electronic services.
FTI Consulting comments:
Until now, to claim the zero-rate benefit on the export of services, two conditions had to be fulfilled:
- The services must be supplied to a person who does not have a place of residence in the UAE and is outside the UAE at the time the services are performed; and
- The services must not be directly connected with real estate or movable personal assets located in the UAE.
While the special place of supply (“POS”) rules have been enshrined in the UAE VAT Law since its introduction, they were not particularly considered to determine if a particular supply should be zerorated or not. However, with this amendment, for special cases where the POS is determined to be in the UAE in terms of Article 30 (3) to 30 (8) and Article 31 of the UAE VAT Law, the zero rate benefit will not be available from 15 November 2024.
We believe the new exception is clarificatory – since the said services, by virtue of their nature, have largely been subject to VAT at 5%. However, there could have been instances where certain services could have been zero-rated as there was no specific requirement under Article 31 of the UAE VAT Executive Regulations that the zero-rate benefit could be denied if the POS could be considered to be in the UAE. The latest amendment settles the issue of the zero-rating of certain performance or location-based services.
Article 33 — Zero-rating International Transportation Services for Passengers and Goods
Update in brief: The FTA has clarified that the domestic / local transportation of goods within the UAE would be zerorated only if the said domestic / local transportation services are also rendered by the same supplier / person who is performing the international leg of the transaction.
FTI Consulting comments:
The above position has also been clarified in multiple private rulings sought by taxpayers in the past. This recent clarification from the FTA is a welcome development, as it resolves any ambiguity surrounding the tax treatment of last-mile deliveries performed within the UAE.
Article 31 — Zero-rating the Export of Services
Update in brief: The FTA has clearly defined the scope of the zero-rating and specified certain services that would be zero-rated if supplied directly to operate, repair, maintain or convert the means of transport. The services covered as per the amendment are mentioned below:
- Repair services if the repair is carried out on board the means of transport
- Maintenance services if the maintenance is carried out on board the means of transport, including inspection, and testing of the means of transport, their parts and equipment, cleaning, repainting and similar services
- Conversion services provided that such means of transport, even after completion of the conversion process, qualifies as ‘means of transport’ prescribed in Article 34 of UAE VAT Executive Regulations
FTI Consulting comments:
This amendment is largely clarificatory in nature. The guidance helps ensure that taxpayers can accurately determine the tax treatment of their services, reducing uncertainty and potential compliance issues. By specifying these conditions, the FTA has made it easier for businesses to apply the correct VAT treatment, thus avoiding penalties or disputes, and ensuring smooth operations within the framework of the UAE VAT Law.
Article 37 — Residential buildings
Update in brief: The definition of a “residential building” under the UAE VAT law has been amended to specifically exclude “hotel apartments” from its scope.
FTI Consulting comments:
The amendment is merely clarificatory in nature. While “hotels” and “serviced apartments” have always been excluded from the definition of a residential building under UAE VAT law, the FTA has now explicitly mentioned "hotel apartments" to eliminate any uncertainty amongst the taxpayers.
Article 42 — Tax Treatment of Financial Services – Broadening the ambit of exemption
Update in brief: The definition of financial services in Article 42 (2) of the UAE VAT Executive Regulations has been expanded to include the following:
- Investment fund management services;
- Transferring ownership of virtual assets including virtual currencies;
- Transferring virtual assets;
- Safeguarding, managing and enabling the control of virtual assets.
‘Investment fund management services’ have been defined to mean services provided by the fund manager independently in return for a fee to funds licensed by a competent authority in the state, including but not limited to managing the fund’s operations and managing the investment for or on behalf of the fund and monitoring and improving the fund’s performance.
Additionally, the term ‘virtual assets’ has been defined under Article 1 of the UAE VAT Executive Regulations as a digital representation of value that can be digitally traded or converted and can be used for investment purposes and does not include digital representations of fiat currencies or financial securities.
The scope of the exemption under Article 42 (3) of the UAE VAT Executive Regulations has been expanded to include the following:
- Investment fund management services with effect from 15 November 2024;
- Transfer of virtual assets with effect from 1 January 2018; and
- Safeguarding, managing and enabling control of virtual assets with effect from 15 November 2024.
FTI Consulting comments:
Tax implications on virtual assets:
- There has been considerable ambiguity among taxpayers regarding the VAT treatment of the transfer of virtual or digital assets, including cryptocurrencies, and this is the first time that the FTA has officially recognised / provided the tax treatment to be adopted for digital / virtual assets. The transfer of such assets, along with services related to safeguarding, managing and enabling control of such assets, has now been retrospectively exempted from VAT (w.e.f. 1 January 2018). This means that taxpayers would have to revisit their historical records to determine the correct tax position for such transactions.
- It is crucial to note that any expenses incurred (whether directly attributable to the above mentioned activities or common expenses) and recovered in previous VAT returns must be carefully analysed. Directly attributable expenses should be classified as non-recoverable, and taxpayers would be required to perform an input tax apportionment exercise for common expenses.
- Additionally, an annual input tax washup exercise would also be required historically.
- Despite the retrospective amendment, taxpayers may not be able to correct / amend VAT returns for the period from January 2018 to September 2019, as the statute of limitations (i.e., five years) for these periods has already expired. It will be interesting to see the FTA’s position on this.
Tax implications on investment fund management services:
- Considering the transaction sphere and fund activities in the UAE, a majority of fund managers located in the UAE provide management services to domestic funds as well as overseas funds / SPVs. While VAT at 5% was being charged on services rendered to domestic funds / SPVs, the provision of management services to overseas funds / SPVs has been subject to 0% VAT historically. However, w.e.f. 15 November 2024, management services rendered to domestic funds / SPVs licensed by a competent authority should be exempt from VAT. On the other hand, services rendered to overseas funds / SPVs should continue to be zero-rated in terms of Article 42 (7) read with Article 31 of the UAE VAT Executive Regulations.
- As a result, any expenses incurred for the provision of fund management services to recipients located within the UAE should not be recoverable in the hands of the management entities. The taxpayers shall also be required to perform input tax apportionment for common expenses. Additionally, the management entities must also conduct an annual input tax washup exercise.
- It is important to note that since the VAT exemption takes effect on 15 November 2024, fund managers must carefully compute the value of their supplies and issue the corresponding invoices with VAT on or before that date.
- Furthermore, fund managers should reassess their business operations in light of these recent updates as they may require some of the domestic fund managers to apply for de-registration under the UAE VAT Law (if the services rendered by them are not taxable due to the said changes in the UAE VAT Executive Regulations).
Article 46 — Tax on Supplies of More Than One Component
Update in brief: The FTA has clarified the tax treatment in the case of a single composite supply. The tax treatment applicable to the nature / characteristics of the supply shall now be considered for computing the tax in the absence of a principal component.
FTI Consulting comments:
The amendment offers clarity on the appropriate tax treatment to be applied in situations where a single composite supply does not have a distinct main or principal component.
Article 53 — Non-recoverable Input tax – Update on health insurance
Update in brief: Input tax can now be recovered on expenses incurred by an employer when obtaining health insurance for their employees and their families. This includes enhanced health insurance coverage, provided it is within the specified limits of one spouse and up to three children under the age of 18 years.
FTI Consulting comments:
Until now, input tax on expenses incurred by an employer towards health insurance for an employee's family was recoverable only if there was a legal obligation to provide such insurance. This legal obligation varied across different Emirates within UAE based on the labour laws prevalent in each Emirate. For instance, in Abu Dhabi input tax recovery was allowed for the medical insurance of the employee's spouse and up to three children (under 18 years), while the northern Emirates did not have a similar legal / statutory requirement. As a result, employers could only recover input tax to the extent legally allowed under the applicable labour laws, with any additional amounts paid becoming a cost to the employer / company.
The recent amendment has streamlined the tax treatment across the country, allowing employers to recover input tax, not only for the employee, but also for the employee’s spouse and up to three children (under 18 years) across all Emirates in the UAE. This provides uniformity in tax recovery and reduces the financial burden on employers. The said amendment should equally apply for all employees (UAE nationals and expats).
Please note that the amendment is effective from 15 November 2024. Accordingly, input tax on insurance coverage before the effective date should be recovered on the basis of the legal requirement in the respective Emirate, whereas taxpayers can recover the input tax on health insurance expenses attributable to the coverage period after 15 November 2024 based on the amended provisions of the UAE VAT Executive Regulations.
Article 55 — Apportionment of Input Tax
Update in brief: Article 55 (4) of the UAE VAT Executive Regulations has been amended to mark the end of the tax year in specific circumstances as follows:
- If the taxable person cancels his tax registration, the tax year will end on the last day on which the person is subject to tax.
- If a member joins a tax group, the tax year will end on the last day before joining the tax group.
- If a member leaves a tax group, the tax year will end on the last day on which the person remains a member of the tax group.
Additionally, the FTA has clarified the applicability of the yearly 'actual use' adjustment limit of AED 250,000. It has been clarified that in cases where the tax year is less than 12 months, the limit of AED 250,000 should also be adjusted proportionately.
The FTA also provided an option to taxpayers to fix the input tax recovery rate based on the recovery rate from the previous tax year. Taxpayers must apply for approval to use this option, but the final decision remains at the discretion of the FTA.
FTI Consulting comments:
Previously, taxpayers were required to adhere strictly to the absolute actual use limit (i.e., AED 250,000), regardless of the specific period within the tax year. The introduction of proportionate calculation for the actual use limit will now require more businesses to perform actual-use-based adjustments during the annual wash-up / apportionment exercise.
Furthermore, an option to fix the recovery rate based on the previous tax year is a welcome development, especially for taxpayers whose business operations, nature and volume of revenues and expenses remain consistent year after year.
Article 59 — Tax Invoices
Update in brief: Article 67 of the UAE VAT Law requires the issuance of a tax invoice within 14 days from the date of supply. The timeline for issuance of tax invoices has been amended for the specific situations outlined below:
- A simplified tax invoice must be issued on the day the date of supply is triggered
- A summary tax invoice can be issued and delivered to the recipient within 14 days from the end of the calendar month in which the date of supply is triggered
Additionally, it is clarified that simplified tax invoices cannot be issued for supplies taxable under the reverse charge mechanism.
FTI Consulting comments:
The FTA has amended the timelines for issuing simplified and summary tax invoices. While additional time has been granted for issuing summary tax invoices, simplified tax invoices must now be issued on the same day the date of supply is triggered.
Businesses will need to carefully review their invoicing procedures / mechanisms to ensure compliance with the UAE VAT law. This may also require re-engineering or updating IT systems to accurately record supplies and ensure that invoices are issued within the specified timelines, thereby avoiding any risk of non-compliance and imposition of penalties.
Article 60 — Tax Credit Notes
Update in brief: The FTA has clarified that when multiple tax credit notes are issued for the same tax invoice, the value of the supply reflected in any subsequent tax credit note should be the adjusted value, taking into account the modifications made after the issuance of the previous tax credit note.
Additionally, specific record-keeping requirements have been inserted in cases where an agent issues tax credit notes on behalf of the principal. Based on this amendment, the principal supplier and agents are required to maintain records viz., name, address and TRN of the principal supplier / agent.
FTI Consulting comments:
The amendments provide a clear guideline for businesses on the taxable value to be considered in case of multiple tax credit notes and the record-keeping requirements where the document is issued by an agent on behalf of the principal supplier.
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Published
November 29, 2024
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