VAT law in the UAE and absolutely essential points foreign companies should be aware
This short Briefing Note summarises VAT law in the UAE and the absolutely essential points of which foreign companies should be aware.
The 6 Gulf Cooperation Council (GCC) states entered into a Value Added Tax (VAT) Treaty in 2016 which led the way for the introduction of VAT in the Gulf region. It was a complex treaty setting out the principles of VAT to be adopted in similar fashion by all of the GCC states. The treaty is not law and it has not yet been followed by all the GCC states. Saudi Arabia, the UAE and Bahrain have enacted VAT laws and Oman will implement VAT in April 2021. The treaty was indicative of what each state should do but the laws of each state, whilst similar, are neither identical nor subject to a uniform interpretation. Advice on the VAT law of one state cannot be assumed to be good for the others.
Since 1 January 2018, the UAE's VAT law has been in effect and a body of law is developing. The Federal Tax Authority (FTA) of the UAE administers the law and has issued a number of clarifications.
What is VAT?
VAT is a tax that is calculated on each supply of goods or services within the territory, payable by the purchaser (or in the case of an import into the territory, payable by the importer). It applies on each step in the supply chain (e.g. (i) on import by the importer; (ii) on transfer to a retailer; and (iii) on sale to the end user). A business entity with a presence in the UAE must:
- Register for VAT in the UAE if its annual turnover exceeds AED 375,000 (voluntary registration is allowed if turnover is above AED 185,000)
- Pay VAT on the goods and services it receives in the UAE
- Collect VAT on the goods or services it supplies within the territory
- Account to the FTA for the VAT it collects (offsetting the VAT it has paid).
Note that the export of goods or services from the UAE does not attract VAT (unless it is to another GCC implementing state).
What is the rate of VAT in the UAE?
The UAE adopted VAT at a basic rate of 5% on 1 January 2018. That rate can, of course, be changed by later legislation.
There exist both zero-rated supplies and exempt supplies. The categories exempted or zero-rated are set out in the law (oil, education, healthcare and some financial services are the most important cases).
What about imports to a UAE Free Zone?
Fenced and gated Free Zones, such as the Jebel Ali Free Zone, are outside the territory for VAT purposes. Transfer occurs at the gate upon exit from the free zone entering the non-free zone part of the UAE.
Who invoices the VAT on an import into the UAE?
The foreign exporter is unaffected by UAE legislation and takes no action. It is the UAE importer who must account for the VAT on the import by reverse-charging itself and accounting to the FTA.
Should a UAE registered business (branch or company) pay VAT on invoices from a consultant based outside the UAE?
Yes. The reverse charge mechanism applies equally to services as well as goods coming from overseas.
If an overseas office instructs lawyers in the UAE on matters affecting its business in the UAE, will UAE VAT be payable?
Yes, if there is a local presence, because it will be assumed that the services are provided to the local business. If the services are associated with the initial creation of that local business, then strictly the period before completion of the establishment should be invoiced overseas, without VAT, and subsequent advice should be invoiced locally, inclusive of VAT.
If a local business is sold, will VAT apply on the sale?
VAT will not apply to the sale of shares. If the assets of the business are sold as a going concern then a 2019 FTA announcement clarified that VAT will not apply provided the vendor can satisfy three tests:
- There must be a transfer of the whole or an independent part of a business
- The transfer must be made to a taxable person
- The recipient intends to continue the business which was transferred
What form must a UAE VAT invoice take?
A Public Clarification document issued by FTA makes the following key points:
- Whenever a taxable supply is made, a tax invoice must be issued and delivered to the recipient.
- A tax invoice must be provided in all circumstances where a taxable supply is made.
- A simplified tax invoice does not have to show the net value (the value before tax) for each line item (where a simplified invoice is permitted). A full tax invoice must show the tax value and net value for each line item; however the gross value (the total including tax) does not have to be shown for each line item.
- If a tax invoice is issued in a foreign currency (e.g. USD), it must show the tax amount converted to AED and the approved exchange rate used for the conversion.
- Rounding on tax invoices must be to the nearest Fil on a line item basis.
The rate of 5% VAT in the UAE is relatively low in comparison with international comparators. However, the penalties for non-compliance are some of the highest in the world and the requirements of UAE law should not be ignored, or overlooked. There are many complexities in the law and strict periods for compliance. For further advice on UAE law please contact the author.