Essential Details about VAT in the UAE 2024

Introduction to VAT in UAE

Value Added Tax (VAT) in the United Arab Emirates (UAE) was introduced on 1 January 2018 at a standard rate of 5%, marking a significant shift in the country’s tax system. VAT is governed by Federal Decree-Law No. (8) of 2017 on Value Added Tax, which outlines the principles, procedures and obligations in respect of VAT in the UAE.

VAT Registration UAE

A business must register for VAT in the UAE if its taxable supplies and imports exceed the mandatory VAT registration threshold of AED375,000 (c. USD100,000).
A business can also choose to register for VAT voluntarily if:

• Its taxable supplies and imports are below the mandatory registration threshold but exceed the voluntary registration threshold of AED187,500.
• Its expenses exceed the voluntary registration threshold – thereby enabling start-up businesses with no turnover to register for VAT.

All businesses in the UAE need to record their financial transactions and ensure that their financial records are accurate and up to date. This will provide them with certainty as to if and when they have exceeded the annual turnover requirement for VAT registration.

After registering for VAT, a business is:

• Required to charge VAT on any taxable goods or services that it supplies.
• Able to reclaim any VAT that it has paid on business-related goods or services.
• Required to maintain a range of business records that will allow the authorities to monitor its VAT compliance.

A business must report the amount of VAT charged to its customers and the amount of VAT it has paid on a regular basis. If the business has charged more VAT than the VAT it has paid, then the business has to pay the difference to the government. If the business has paid more VAT on its expenses than it has charged on VAT to its customers, then the excess VAT paid can be reclaimed from the tax authorities.

Deadlines for VAT Registration in the UAE

Businesses that meet or exceed the mandatory VAT registration threshold are required to apply for VAT registration within 30 days from the date on which the threshold was exceeded.

The UAE VAT Law imposes strict penalties for businesses that fail to register for VAT within the stipulated time frame. These penalties can include a fixed fine of AED 10,000, in addition to other administrative fines.

VAT Return Submission in the UAE

VAT-registered businesses in the UAE are required to submit VAT returns to the Federal Tax Authority (FTA). A VAT return is a formal statement that provides a summary of the VAT a business has charged on its sales (output tax) and the VAT it has paid on its purchases (input tax).

Frequency and Deadlines

• Filing Frequency – In the UAE, most businesses are required to file VAT returns on a quarterly basis. However, larger businesses with an annual turnover exceeding a certain threshold may be required to file VAT returns on a monthly basis. The specific filing period is determined by the FTA at the time of VAT registration and is communicated to the business in the registration certificate.
• Submission Deadline – The VAT return must be submitted to the FTA within 28 days of the end of the tax period (quarterly or monthly). For example, if a business’s tax period ends on 31 March, the VAT return must be filed by 28 April. If the 28th day falls on a weekend or public holiday, the deadline is extended to the next working day.

Application of VAT to Goods and Services in the UAE

In the UAE, the Value Added Tax (VAT) system categorises goods and services under three main VAT rates or treatments. It is essential that businesses understand these categories and apply VAT correctly to comply with the law, as follows:

1. Standard Rate (5%) – Most goods and services fall under this category. Businesses collect VAT from customers and remit it to the FTA, while also claiming back VAT on their business expenses
2. Zero-Rated (0%) – Businesses charge 0% VAT but still reclaim VAT on their inputs, which can be beneficial in reducing costs. This category includes exports, international transportation, and specific healthcare and educational services.
3. Exempt – No VAT is charged but businesses cannot claim input tax credits, which can increase their cost base. This category includes residential real estate, local passenger transport and ‘bare’ land.

VAT on transactions between UAE Mainland, Free Zones and Designated Zones

Key points related to VAT implications:

• UAE Mainland – All transactions involving goods and services within the UAE Mainland are subject to VAT at the standard rate of 5%.
• Designated Zones – These are specific Designated Free Zones that are treated as outside the UAE for VAT purposes such that certain transactions conducted within these zones, particularly involving goods, are not subject to VAT.
• Services – VAT applies to all services provided between these zones, at the standard rate of 5%, with no exemptions based on the location of the service provider or recipient.

1. Trade between Mainland Companies and Designated Zone Companies

• Goods – When goods are supplied from a Mainland company to a company in a Designated Zone, these transactions are typically not subject to VAT, provided that the goods are not intended for use within the UAE Mainland. The Designated Zones are treated as being outside the UAE for VAT purposes, so provided the goods are moved directly to the Designated Zone and are not consumed on the Mainland, the transaction is zero-rated for VAT. If the goods are intended to be used within the UAE Mainland, VAT would apply at the standard rate of 5%.
• Services – Services provided by a Mainland company to a Designated Zone company are subject to VAT at the standard rate of 5%, regardless of where the service is performed. Unlike goods, the VAT treatment for services does not change based on the location or use, such that VAT is charged on all services supplied from Mainland to Designated Zones.

2. Trade between Companies within Designated Zones

• Goods – Transactions involving the supply of goods between companies located within the same Designated Zone are typically not subject to VAT. Designated Zones are treated as being outside the UAE for VAT purposes, so goods traded within these zones do not attract VAT. However, if the goods are consumed or used within the UAE Mainland, the transaction may be subject to VAT at the standard rate. For example, if goods are sold within a Designated Zone but are then moved to the Mainland for use or consumption, VAT would be due.
• Services – The supply of services between companies within Designated Zones is subject to VAT at the standard rate of 5%. This applies even if the services are provided within the Designated Zone itself.

3. Trade between Designated Zones and Non-Designated Free Zones

• Goods – If goods are supplied between a Designated Zone and a non-Designated Free Zone, the VAT treatment will depend on where the goods are ultimately consumed or used. If the goods remain within the Designated Zone or are exported outside the UAE, the transaction is generally not subject to VAT. However, if the goods are transferred to the Mainland or used in a way that brings them into the taxable territory of the UAE, VAT may apply.
• Services – Services provided between Designated Zones and non-Designated Free Zones are subject to VAT at the standard rate of 5%.

4. Trade between Non-Designated Free Zones

• Goods – Goods supplied between non-Designated Free Zones are treated similarly to transactions on the Mainland because these zones are not treated as outside the UAE for VAT purposes. As a result, the standard VAT rate of 5% generally applies to goods traded between non-Designated Free Zones, just as it would be for transactions between mainland companies.
• Services – Services supplied between companies in non-Designated Free Zones are subject to VAT at the standard rate of 5%. As with Mainland transactions, there are no exemptions for services based solely on location within a non-Designated Free Zone.

VAT Deregistration in UAE

VAT deregistration is the process by which a business cancels its VAT registration with the FTA. This can occur for several reasons, and it is important for businesses to understand when and how they must deregister to avoid penalties.

1. Mandatory VAT Deregistration – A business must apply for VAT deregistration within 20 business days in the following situations:

• Cessation of Taxable Supplies – The business has ceased making taxable supplies if it no longer sells goods or services that are subject to VAT.
• Threshold not met – The business’s taxable supplies or imports have fallen below the voluntary registration threshold of AED187,500 over the last 12 months, and it does not anticipate exceeding this threshold in the next 30 days.

Failure to apply for deregistration when required can result in a penalty of up to AED 10,000.

2. Voluntary VAT Deregistration – A business may also choose to voluntarily deregister for VAT if its taxable supplies and imports fall below the mandatory registration threshold of AED375,000 but remain above the voluntary registration threshold of AED187,500. The application for voluntary deregistration is at the discretion of the business but must still be approved by the FTA.

Conclusion

The introduction of VAT in the UAE has brought about significant changes in how businesses operate, particularly in respect of compliance and financial planning. Understanding the thresholds for registration, the applicable VAT rates and the implication of non-compliance is essential if businesses are to avoid penalties and ensure smooth operations. The differences in VAT treatment between Mainland, Free Zones and Designated Zones highlight the complexity of the VAT system in the UAE and the importance of seeking professional advice to navigate these regulations effectively.

Sovereign’s team of VAT accountants can assist clients with all VAT-related matters, from VAT registration and deregistration through to preparing and submitting your VAT returns to FTA.

If you need VAT advice and guidance, Sovereign can also support you. Whether you want to talk through the benefits and requirements for becoming VAT registered, the different VAT schemes available, or you want to understand how VAT is applied to services or products in the UAE Mainland, its Free Zones and abroad, we can help.

Sovereign can remove the administrative burden and stress of filing your VAT returns in the UAE so you can be confident that they have been submitted on time every time, and your business remains in full compliance with the UAE’s VAT regime all the time.