What is VAT?

VAT is a transaction-based indirect tax, which is charged and collected at each stage
of the supply chain by legal and natural persons (“persons”) which meet the
requirements to be registered for VAT.
Thus, persons which are either registered or are required to register for VAT (known
as “taxable persons”) charge VAT to their customers on taxable supplies of goods or
services. A taxable supply is defined in the VAT legislation as a “supply of goods or
services for a consideration by a person conducting business in the UAE, and does not
include an exempt supply”. As a consequence, for a supply to be a taxable supply,
the following conditions must be met:
• there needs to be a supply of goods or services;
• the supply has to be for consideration;
• the supply has to be made by a person who is conducting business in the UAE;
and
• the supply should not be an exempt supply.
Taxable supplies may either be subject to the standard rate of 5% or zero rate
(i.e. 0%). A supply cannot be a taxable supply if it is an exempt supply. Where a supply
is neither a taxable supply nor an exempt supply, it will be outside the scope of UAE
VAT. VAT which taxable persons charge to their customers is known as “output tax”. On a
periodic basis, taxable persons are required to account for output tax to the FTA. This
is done by submitting a periodic tax return (also known as a “VAT return”).
It should be noted that taxable persons will typically be charged VAT (known as “input
tax”) by their suppliers when they acquire goods and services. Taxable persons are
generally able to recover input tax, subject to certain conditions. Where the conditions
allowing recovery of input tax are met, taxable persons are able to deduct this input
tax from the value of output tax declared in the same VAT return.
The difference between the output tax and input tax reported by a taxable person in
their VAT returns is either the net VAT payable to the FTA (if the output tax exceeds
the input tax) or net VAT recoverable from the FTA (if the input tax exceeds the output
tax) for that specific tax return period.

What are VAT registration requirements?
VAT registration process as per below details:

As mentioned above, a person is only required to account for VAT in the UAE, if it is
a taxable person – that is, if the person is either registered for VAT or is obligated to
register for VAT. It is, therefore, necessary to determine when a person is required to
be registered for VAT.
VAT registration may be either mandatory or voluntary. It should be noted that
different registration requirements and conditions may apply to both mandatory and
voluntary registrations depending on whether a person has a place of residence in the
UAE. As a consequence, it is important for a person to know whether or not it is
resident in the UAE when considering which registration rules apply to it.
A person would have a place of residence in the UAE for the purposes of VAT
registration if the person has a place of establishment or fixed establishment in the
UAE. The terms are defined in the Decree-Law:4
• “Place of Establishment” is the place where a business is legally established in
a country pursuant to the decision of its establishment, in which significant
management decisions are taken or central management functions are
conducted.
• “Fixed Establishment” is any fixed place of business, other than the Place of
Establishment, in which the person conducts his business regularly or
permanently and where sufficient human and technology resources exist to
enable the person to supply or acquire goods or services, including the person’s
branches.

What are mandatory points for registration?
A person resident in the UAE is required to register for VAT if any of the following
apply:5
• the total value of their taxable supplies made within the UAE and imports into
the UAE exceeded AED 375,000 over the previous 12-month period; or
• the person anticipates that the total value of their taxable supplies made within
the UAE and imports into the UAE will exceed AED 375,000 in the next 30 days.
Supplies of goods or services made in the UAE in the course of business.
• Any goods or services that the person has imported into the UAE that would
have been subject to VAT had they been supplied in the UAE.
The person should not include in this calculation the value of any supplies which are
either exempt from VAT or are outside the scope of UAE VAT.

What does a business need to do to prepare for VAT?
Businesses will need to meet certain requirements to fulfil their tax obligations. To fully comply with VAT, businesses will need to consider the VAT impact on their core operations, financial management and book-keeping, technology, and perhaps even their human resource mix (e.g., accountants and tax advisors). It is essential that businesses try to understand the implications of VAT and make every effort to align their business model to government reporting and compliance requirements.

How will real estate be treated?

The VAT treatment of real estate will depend on whether it is a commercial or residential property.

Supplies (including sales or leases) of commercial properties will be taxable at the standard VAT rate (i.e 5%).

On the other hand, supplies of residential properties will generally be exempt from VAT. This will ensure that VAT would not constitute an irrecoverable cost to persons who buy their own properties. In order to ensure that real estate developers can recover VAT on construction of residential properties, the first supply of residential properties (through sale or lease) within 3 years from their completion will be zero-rated.

Will there be VAT grouping?
Businesses that satisfy certain requirements covered under the Legislation (such as being resident in the UAE and being related/associated parties) will be able to register as a VAT group. VAT grouping would generally simplify accounting for VAT.

How will insurance be treated?
Generally, insurance (vehicle, medical, etc) is taxable. Life insurance, however, is an exempt service.

How will financial services be treated?
Fee based financial services are subject to VAT while margin based products are exempt.

How will Islamic finance be treated?

Islamic finance products are consistent with the principles of sharia and therefore often operate differently from financial products that are common internationally.

To ensure that there are no inconsistencies between the VAT treatment of standard financial services and Islamic finance products, the treatment of Islamic finance products is aligned with the treatment of similar standard financial services.

How quickly will refunds be released?
Refunds will be made after the receipt of the application and subject to verification checks, with a particular focus on avoiding fraud.

Will VAT be paid on imports?

VAT is due on the goods and services purchased from abroad.

In case the recipient in the State is a registered person with the Federal Tax Authority for VAT purposes, VAT would be due on that import using a reverse charge mechanism.

In case the recipient in the State is a non-registered person for VAT purposes, VAT would need to be paid before the goods are released to the person.

Will the goods exempt from customs duties also be exempt from VAT?
No. Imported goods may be exempt from customs duties but still be subject to VAT.

Will there be a profit margin scheme?
To avoid double taxation where second hand goods are acquired by a registered person from an unregistered person for the purpose of resale, the VAT-registered person will be able to account for VAT on sales of second hand goods with reference to the difference between the purchase price of the goods and the sale price of the goods (that is, the profit margin). The VAT which must be accounted for by the registered person will be included in the profit margin. Further details of the conditions to be met in order to apply this mechanism can be found in the Executive Regulations of the Federal Decree-Law No.(8) of 2017 on Value Added Tax.