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FTA publishes Public Clarifications on public transportation and farm houses/farm land

The United Arab Emirates (UAE) Federal Tax Authority (FTA) has published new Value Added Tax (VAT) Public Clarifications on public transportation and farm houses/farm land.

The new Public Clarifications are important for businesses in the transportation, real estate development, construction and infrastructure industries, and any other sectors where large scale transportation of employees occurs. 

The Public Clarification on farm houses and farm land is also important for businesses in the agricultural industry, and provides greater clarity on the VAT treatment of some of the supplies they make.

In this alert:

  • VAT Public Clarification VATP007 on public transportation
  • VAT Public Clarification VATP008 on farm houses and farm land

VAT Public Clarification VATP007 on public transportation

VAT Public Clarification VATP007 discusses the definition of ‘public transportation’, and the FTA’s interpretation of which buses and trains qualify to be supplied at the zero rate for VAT under Article 45(4) of Federal Decree-Law No. 8 of 2017 on Value Added Tax (UAE VAT Law).

Article 34(3) of Cabinet Decision No. (52) of 2017 on the Executive Regulations of the Federal Decree Law No. (8) of 2017 on Value Added Tax (Executive Regulations) states that the supply of a bus or train that is designed or adapted to be used for public transportation of 10 or more passengers as a qualifying means of transport shall be zero-rated under Article 45(4) of the UAE VAT Law.

It is important to note that VATP007 addresses only the VAT liability of the supply of the buses and trains themselves, and does not impact the VAT liability of transportation services supplied under Article 45(2) of the UAE VAT Law (which are zero-rated) or under Article 46(4) of the UAE VAT Law (which are exempt).

The Public Clarification includes the following key points:

  • The FTA defines ‘private transportation’ and ‘public transportation’ as the following:

o   Private transportation: all means of transportation used to transport a specific group of people under contracts.

o   Public transportation: all means of transportation used to transport all individuals without specifying any category.

  • The FTA has further explicitly stated that public transportation should be available for all individuals without exception in order to be considered as such.
  • Only buses or trains which are designed or adapted to be used for the mass transport of individuals, without restriction to a specific category of users, qualify to be supplied at the zero rate.
  • Those means of transport which are designed to transport a specific category of individuals, such as school students, employees of a business, or hotel guests to other locations, do not qualify to be supplied at the zero rate and will be standard-rated for VAT.
  • The FTA considers the following factors, among others, to be indicative of public transportation:

    • There are facilities for passengers to pay for the transportation or show their ticket (such as a payment booth or ticket scanner);
    • There is branding within or outside the vehicle advertising the transport service, indicating it is available to all;
    • There is branding indicating that the means of transport is regulated by the entity regulating public transportation in the Emirate of operation;
    • There is evidence that the means of transport is required to comply with certain provisions or specifications, or there is a requirement to pay for a specific test determined by the regulating entity before being approved to transport passengers;
    • There are features for placing advertising materials by third parties on or within the means of transport; and
    • The means of transport is not limited to a specific group.
  • The VAT liability of the original supply of the means of transport has no impact on the VAT liability of a supply of transportation services; the VAT liability of a supply of transportation services will depend on whether the transportation is local (exempt from VAT) or international (zero-rated for VAT).
  • Article 45 of the Executive Regulations, which refers to the supply of local passenger transport services in a ‘qualifying means of transport’ as being exempt, is interpreted by the FTA to include the transport of any passengers, and this can be a defined group. Thus, VAT incurred on the supply of exempt local transport services is not recoverable.

The net effect is that entities that supply transport of a type similar to what the FTA has indicated is now classed as ‘public transport’ will need to review whether they comply with the various requirements set out in the Clarification. If not, and specifically if the transport is not generally available to be used as public transportation, it will not be entitled to zero-rating on supply.

This is likely to be of particular concern to operators of school buses, as well as buses used primarily for transport of employees.

For more information about the VAT liability of supplying a means of transport or transportation services in the UAE, please contact one of the contacts listed below or your usual Deloitte contact.

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