On the 4th of October 2024, Federal Tax Authority (FTA), a tax authority of the United Arab Emirates, has published a new Cabinet Decision that significantly changed the VAT legal framework.
Value Added Tax in the UAE is regulated by two main acts:
– Federal Decree-Law No. 8 of 2017 on Value Added Tax, with its amendments (“VAT Act”) that is treated as a main framework for VAT regulations and
– Cabinet Decision No. 52 of 2017 – The Executive Regulation on the Federal Decree-Law No. 8 of 2017 on Value Added Tax, with its amendments (“VAT ER”) being a more detailed VAT legal act.
The latter legal act was changed recently by the Cabinet. The Decision introduced two (2) new Articles and amended thirty-three (33) of the existing provisions. The scope of changes brought by the Decision is vast as close to half of all articles are adjusted.
The Decision comes into force on the 15th of November 2024.
In this tax alert, we provide an overview of those changes with their practical implications.
Executive Summary – most important changes
a. The Decision introduced Virtual Assets and assigned tax treatment
Virtual Assets (VA) were intended to correspond with cryptocurrencies, however, it appears that not all cryptocurrencies can classify as VA (e.g. Filecoin or USDT or any other stablecoins). Trading of VA is considered tax exempt, i.e. any tax incurred on costs associated with the sale (e.g. advisory costs) will be not recoverable. It should be noted that regulations related to VA are introduced retrospectively from 1st of January 2018. Hence, those entities trading VA should immediately reassess their tax position.
b. Real Estate transactions between Governmental Entities considered outside the scope
Considering real estate transactions between Governmental Entities (GE) as regular sale and purchase leads to a situation where one GE reports significant amount of tax due to such sale and another GE typically reports significant excess of tax for refund effectively making the FTA as intermediary in passing tax between GE. To avoid that such transactions will be considered as outside the scope.
c. Increased limit of output tax not triggering Deemed Supply for Governmental Entities and Charities
Taxpayers sometimes purchase Goods or Services for which input tax is recovered but those Goods or Services are never used for business purposes. Under the VAT ER the entities do not have to self-impose VAT if the amount of such tax does not exceed AED 2,000 within 12-month period. Due to the nature of activities by the Governmental Entities and Charities (e.g. gifts for officials, etc.) this limit was often not sufficient. As a result, GE and Charities can benefit from the 15th of November from the increased output tax limit of AED 250,000 that does not trigger obligation to self-impose tax.
d. Changes in registration and deregistration process
The Decision allows to voluntarily register for VAT purposes if the applicant can prove that he intends to make the business. This change is to align with the current practice, where businesses were registered based on the intention to make business (the VAT ER wording technically does not allow that). The Decision clarifies that deregistration does not exonerate deregistrant from the future obligation to register for VAT if he is obliged to do so. According to the Decision, the FTA can make decision to deregister a taxpayer from VAT if keeping his registration “may prejudice the integrity of the Tax system”. This can be applied in practice to entities making entirely zero-rated supplies and incurring local input tax (i.e. being on a constant refund position). Furthermore, a person previously exempted from the registration obligation needs to notify the FTA not only when his circumstances furnishing the exception ceased but also when due to the person’s change of
circumstances (e.g. different business model) they are likely to be ceased.
e. Direct and Indirect Export – change in documentation
Taxpayer can apply zero rate to export of goods only if he has sufficient documents aimed at proving that goods actually left the UAE. Despite the wording in the VAT ER allowing relatively broad catalogue of documents that should be sufficient for zero rate application, in practice exit certificates were requested by the FTA to secure zero rate treatment. Such documents were not issued in each case, hence the change in the Decision. From 15 th of November the taxpayer can provide combination of the customs declaration and Commercial Evidence, combination of Shipping Certificate and Official Evidence or customs declaration proving suspension of customs duty to justify zero rate treatment. Importantly, document from the authorities of the foreign country confirming receipt of goods is also recognized as one of the documents that can be used to defend zero rate application. Nonetheless, the Decision still leaves the FTA with a discretion to disregard documents if they consider them insufficient to prove that goods left the UAE.
f. Zero-rate application for Export of Services
From 15th of November, a transaction that is subject to special place of supply rules will not be able to benefit from zero-rate treatment (even if its recipient is located outside the State). This can lead to situations where non-resident entities will incur local VAT that will be recoverable only via the special procedure (refund for Foreign Business Visitors).
g. Fund Management Services exempted from VAT
Services offered by fund managers to licensed funds, including but not limited to management of the fund’s operations, management of investments for or on behalf of the fund, monitoring and improvement of the fund’s performance are going to be considered as exempt financial service. That will result in full blockage of any input tax incurred by such managers for their business activity. Consequently, it is not excluded that fund managers will try to push this irrecoverable tax burden to their clients by increasing fees or other administrative costs of their services.
h. Treatment of single composite supply without the principal element
Supply of two or more equivalent elements where one cannot be defined as the principal over another should be assessed from tax perspective on the nature of the supply as a whole. A good example would be maintenance contract as it includes series of different types of supplies that can have different tax treatments (e.g. supply with installation, supply of services related to real estate, etc.).
i. Input tax apportionment rules
There are three main changes introduced for input tax apportionment mechanism. Firstly, the limit for difference between recoverable input tax calculated under special method and the one under default method that does not trigger adjustment (AED 250,000) can be apportioned if the calculation period is shorter than 12 months. Secondly, the FTA has the right to demand a taxpayer to apply for a special method of apportionment. Thirdly, a taxpayer may apply to use the same recovery ratio as in the preceding tax year (semi- simplified method). Overall, those changes are aimed at applying apportionment as accurately as possible (potential enforcement of special rule) with potential incentives on the other side (semi-simplified method).
j. Changes in tax invoices and credit notes
The Decision allows the FTA to specify the cases when a taxpayer will need to issue a full tax invoice even if transaction meets conditions for issuance of the simplified tax invoice. Furthermore, simplified tax invoices cannot be issued to document transactions subject to reverse-charge mechanism. Lastly, the FTA introduced additional record-keeping obligations for credit notes and tax invoices if they are issued by the agent on behalf of the principal.
Next Steps
Taking into account significant scope of changes introduced by the Decision it is highly recommended to verify if your business and current processes can be affected by those changes. Treating transactions related to Virtual Assets as exempt from VAT retrospectively from 1st January 2018 can pose a significant challenge to those who applied a different treatment up to date.
Moreover, application of zero-rate for export of services is expected to be reduced due to the Decision that will trigger the need to reconfigure the existing matrix in ERP or other accounting systems to correctly assign tax treatment.
If you wish to have a chat on how those changes can affect your business and how to prepare, please feel free to contact us.
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DUBAI | AMERELLER | One by Omniyat, 14th Floor | Business Bay | P.O. Box 97706 | Dubai, United Arab Emirates | T +971 4 432 3671
RAS AL KHAIMAH | AMERELLER TAX Consultancy FZ-LLC | Ras Al Khaimah Economic Zone | P.O. Box 16462 | Ras Al Khaimah, United Arab Emirates | T +971 7 204 6255
