Amendments to the VAT Executive Regulations
Introduction
The Federal Tax Authority (FTA) published on 2 October 2024, Cabinet Decision No. (100) of 2024 on the Executive Regulations (ER) on the Federal Decree-Law No.8 of 2017 on Value Added Tax (VAT) and its amendments.
Entering into force on 15 November 2024, the amendments include a number of changes to the existing VAT rules, which are likely to impact businesses operating in a variety of industries.
We have included below some of the most relevant amendments introduced with the amended ER.
Key takeaways
a. Scope of financial services exemption
The scope of the financial services exemption (foreseen in article 42 VAT Law) is broadened to include the following:
- Investment fund management, which includes providing investment fund management services independently for a fee to funds licensed by a competent authority in the state, including but not limited to managing fund operations and managing investments for the benefit of the fund or on its behalf and monitoring and improving fund performance;
- Transfer of ownership of virtual assets including cryptocurrencies (with retrospective effect to 1 January 2018); and
- Exchange of virtual assets (also with retrospective effect to 1 January 2018).
Whilst “managing and safeguarding of virtual assets and enabling control thereof” has also been included within the scope of “financial services” for VAT purposes, these services would only be exempt as long as they are not provided in exchange for an explicit fee, commission, discount, and rebate or similar.
In the above context, the amended ER have also introduced a definition of “virtual assets” under article 1 of the VAT Law, which are defined as “digital representations of value that can be traded or transferred digitally and used for investment purposes, excluding fiat currencies or securities”.
b. Documentation evidence on zero-rating export of goods
Article 30 of the VAT ER has been modified to introduce further guidance and clarity around the documents required to demonstrate the direct or indirect export of goods (or customs suspension) for the purpose of applying the zero-rating for VAT.
The FTA has clarified that the following should suffice as evidence for the application of the zero rate:
- 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.
For the purpose of the above, the amended ER have also introduced a definition for the concepts of “commercial evidence”, “official evidence” and “shipping certificate” as per the below detail:
- Commercial evidence: a document issued by transportation companies or agencies which proves that the goods have effectively departed the territory of the UAE. This can include (i) airway bill or air manifest, (ii) sea waybill or sea manifest or (iii) land waybill or land manifest.
- Official evidence: export certificate issued by the customs department or competent authority in the UAE, clearance certificate issued by the same authorities which verifies the departure of the goods from UAE territory or a document or clearance certificate issued by the competent authorities in the country of destination which prove that the goods have entered into the country.
- Shipping certificate: a certificate issued by the relevant land or transport companies and agents as equivalent to commercial evidence if this is not available.
c. Zero-rating of services and means of transport
Exports of services
The amended ER further restrict the applicability of the zero-rating on exports of services provided in article 31 of the VAT Law. The FTA now clarifies that the zero-rating will only be applicable on exports of services which are not subject to the special place of supply rules established in articles 30 and 31 of the VAT Law.
The special place of supply rules include (i) services in relation to goods (such as installation of goods), (ii) supply of means of transport to non-taxable persons, (iii) restaurant, hotel and food/drink catering services, (iv) cultural, artistic, sporting services or similar, (v) services which relate to real estate and (vi) transportation services or transport-related services.
International transportation services
The FTA has clarified that the zero-rating of transportation services provided under article 33.1 d) of the ER (i.e., transporting goods within the UAE in the framework of a wider service of international transportation of goods) is only applicable if the domestic transportation service is provided by the same suppliers as the wider international transportation.
Certain means of transport
Whilst article 34 of the ER used to establish the zero-rating of the supply of means of transport, the amended ER have now clarified that the zero-rating is also applicable to imports of means of transport.
Goods and services supplies in connection with means of transport
Article 35 of the ER has now been modified to increase the scope of the zero-rating beyond the supply of goods related to the supplies of means of transport, to also include the import of such goods.
The scope of the services which are covered under article 35 has also been clarified, requiring that those services are performed for the purpose of “operating, repairing, maintaining or converting” the means of transport.
d. Input VAT recovery
The amended ER have also introduced certain modifications to the rules regarding input VAT recovery, which are detailed below:
- The VAT Law in its article 54 establishes the recoverability of input VAT incurred for the acquisition of goods or services which are used or intended to be used for making supplies which would have been treated as exempt if they had been made in the UAE.
The ER specify in article 52 that this refers to supplies of financial services where the place of supply of these services is treated as outside the state and the recipient is also outside the state.
The amended ER now clarify that a person is still considered to be “outside the state” if (i) they are present in the UAE for a period of time which does not exceed one month and (ii) the presence in the UAE is not effectively connected with the supply. - The amended ER modify article 53 of the ER on non-recoverable input VAT, to allow recoverability of input VAT which is related to medical insurance provided to the employees and dependents (hence, taking into consideration the legal obligations that employers have under the labour regulations).
e. Exception to supplies made by government bodies
Article 3 (bis) on exceptions of supplies has been added to the ER, to include certain scenarios of transactions performed by government entities which shall not be considered as supplies of goods for VAT purposes. This includes the following:
- The grant or transfer of ownership or disposal of government buildings, real estate assets and other projects of a similar nature from a government entity to another; and
- The grant or transfer of the right to use, exploit or utilize the government buildings, real estate assets and other projects of a similar nature from a government entity to another, including any granted or transferred right of use, exploitation or utilization as of 1 January 2023.
The article also defines what shall be considered as “government buildings, real estate assets and other projects of a similar nature” for this purpose, which includes government entities' premises, government capital or infrastructure projects or real estate assets which are used by government entities.
f. Other modifications
The amended ER also introduces additional modifications which include, amongst others, the following:
- Article 2 of the ER, which defines the concept of “supply of goods”, has now been modified to extend the scope of “supplies of real estate” to any disposal that could lead to a transfer of ownership between different person (which adds on to the sale and tenancy contracts which were initially foreseen).
- Article 8 of the ER on voluntary registration has been modified to clarify that, for voluntarily registering for VAT, the applicant has to provide sufficient proof to the FTA that it has the intention to carry out taxable supplies, supplies made outside the UAE which would have been taxable supplies if made in the UAE or supplies made outside the UAE which would have been treated as exempt if made in the UAE.
- Article 15 of the ER has been modified, confirming that a member of a VAT Group shall be removed from the VAT Group if it is no longer making taxable supplies.
- Article 29 now establishes that, for calculating the profit margin, the purchase price needs to include, not only the price of the goods, but also any additional cost or fee incurred in purchasing those goods.
- A new rule has been introduced as part of article 46 whereby it is established that the treatment for VAT purposes of a single composite supply which does not include a principal component needs to be assessed based on the nature of the whole supply and all its components.
- Article 59 regarding tax invoices has introduced certain changes to the date of issuance of tax invoices for certain scenarios.
Conclusion
The changes introduced in the VAT framework under the amended ER bring significant modifications which are likely to affect taxpayers operating in varied industries.
Companies operating in the UAE are encouraged to seek tax advice to understand how these modifications may affect their day-to-day operations.
