VAT Amendments in UAE

Background 

Amendments to the UAE VAT Executive Regulations were signed on 6 September 2024, and published in Arabic in the Official Gazette (No.783) dated 16 September 2024. The notification email from the Official Gazette was circulated on 2 October 2024. 

1. Financial services – VAT exemption for fund management and virtual assets 

The VAT exemption for financial services in Article 42 of the VAT ER has been extended to include the following activities:

• Management of investment funds, meaning services provided independently by a fund manager for a fee, to funds licensed by a competent authority. These services include, but are not limited to, the management of fund operations, the management of the fund’s investments for the benefit of the fund or on its behalf, and the monitoring and improving the fund’s performance.
• The transfer of ownership of virtual assets, including virtual currencies, and the conversion of virtual assets (with a retrospective effect per 1 January 2018).
• Keeping and managing virtual assets and enabling control thereof.

The introduction of exemptions for certain financial services reduces the compliance burden by eliminating invoicing obligations and exempting these services from VAT charges. However, it is important to note that these exemptions may have a negative impact on the entitlement of input VAT recovery, particularly for fund managers. Determining input VAT recovery may become more complex as a result.

The exemption for fund management services will significantly affect the financial services sector. Drawing from experiences in other jurisdictions like the European Union, we anticipate discussions around the qualification criteria for investment fund management services and whether they are provided to qualifying funds. 

In addition, the amendments provide a comprehensive definition and set of rules for virtual assets, which brings greater clarity to this emerging industry. Virtual assets are now defined as 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.

Interestingly, the exemption for the trading of digital assets has retrospectively taken effect, which means that businesses may be required to assess historic filing positions and take corrective action as a result. 

2. Zero-rate for the export of goods 

The amendments to Article 30 of the VAT ER have brought clarity to the documentation requirements for demonstrating the export of goods and applying the zero rate. The change adds more flexibility to the documentation requirements, reflecting the variety of export scenarios that arise and the differing documentation and processes which apply to each.

As per the current regulations, exporters are obligated to retain “official and commercial evidence” of export or customs suspension. However, numerous businesses have encountered challenges in obtaining these documents due to the nature of their operations, route of export etc.

The complexities arise from the fact that some businesses face difficulties in acquiring the necessary official and commercial evidence to support their export activities (e.g., exit certificates). This has resulted in practical complications for businesses in meeting the documentation requirements outlined in the VAT ER, and therefore not being able to apply the zero-rate.

The amendments should provide more clarity for businesses and enhance the ease of doing business. Any of the following documents should be retained by the exporter to apply the zero rate for the export of goods:

• Customs declaration and commercial evidence proving the export.
• Bill of lading and official evidence proving the export; or 
• A customs declaration proving the status of suspension of customs duties if the goods are placed under a customs suspension regime.

Multiple definitions have now also been clarified including “official evidence”, “commercial evidence” and “shipping certificate”. 

3. Zero rate for services and means of transport

Export of services

The scope of the zero rate for the export of services as per Article 31 of the VAT ER has been limited further, representing the second significant change to these provisions since the implementation of VAT. 

The application of the zero rate will now be prevented if any of the special place of supply rules in Clause 3 to 8 of Article 30 of the VAT Law apply i.e., (i) services in relation to goods, such as installation of goods, (ii) supply of a means of transport to a non-taxable person, (iii) restaurant, hotel, and food and drink catering services, (iv) cultural, artistic, sporting educational or any similar services, (v) services related to real estate and (vi) transportation services or transport-related services.

These amendments limit the arguments and possibility for the application of the zero rate for the services impacted. 

International transportation services 

The conditions for the zero rate for international transportation services in Article 33(1)(d) of the VAT ER have been clarified and specify that the domestic leg of an international transportation service may only be zero-rated when supplied by the supplier of the international transportation. This clarifies uncertainty within the transportation industry where domestic transportation (e.g., first mile / last mile transport) has been subcontracted to a third party. 

Services supplied in connection with a means of transport

The additions under Article 35(1)(b) provides conditions for the application of zero-rating of services supplied directly in connection with a means of transport for the purpose of operating, repairing, maintaining or conversion. In general, the specified services should be carried out on board the means of transport to apply the zero-rating.

These amendments provide more clarity for businesses involved in international transportation and provision of related services.

4. Input VAT recovery health insurance expenses

At present, businesses faced uncertainty and an increased administrative burden to track the entitlement of input VAT recovery on health insurance expenses provided to employees and dependents. 

However, the recent amendments to Article 53(1)(c)(3) of the VAT ER should bring welcome relief to businesses. These amendments now enable businesses to recover input VAT on health insurance expenses for one spouse and three children under the age of 18, even if it is not mandated by the regulatory law of the Emirate. 

This change provides businesses the opportunity to recover input VAT on eligible health insurance expenses, as well as ensuring consistent tax treatment for businesses employing staff regardless of the Emirate in which the employment visa is issued.

5. Exception to supplies made by government entities and deemed supplies

Another important amendment is the addition of new Article 3 (bis) of the VAT ER, which introduces a provision excluding specific transactions between government entities from being subject to VAT. 

The exclusion applies to the transfer of ownership or disposal of government real estate, government buildings or similar other projects. In addition, the right to use or exploit these assets is also excluded, with an effective date from 1 January 2023.

The amendments provide a comprehensive list of the scope of government real estate, buildings, and similar projects.

The deemed supply rules have been amended and include a new exception for government entities and charities. If the total VAT amount payable on all deemed supplies by a government entity or charity to other government entities or charities does not exceed the amount of AED 250,000 within a 12-month period, such transactions shall not be considered a deemed supply and will therefore not be subject to VAT. 

These amendments provide government entities with more clarity on its transactions and also limit the compliance and VAT burden that may arise from such transactions. Additionally, a significantly higher threshold is introduced for free of charge activities performed by governments and charities before a deemed supply arises, which will relieve VAT costs for such entities.

Other changes

More amendments have been published in the updated VAT ER. Below a non-exhaustive list of topics which have been impacted:

• Tax invoice requirements: Among others, new timelines for issuing summary tax invoices (14 days from end of relevant calendar month) and new conditions for invoices issued by agents on behalf of the principal.
• Input VAT recovery: New rules to calculate the input VAT recovery entitlement, for example if the tax year is less than 12 months or if a tax group changes. Additionally, an option to apply for a fixed input tax recovery rate has been introduced. 
• Composite supply rules: Amendments to determine the VAT treatment of a supply which consists of multiple elements. 
• Profit margin scheme: The definition of “purchase price” has been clarified to includes all costs and fees incurred in addition to the price of the goods. 
• Tax registration cancellation: The FTA has the authority to cancel a VAT registration of a taxpayer under certain circumstances (e.g., registration requirements not met). 
• New and updated definitions.

Implications and next steps for businesses 

These amendments to the VAT ER have significant implications for businesses across all industries. It is important for all taxpayers to familiarize themselves with the changes and assess the impact on their business. The changes will come into effect on 15 November 2024, with some provisions having retrospective effects as per the amendments. It is crucial to take prompt action to prepare for the changes. 

Businesses should conduct an internal review to identify which transactions and processes are affected by the changes. They should then update their relevant systems and processes to incorporate the necessary adjustments for compliance.

How HayyaTax can help

Please reach out to your trusted HayyaTax advisor if you would like to discuss the impact of the amendments on your business and how you can prepare for these changes.

HayyaTax offers a comprehensive range of services to assist businesses in effectively managing the implications of the updated VAT ER. We can provide in-depth analysis and guidance on compliance requirements, helping you understand the specific implications for your business. Additionally, we can support to raise awareness internally and build the necessary knowledge within your organisation.