UAE FTA publishes Financial Services VAT Guide | VATGFS1
The United Arab Emirates (UAE) Federal Tax Authority (FTA) has recently published the Financial Services VAT Guide (VATGFS1).
The guide provides businesses in the financial services (and insurance) industry with further clarity on the VAT qualification of services provided by those businesses, as well as on the right to recover input tax.
Who is this alert for?
Businesses active in the financial services industry making both taxable and exempt supplies, such as banks (retail, corporate, investment and all other types of banking), (re-)insurers, funds and fund managers.
Additionally, we would expect this alert to be of interest to any other business providing intercompany loans and similar activities.
Financial Services VAT Guide (VATGFS1)
The FS VAT Guide discusses the definition of ‘Financial Services’ and the FTA’s interpretation of the financial services provision in the VAT Decree-Law. The FTA has confirmed that financial services shall be exempt from tax, unless the service provider is remunerated by way of explicit fee, commission, rebate, commercial discount or similar.
The FTA has further provided for an extensive list of fees per (sub) category of financial services which it considers to be taxable for VAT purposes (refer to Appendix A of the Guide).
The FS VAT Guide further includes the following key points:
- The financial services provisions in the VAT Decree-Law are not limited to only Regulated bodies by the Central Bank of the UAE and could also be applicable to any businesses providing financial services (such as financing group companies).
- Supplies of financial services where they are remunerated by way of an implicit margin or spread (i.e. no explicit fee is charged in respect of them) will be exempt from VAT. Appendix A of the FS VAT Guide sets out the types of financial services which will be treated as exempt from VAT by banking function.
- Exported financial services shall be treated as follows:
- The supply of financial services to a recipient established outside the GCC will be treated as zero rated in the UAE;
- Supplies of financial services to a recipient registered or registrable for VAT in a GCC implementing state, will be treated as outside the scope of UAE VAT and the recipient will be liable to account for the reverse charge in the GCC member state*; and
- Where financial services are being provided to a recipient not registered nor registrable for VAT in the GCC state, the place of supply of those services will be the UAE*.
* Note that this assumes that the Member States recognize each other as Implementing States.
- The supply of investment grade precious metals is also subject to VAT at the zero-rate and the costs in relation to these supplies can be recovered in full.
- Islamic financial arrangements shall be treated in such a way that the VAT treatment shall be in line with its non-Islamic counterpart. The FTA recognizes that it is not always possible to find a comparable product – particularly with complex Islamic Finance products – and that the service provider would need to use the same principles to come to the desired result from a VAT perspective.
- Penalty fees, in general, are to be treated as standard rated, unless the fee relates to penal interest which will be treated as exempt of VAT.
- Option Premiums are considered to be taxable as these are considered to be explicit fees.
- Input tax apportionment methods (Standard and special) shall be calculated in line with the guidance provided by the FTA in the Input Tax Apportionment Guide (VATGIT1).