Financial Services UAE VAT Exemption

In Art. 42 of the Regulations, financial services for the purpose of the exemption are defined as follows:

a. The exchange of currency, whether effected by the exchange of banknotes or coins, by crediting or debiting accounts or otherwise.

b. The issue, payment, collection, or transfer of ownership of a cheque or letter of credit.

C. The issue, allotment, drawing, acceptance, endorsement, or transfer of ownership of debt security.

d. The provision of any loan advance or credit.

e. The renewal or variation of debt security, equity security, or credit contract.

f. The provision, taking, variation, or release of a guarantee, indemnity, security, or bond in respect of the performance of obligations under a cheque, credit, equity security, debt security, or in respect of the activities specified in paragraphs (b) to (e) of this Article.

g. The operation of any current, deposit or savings account.

h. The provision or transfer of ownership of financial instruments such as derivatives, options in respect of debt securities and equity securities, swaps, credit default swaps, and futures. THE AUTHORITY has issued a Public Clarification on “VAT Treatment of Options and Option Premiums” (VATP014) which provides the definition of certain instruments and their treatment. In particular the following:

• A financial option gives the holder the right to buy or sell the underlying financial instrument at a specified price.

• An option premium is the fee received for selling an option.

• Debt security means any interest in or right to be paid money that is owing

•Equity security means any interest in or right to share capital in a legal person.

Note: options supplied for premiums in respect of underlying commodities or other non-debt and non-equity instruments do not qualify for exemption and will be taxable in accordance with Article 42(4).

i.The payment or collection of any amount of interest, principal, dividend, or another amount whatever in respect of any debt security, equity security, credit, and contract of life insurance.

j.Agreeing to do or arranging, any of the activities specified in paragraphs (a) to (i) of this Clause, other than advising thereon.

The financial services defined above are exempt from VAT when they are NOT conducted in return for a specific fee, commission, discount and rebate or similar.

In practice, this means they will be exempt when interest is charged, as will financial services remunerated via a margin or spread, but with no explicit fee charged. But in cases where they are conducted for a fee or commission etc., the supply will be subject to VAT. (Art. 42(4) of the Regulations)

Islamic finance products are financial products which are certified as Islamic Shariah compliant, which simulate the intention and achieve effectively the same result as a non-Shariah compliant financial product, will be treated in a similar manner as the equivalent non-Sharia financial product for the purpose of applying for exemption from VAT. (Art. 42(5) of the Regulations).

Any supply made under an Islamic financial arrangement shall be treated in such a way as to give an outcome for the purposes of the Law comparable to that which would be the case for their non-Islamic counterparts. (Art. 4216) of the Regulations).

Where Art. 31 of the Regulations applies to financial services, i.e. the zero-rating provisions, zero-rating will apply.

THE AUTHORITY has issued a VAT Guide on “Financial Services” (VATGFS1) which gives further detail to distinguish exempt supplies from those which are standard-rated. Examples of standard-rated financial services include the following:

• Operation of a bank account such as subscription and withdrawal fees

• Money transfer fees, including SWIFT fees

• Fees for the administrative handling of mortgages and loans

• Card services such as ATM transaction fees

• Currency exchange fees.

The VAT Guide also details the treatment of the following supplies of financial

services:

1. Returns on investment: where a financial service provider makes a payment, which is a return on an investment, such as interest on deposits, dividends, drawings, etc. and where there is no service nor transaction provided in return for such a payment, then the returns on investment are outside the scope of VAT.

2. Equity securities and debt securities: the issue, allotment, or transfer of ownership of an equity security or debt security is exempt from VAT. This also applies to stocks and other securities.

Fees charged by brokers or dealers who act as intermediaries to these transactions are standard-rated. Share registrar, trading and settlement services which are provided in exchange for a fee are also standard-rated. This includes fees charged for facilities provided by exchanges.

Where assistance is provided to a company with the management of shareholders and other financial stakeholders, payment of dividends, arranging annual general meetings and providing annual reports to shareholders, such services are standard-rated.

THE AUTHORITY has also issued a Public Clarification on “Bank interest and Dividends (VATP010), which clarifies that although payment or collection of a dividend or interest is an exempt supply of financial services, this treatment will only apply when there is in fact a supply. 

Remember that ‘passive’ investment income is not a supply and is outside the scope of VAT.

Portfolio management: management of a portfolio of investments is also

standard-rated

3. Trustee services: these are standard-rated.

4. Pensions and collective investments: payments into a pension or a collective investment scheme are outside the scope of VAT. However, fees for the management of a pension fund or collective scheme are standard-rated.

5. Stock lending: the lending of shares itself is not subject to VAT. However, if a fee is charged for this service, it will be standard-rated.

6. Interest Rate Swaps: where banks and other financial institutions exchange fixed interest rates on their debts and there is no explicit fee for this service, this is exempt from VAT.

7. Currency Swaps: where there is no explicit fee for this service, this is exempt from VAT.

8. Other Derivatives: derivatives are financial instruments whose price depends on the value of the underlying financial instrument, commodity or currency to which the derivative relates. Devising, advising on, originating and issuing derivatives and similarly structured products is liable to VAT at the standard rate, where this is carried out for an explicit fee or where consideration is derived from an explicit premium.

However, trading in derivatives where income is derived from arbitrage, or gains from the net margin or spread is exempt from VAT. Also exempt is any trading income earned on the underlying financial instruments.

The transfer of ownership of derivatives or of a futures contract in relation to commodities, where there is no delivery of the underlying commodity, is exempt from VAT, where carried out on a margin basis. However, settlement of futures contracts by delivery of commodities is taxable at the appropriate rate of VAT for the underlying supply of those commodities.

9. Intermediary services: services of intermediation are subject to VAT. For example, a financial advisor may act as an intermediary in the arranging or sale of a financial product. Any fees or commissions they receive from their customer or the financial service provider for their services are standard-rated.

10. Preparatory services: preparatory services carried out separately, before a supply of a financial service, whether the financial service is exempt or taxable, are themselves standard-rated, for example, the preparation and delivery of data undertaking due diligence.

11. Debt recovery and litigation: services related to debt recovery, litigation and the management of the recovery of debts due from debtors are subject to VAT at the standard rate. This includes all services related to debt factoring.

12. Leasing: the hire or leasing of equipment is subject to VAT at the standard rate.

A hire or lease contract grants the right to use the equipment for a specified period of time without transferring ownership.

Where equipment is subsequently sold to a third party at the end of the lease, this sale is also subject to VAT.

13. Hire purchase and credit sales agreements: the supply of credit is exempt from

VAT provided there is no explicit fee. But if goods or services that are subject to VAT are supplied on credit, and the finance charge is included in the total amount payable by the buyer in instalments, then the total amount payable will follow the treatment of the supply and will be liable to VAT.

However, if separate charges of interest are made for the provision of the credit and these are not included in the charge for the goods, these interest charges will be exempt from VAT.

Exports and Imports

Exported financial services, i.e. supplies of financial services to a recipient

established outside GCC, zero-rated.

This applies whether or not the services would otherwise have been exempt where supplied in the GCC.

Imported financial services, i.e. financial services received from outside the GCC, are liable to VAT at the standard rate where the supplies would be standard-rated supplies were they to be made in the UAE. Where standard rating applies, the imported services are subject to the reverse charge mechanism. This works by treating the supply as if the importer had supplied the services to itself. The importing financial services institution must therefore account for the VAT incurred on the imported services. It will also be able to claim back the corresponding VAT, subject to the usual rules of recovery.

Input tax apportionment.

When claiming input VAT incurred on financial services, as for other inputs, VAT incurred on costs which are partly attributable to taxable supplies and also to exempt supplies of financial services must be apportioned. Various methods are available to carry out this apportionment.

Input tax recovery must reflect the actual use to which the VAT on the relevant cost has been put or has been determined via an appropriate input tax apportionment method. All businesses must take care when making use of an input tax apportionment method that it is ‘fair and reasonable’ in their particular circumstances. Where it is not, the business should take steps to ensure that an approved alternative method is used.

A business may choose between either the standard input tax apportionment method, or by application to and on prior written approval of THE AUTHORITY, a special input tax apportionment method may be used.

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