The UAE, specifically Dubai is known for its tax-free environment. However, with the introduction of VAT and Corporate tax laws, the question that needs to be answered is “Is UAE still one of the tax-free countries?” In our blog, let us explore the reality of applicability of taxes and delve into the types of tax rates in UAE VAT.
UAE remains largely a tax-free country for individuals in terms of their personal income taxes. Residents and expatriates still enjoy the benefit of not paying taxes on their salaries or income derived from other sources.
However, UAE introduced VAT under the Federal Decree Law No. 8 of 2017 on the Value Added Tax on January 1, 2018, an indirect tax levied on sales of goods and services. Which will have a tax impact majority of transactions in UAE. Let us explore the types of VAT rates introduced.
How to determine if VAT is applicable to any transactions?
VAT law classifies the supplies into two categories ‘Taxable Supplies’ and ‘Non-Taxable Supplies’. This classification determines if VAT needs to be charged on that supply or not.
If the transaction is classified as “Taxable supplies” then the VAT shall be applied at two rates which are explained below:
- Standard Rated Supply: VAT at 5%.
- What are covered? – A standard rate of 5% will be applicable to almost all supply of good and services in the UAE except Exempted supplies & Zero rated supplies. Supplies like sale of electrical items, apparels, Hotel & restaurant services, Ride-hailing services like Uber, Air tickets, professional consulting services etc. would attract VAT at standard rate of 5%.
- Example (Case 1): Company XYZ, engaged in trading business in UAE mainland, sold one Mobile phone, a laptop, and a television (electronic items) worth AED 10,000 to Mr. A. Company XYZ must charge VAT at 5% on AED 10,000 i.e., 10,000*5%= AED 500. The total invoice value will be AED 10,000+ VAT of AED 500 = AED 10,500.
2. Zero Rated Supply: VAT at 0%.
- What are covered? – A few supplies that are specifically charged at 0% (Zero) in the VAT Law is listed under Article 45 of the Decree-Law. The list includes – Exports, international transport, investment metals, first supply of residential buildings (sold within three years of completion), crude oil & gas, educational services as well as preventative and basic healthcare services. Taxable person providing any of these supplies needs to charge VAT at 0%.
- Example (Case 2): In the example mentioned in case 1, if the company XYZ has sold those electronic goods to Mr. A who is residing in USA, then, company XYZ has to charge VAT at 0%. The company should mention the VAT at 0% in the invoice. Total invoice value will be AED 10,000+ VAT of AED 0 = AED 10,000.
Non-Taxable Supplies are supplies which are exempt from levy of VAT or not included within the purview of VAT legislation which are discussed in detail below:
3. Exempt Supplies:
- Supply of financial services specified in the executive regulation, bare land, local passenger transport, sale and lease of residential buildings (not included in the zero rated) are supplies which are exempted from VAT as per Decree-law.
- Example (Case 3): Mr. B, resident of UAE decides to sell his residential building, which was say built 5 years ago, to Mr. C for a consideration of AED 1 million. The transaction between Mr. B and Mr. C is covered under exempt supply and there is no need to charge VAT for the said transaction.
4. Out of Scope Supplies:
- It refers to those supplies which are outside the ambit of VAT legislature. Like supplies where place of supply is outside UAE. These might have been taxable supplies if its place of supply were to be in the UAE.
- Example (Case 4): Company ABC, a VAT registered LLC in UAE, enters into an agreement to sell cloths to a local entity , DEF LLC. Such cloths are shipped from ABC’s factory in China to DEF’branch in London. These goods do not pass through the UAE. The sale of these goods will be treated as out-of-scope supply and hence no VAT
In a nutshell VAT is to be charged by a taxable person on all supply of goods and services made by him in the UAE at 5% except on those supplies which are listed under zero rated or exempt supplies as per the Decree-law.
We understand that to decide if your business transaction falls within the scope of taxable supplies or not can be overwhelming. Besides, wrong classification of supplies attracts penalties and fines. Therefore, it is always suggestable to consult an expert if there is ambiguity in the classification.
We at BCL Globiz, offer accounting services, VAT filings, advisory services and much more at affordable price
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