On 23 August 2017, the UAE published Federal Decree Law No. 8 of 2017 on Value Added Tax (“VAT Law”) which comes into effect on 1 January 2018 and sets out the framework within which VAT will be levied in the UAE. We have set out below the key points in relation to the implementation of VAT based on the new UAE VAT Law and the guides published by the Federal Tax Authority (“FTA”).
Summary “UAE VAT Law”
• Applicability: VAT will apply on the supply of goods and services in the UAE (including imports) by a taxable person for consideration and during the course of business, except on the exempt goods and services as specified under the UAE VAT Law.
• Tax Rate and Implementation: VAT will be implemented across the UAE on 1 January 2018 at a standard rate of 5% on any supply or import of goods or services.
• Zero-rated goods: VAT will be charged at 0% for the following main categories of supplies:
(i) Exports of goods and services outside of the GCC countries;
(ii) International transportation, and related supplies;
(iii) Supplies of certain sea, air and land means of transportation (such as aircrafts and ships);
(iv) Certain investment grade precious metals (e.g. gold, silver, of 99% purity);
(v) Newly constructed residential properties, that are supplied for the first time within 3 years of their construction;
(vi) Supply of certain education services, and supply of relevant goods and services;
(vii) Supply of certain healthcare services, and supply of relevant goods and services.
• Exemptions: The UAE VAT Law exempts the following supplies from VAT:
(i) Financial services as specified in Executive Regulations (our update on the Executive Regulations can now be found here.);
(ii) Supply of residential buildings through sale or lease (except those which are specifically zero-rated);
(iii) Supply of bare land;
(iv) Supply of local passenger transport.
Note that while no VAT is payable on exempted supplies, the supplier cannot claim any deduction for input tax already paid from the FTA.
• Place of Supply: The place of supply determines whether a supply is made in the UAE or outside the UAE. As such, if the supply is treated as made outside the UAE, VAT is not chargeable. However, if a supply is made in the UAE, VAT may be chargeable.
In relation to goods, the basic rule is that the place of supply is the location of goods when the supply takes place subject to special rules applying to certain categories such as water & energy and cross-border supplies. Accordingly, VAT is chargeable for domestic supplies and exports. In the case of business-to-business imports into the UAE from outside the UAE, the recipient accounts for VAT under the reverse charge mechanism (explained below).
In relation to services, the place of supply is where the supplier has the place of residence subject to specific rules applying to real estate, transport, telecommunications, and cultural, artistic, sporting or similar activities. In cases where a VAT registered person imports services into the UAE which would be subject to VAT if purchased in the UAE, the VAT registered purchaser must account for VAT under the reverse charge mechanism.
• Taxable Person and Mandatory Registration: Taxable person means any person (corporation or not) conducting an economic activity for the purpose of generating income and whose value of the annual supplies in the UAE exceeds the mandatory registration threshold over the previous 12-month period or is expected to exceed the mandatory registration threshold in the next 30 days. Currently, the threshold for mandatory registration is set at AED 375,000. The FTA is likely to commence registrations during this month.
• Voluntary Registration: A business may still apply to register for VAT if they do not meet the mandatory registration criteria if value of annual supplies in the UAE exceeds the voluntary registration threshold over the previous 12-month period or is expected to exceed the voluntary registration threshold in the next 30 days. Currently, the thresholds for voluntary registration is AED 187,500.
• VAT Groups: Under the UAE VAT Law, businesses that are related or associated parties may be able to register as a VAT group which could be a useful tool to simplify accounting for VAT.
• Reverse Charge Mechanism: This is a mechanism under which the recipient of goods or services is required to pay VAT instead of the supplier, when the supplier is not a taxable person in the UAE where the supply has been made. This would generally apply to cross-border business-to-business transactions to relieve a non-resident supplier from the requirement to register and account for VAT in the country of the purchaser. As such, the taxable person will account for VAT on its normal VAT return and may be able to claim that VAT back on the same return, subject to the normal VAT recovery rules.
• Stay up-to-date: The FTA has launched a new website, www.tax.gov.ae, which sets out the key updates in relation to the upcoming introduction of VAT and excise tax in the UAE. We are also preparing specialist guides and further updates on VAT.