Category: Uncategorized

The Profit Margin Scheme is a scheme whereby a Taxable Person has an option to calculate Tax on the profit margin earned on the supply of goods, instead of the sale value. VAT under profit margin scheme can be calculated only when the conditions prescribed in UAE VAT law are fulfilled.

To know more on the profit margin scheme conditions and the VAT calculation, please read our article Profit Margin Scheme under VAT in UAE and How to calculate VAT under Profit Margin Scheme.

In this article, we will understand the goods eligible under the profit margin scheme and the treatment of goods purchased prior to the introduction of the VAT.

Goods under the Profit Margin Scheme

Only notified goods can be supplied under the profit margin scheme. The following are the goods which are eligible under the profit margin scheme.

• Second-hand goods, meaning tangible moveable property that is suitable for further use as it is or after repair.
• Antiques i.e. goods that are over 50 years old.
• Collectors’ items i.e. stamps, coins, currency and other pieces of scientific, historical or archaeological interest.

The above-mentioned goods can be supplied under the profit margin scheme only when they were subject to VAT before the supply. In simple words, these goods should have suffered VAT before supplying it under the Profit margin scheme.

Now, you might be wondering what if these notified goods were purchased before 1st January, 2018 when VAT was not implemented?

Let us understand this in detail.

Treatment of goods purchased prior to the introduction of VAT under the Profit margin scheme

As discussed above, the goods which are eligible to be sold under the profit margin scheme are those which have previously been subject to VAT. As a result, the notified goods which are eligible to be supplied under profit margin scheme but since they were purchased during a period in which they would not have been subject to VAT, are not eligible for the profit margin scheme.

In simple words, the notified goods which are purchased prior to 1st January, 2018 are not eligible to be supplied under the profit margin scheme. On supply of such goods, VAT is due on the full selling price.

In the following table, we have considered two scenarios to understand the eligibility of supplies under the profit margin scheme

Evidence that goods were subject to tax previously

As discussed above, a supplier should know in advance that the goods were previously been subject to VAT in order to apply the profit margin scheme. The following are some of the instances which will evidence that goods were subject to VAT previously.

• Information relating to the date the good was first manufactured, sold or brought in to use. For example, in the case of a car, the date the car was first registered would indicate its sale would have been subject to VAT if it was registered on a date after 1 January 2018
• Evidence that the supplier paid VAT on their original purchase. For example, you may ask the supplier for a copy of the tax invoice relating to their purchase of the goods.

For more information on these services, please contact us:

The UAE has scrapped the need to have UAE nationals as sponsors, thus allowing expatriate investors 100 per cent ownership with effect from December 1, 2020. The move is in line with a federal law issued by President His Highness Sheikh Khalifa Bin Zayed Al Nahyan and which amends Law No. 2 of 2015 on companies and their shareholding.

The long-awaited 100 per cent ownership by foreign nationals of companies licensed and registered in the UAE is allowed as per Cabinet Resolution No. 16 of 2020. In recent years, individual emirates allowed foreign national owned companies to acquire the remaining stakes on a case by case basis. The latest amendment thus extends the scope of that significantly.

The new law amended 51 articles and added new ones, mostly focusing on the regulation of provisions of establishing companies with limited liability shareholding. The amendments exempt expatriate investors from the minimum percentage ownership of UAE nationals.

His Highness Sheikh Mohammed Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, announced the amendments to the law, noting that the UAE now enjoys a fertile legislative environment for the establishment of businesses in order to enhance the UAE’s competitiveness.

A key update

As per the Commercial Companies Law, Law No. 2 of 2015, foreign shareholders were limited to owning a maximum 49 per cent in a ‘limited liability company’ (LLC) operating as an onshore UAE business. This requires an Emirati individual or 100 per cent Emirati-owned company to hold the balance 51 per cent share as a local sponsor.

The amended law allows natural and legal persons to establish companies without the need for a specific nationality. The law, however, will not apply to some companies that are excluded based on decisions by the Cabinet and those that are either wholly-owned by federal or local governments or their subsidiaries. 

Minister welcomes move

Abdullah bin Touq Al Marri, UAE Minister of Economy, said the new decree is an additional step in a series of efforts that the UAE is taking to raise the readiness of the national economy and prepare for the future by developing commercial and investment opportunities and increasing the competitiveness of the business environment, in line with the rapid economic changes and developments taking place in the global economy.

News Courtesy : Gulf News

For more information on these services, please contact us:

Under VAT in UAE, all businesses which have a place of residence in UAE, and whose value of supplies in the GCC member States in the previous 12 months exceeds AED 375,000, should mandatorily register under UAE VAT. Further, businesses in UAE which do not have a place of residence in UAE will have to compulsorily register under VAT, irrespective of their turnover.

For registered businesses which deal with other registered businesses, it is of great importance to issue a valid document evidencing that a supply has taken place. On the other hand, this document is of even greater importance to recipients who are registered under VAT, as it will serve as the basis for their input tax recovery on this transaction. To understand more about the eligibility and conditions to recover input tax on a supply, you can refer our blog ‘Input tax recovery’.

The document to be issued by all suppliers registered under VAT to registered recipients is called ‘Tax Invoice’. A Tax Invoice is the document which evidences that a supply has taken place and serves as the basis for a recipient to recover input tax on a supply. Hence, a Tax Invoice is of great importance under VAT in UAE. The VAT Law has also laid down the details that are mandatorily required in a Tax Invoice.

Let us understand how a registered supplier can issue a Tax Invoice under VAT. For example: Ahmad & Co., a registered apparel supplier in Dubai, supplies 1,000 T-Shirts @ AED 100 to a registered customer, Jumeira Apparels, in Sharjah. VAT @ 5%, amounting to AED 5,000 is charged. The Tax Invoice to be issued by Ahmad & Co. is shown below:

Businesses registered under VAT in UAE should take note of these details that are mandatorily required in a Tax Invoice. It is of utmost importance that none of the required details in a Tax Invoice are omitted. Registered businesses can explore the option of using a software that will automate the capturing of these details and generate Tax invoices accordingly. This will assist such businesses to save the time and effort required to record and generate Tax Invoices manually. Let us now answer some FAQs which businesses have, with respect to Tax Invoices.

FAQ 1: Is there a standard format for a Tax Invoice as per the VAT Law?

Answer: The VAT Law has not prescribed any standard format for a Tax Invoice. However, it has laid down the details that are mandatorily required in a Tax Invoice. These details must be given in every Tax Invoice issued by a registered supplier.

FAQ 2: Is a Tax Invoice a valid document for Input Tax Recovery?

Answer: Yes, a Tax Invoice is a valid document for Input Tax Recovery. However, a registered recipient should ensure that his/her Tax Registration Number is mentioned on the Tax Invoice issued by the supplier. Note that recovery of input tax is subject to certain conditions and eligibility. You can read more about the conditions and eligibility for input tax recovery in our articles ‘Input Tax Recovery’ and ‘Supplies not eligible for input tax recovery’.

For more information on these services, please contact us:

The UAE is the fifth largest market in the world in terms of global retail. Many businesses in UAE solely or mostly supply goods and services to recipients who are not registered under VAT.

For example: Supermarkets, retail outlets, restaurants, etc. There are also many businesses which mostly supply goods and services to registrants and once in a while, supply to persons who are not registered under VAT in UAE.

In these cases, should such businesses issue the detailed Tax Invoice for such supplies, containing all the mandatory details that are required in a Tax Invoice? For businesses which deal mostly with customers who are not registered under VAT in UAE, it is a difficult task to provide all the details required in a VAT Tax Invoice, such as the address of the recipient. At the same time, issue of an invoice evidencing that a supply has taken place is of utmost importance.

To solve this dilemma, the VAT Law provides for the facility to issue ‘Simplified Tax Invoices’ when a person registered under VAT makes supplies to persons who are not registered under VAT. Here, the recipients could be retail customers as well as businesses whose turnover does not exceed the threshold limit to register under VAT. You can visit our blog ‘Registration under VAT’ for more details of the requirements to register under VAT in UAE.

Let us take an example to understand how a registrant can issue simplified Tax Invoices under VAT.

Example: Jehan & Co., a registrant in Abu Dhabi, supplies 2 keyboards to a consumer, Mr. Ali, in Dubai. The simplified Tax Invoice to be issued by Jehan & Co. appears as shown below:

As you can observe, the details mandatorily required in a simplified Tax Invoice are lesser than the details required in a Tax Invoice. A key benefit of a simplified Tax Invoice is that the recipient’s name and address are not required. This becomes very useful for businesses which regularly deal with consumers or unregistered businesses. Such businesses can now easily configure the software they are using in their business for billing and for processing quicker invoices.

Finally, let us answer some FAQs that businesses have, with regard to simplified Tax Invoices.

FAQ 1: Should the title of simplified Tax Invoice be ‘Simplified Tax Invoice’?

Answer: No, the title of a simplified Tax Invoice’ should be ‘Tax Invoice’.

FAQ 2: What is the key difference between a Tax Invoice and a simplified Tax Invoice?

Answer: The key difference between a Tax Invoice and a simplified Tax Invoice is that in a simplified Tax Invoice, the recipient’s details, i.e. name and address are not required.

FAQ 3: Should VAT be charged on supplies for which simplified Tax Invoice is issued?

Answer: Yes, VAT at the standard rate of 5% should be charged in a simplified Tax Invoice.

FAQ 4: Is a simplified Tax Invoice a valid document for input tax recovery?

Answer: No, a simplified Tax Invoice is not a valid document for input tax recovery, as the recipient’s TRN details are not mentioned therein. Hence, if you are a registered business, ensure that a Tax Invoice containing your TRN is issued by the supplier to you.

For more information on these services, please contact us:

Sheikh Mansour bin Zayed Al Nahyan, Deputy Prime Minister, Minister of Presidential Affairs and Chairman of the Abu Dhabi Judicial Department (ADJD), issued a resolution to establish a court specializing in money laundering and tax evasion crimes.

The court will be set up under the framework of the judicial department’s strategic priority to improve the litigation process and create a fair and just judicial system.

Youssef Saeed Al Abri, under-Secretary of the ADJD, explained that the establishment of a specialist court will support the continuous development of Abu Dhabi’s judicial system, as well as play a major role in ensuring the timely adjudication of relevant cases and enhance the expertise of relevant judges, which will be reflected by the quality and consistency of legal judgements.

“The establishment of the court will also support the UAE’s efforts to combat such crimes and persecute perpetrators, through undertaking a series of steps and procedures, in coordination with relevant authorities and in light of an updated legislative infrastructure, which will reinforce the country’s competitiveness both regionally and internationally,” he added.

The court’s establishment highlights the ADJD’s keenness to support the specialisation of judicial work, to raise performance and achieve excellence and leadership, he further added, noting that the department will organise training courses for judges and prosecutors specialising in money laundering and tax evasion.

News Courtesy : Khaleej Times

For more information on these services, please contact us:

The Federal Tax Authority (FTA) of UAE has announced three new VAT free zones which are known as Designated Zones in VAT Law. With the announcement of three new free zone, the number of designated zones is increased to 23. This is indeed good news for the businesses located in those zones. Because VAT at 5% will not applicable to the transactions done within the new Designated Zones barring few exceptions.

List of New VAT Free Zones in UAE VAT

Among the latest addition, Al Ain International Airport Free Zone and Al Butain International Airport Free Zone are the two new Designated Zone added in Abu Dhabi and International Humanitarian City – Jebel Ali in Dubai.

Effective Date of New Free Zone

The new VAT free zone or the designated zones (Al Ain International Airport Free Zone, Al Butain International Airport Free zone and International Humanitarian City – Jebel Ali) will be effective from 18th June 2018. This implies that from 18th June 2018 onwards, the businesses located in these new VAT free zones need to understand the VAT treatment on supplies carried out by them, assess the impact of VAT on their business and accordingly plan. To know more about the VAT treatment on Designated Zone supplies, please read VAT Computation on Goods Supplied from Designated Zone in UAE

Business Benefits for Businesses located in the New VAT Free Zones

The announcement of new VAT free zones provides major relief to the businesses located in those zones. This because, Designated Zone is a VAT free Zone which is considered to be outside the State of UAE for the purpose of VAT. As a result, on any transfer of goods between Designated Zones, VAT will be not be levied. The following are few benefits available for the business located in the Designated Zone.

• Any transfer of goods between Designated Zones will not be taxable.
• Export of goods from Designated Zone to oversee countries will not be taxable.
• Supply of goods from Designated zone to other GCC countries will not be taxable
• Similarly, import of goods from other GCC countries or overseas countries will be non-taxable

While the designated zones offer various benefits, it is important for businesses to note that they have to comply with the certain prescribed conditions which determine their eligibility. Also, there are few supplies which are taxable even when supplied inside the Designated Zone. To know more about the conditions and tax treatment on different types of supplies, please read our article VAT on Designated Zone in UAE.

For more information on these services, please contact us:

Question #1: My company has already submitted the ESR notification in June 2020 after a thorough review. Are the current amendments on ESR relevant for me?

The short answer is ‘Yes’, essentially for the following three reasons:

a) Since the submission of the ESR notifications in June this year, the scope of the ESR has been significantly revised in August 2020. Companies are required to examine whether they are still, or are now, covered under the amended ESR and ensure if their business is compliant.

b) The Ministry of Finance will launch an online portal to facilitate the electronic filing of the ESR notification. Companies are required to resubmit the ESR notification on the online portal even if the notification was earlier submitted in June 2020.

c) If a company is still covered, or is now covered, under the amended ESR, the company would also be required to submit the ESR Report (as per the recently introduced template) on the online portal.

(The online portal is yet to go-live, however, the MoF has recently issued the templates of the ESR notification and the ESR Report on the public domain or website, which gives insights into ESR compliance on the required data and records.)

Question #2: My company’s trade license does not list any of the ‘relevant activities’ covered under the ESR, should I still be concerned?

It is not enough to review the activities listed in the trade license to determine the applicability of the ESR. A ‘substance over form’ approach should be adopted to determine whether a company is conducting any of the ‘relevant activities’ covered under the ESR.

What is a ‘substance over form’ approach? ‘Substance over form’ is a subjective test whereby the actual essence or nature of a transaction is considered instead of the form or name given to such transaction.

WHAT ARE ‘RELEVANT ACTIVITIES’?

Nine activities are covered as ‘relevant activities’ under the ESR namely, (1) Distribution & Service Centre Business (2) Headquarters Business; (3) Lease Finance Business; (4) Insurance Business; (5) Investment Fund Management Business; (6) Banking Business; (7) Shipping Business; (8) Intellectual Property Business; and (9) Holding Company Business. The scope of each ‘relevant activity’ is explained in detail in the ESR laws and guidance.

Question #3: My UAE-based company (let’s call it ‘Company X’) purchases goods from group companies in Belgium and Germany. To save on the logistics costs, the group companies dispatches the goods directly to the end-customers in the US. Are the transactions of ‘Company X’ covered under the scope of the amended ESR?

Among other changes in the scope of ‘relevant activities’, Distribution & Service Centre (D&SC) business now covers purchasing of goods from a foreign connected person and reselling of such goods. Under the earlier ESR, coverage under the D&SC business required (a) purchasing of goods from a foreign connected person; (b) importing and storing the goods in UAE; and (c) reselling the goods outside UAE

With the removal of condition (b) and (c), purchasing of goods from foreign connected persons for international distribution typically referred to as “Bill To-Ship To” transactions, or for local distribution within UAE, could trigger the ESR compliance.

WHAT IS A ‘FOREIGN CONNECTED PERSON’?

Two or more entities are treated as ‘Connected Persons’ if they are related through ownership, like companies within the same group, trusts and trustees, companies and their shareholders, partners and their families. A ‘Foreign Connected Person’ means a connected person that is not tax resident in the UAE.

Question #4: Does my company need to pay additional taxes if my firm falls under ESR purview? Should the company stop the ‘relevant activity’ henceforth to remain outside the scope of the ESR?

Through international cooperation by over 135 countries, the ESR is aimed to curb tax evasion. However, applicability of the ESR in itself does not involve any additional tax obligation.

If the ESR is applicable on a company then the company needs to demonstrate that the ‘economic substance’ is present in the UAE. Only in the absence of ‘economic substance’ in the UAE, stringent penal consequences are applicable. The penalties for non-compliance could range from Dh20,000 to Dh50,000, further increasing to Dh400,00 and possible cancellation/suspension of trade license in the future years.

DID YOU KNOW?

The Federal Tax Authority (FTA) has now been appointed as the ‘National Assessing Authority’ for the ESR. In addition to VAT and Excise Tax, FTA will undertake assessments to determine compliance with ‘economic substance’ tests by the companies. As per the recent ESR notification template , the companies are required to report if they are registered for VAT or not.

Question #5: My company (let’s call it ‘Company D’) was incorporated on July 1, 2018 with its financial year ending June 30, 2019. What would be the first reportable period under the ESR?

ESR is applicable in relation to financial years commencing on or after January 1, 2019. Accordingly, the financial year of ‘Company D’ from July 1, 2018 to June 30, 2019 would not be covered under the ESR. The first reportable period for ‘Company D’ would be from July 1, 2019 to June 30, 2020.

WHAT ARE THE COMPLIANCE TIMELINES UNDER THE ESR?

For the financial year starting on or after January 1, 2019, a company is required to submit ESR Notification within 6 months from the end of the relevant financial year and the ESR report, if applicable, within 12 months from the end of the relevant financial year. The above timelines could vary depending on the go-live status of the online portal by MoF.

Question #6: My company (let’s call it ‘Company Local’) is a mainland company involved in a local grocery shop business. A UAE national and myself are the only two shareholders of Company Local. Is the company still required to comply with the ESR?

The amended ESR has introduced a category of ‘exempt licensees’ which covers (a) Investment Funds, (b) Licensee that is a tax resident in a foreign jurisdiction, (c) a UAE branch of a foreign entity (if taxed in a foreign jurisdiction); and (d) entities that carry out business in the UAE which are wholly owned by UAE residents/nationals and are not part of a multinational group.

Company Local should be covered under category (d) above and would be required to submit only the ESR notification along with certain prescribed documents on a yearly basis. Based on the category of the ‘exempt licensee’, the prescribed documents could include tax residency certificate of the foreign jurisdiction, details and tax residency certificate of the Head Office (Foreign Company), details of the shareholders of the companies and/or financial statements.

Courtesy: Gulf News.

For more information on these services, please contact us:

A business keeps growing and expanding constantly. In this process, it is important for businesses in UAE to be cognizant of the impact of changes in the business on compliance under VAT rules. Let us understand the type of business changes which have an impact on a business’s compliance under VAT and the steps to be taken in each case.

The changes in a business which impact compliance under VAT can be categorized into 2 types:

• Change in account details
• Change in business circumstances

Let us understand these in detail.

Change in business details

This type of change is applicable to persons who are registered under VAT in UAE. When there are changes in their account details maintained with the FTA, it is important that these changes should be notified to the FTA. The FTA will amend the VAT registration accordingly.

Some examples of changes in account details, which should be notified to the FTA are:

• Name or trading name of the business
• Composition of a partnership
• Address of the principal place of business
• Primary business activity or activities
• Bank account details of the business or
• Details of Customs registration

Certain changes in account details, such as business activities, customs registration information, can be changed online by logging in to the FTA portal. These changes and how to make these changes are explained in detail in our article ‘Online amendment of registration details’.

Certain other changes in account details, such as address of the principal place of business, bank account details, have to be notified in writing to the FTA. These changes have been explained in detail in our article ‘Amendment of details blocked for online modification’.

Change in business circumstances

There are certain changes which occur in a business which lead to a change in the business’s circumstances materially. Examples of such changes are:

• The business ceases to be eligible for an exception from registration
• The business ceases trading or
• Certain taxable activities cease for any reason

These changes in business circumstances will result in a requirement to register under VAT or cancellation of registration.

Administrative penalty for failure to notify FTA of business changes

It is a taxable person’s responsibility to ensure that the information on which their registration is based, is accurate and up to date. In the event of a change in business details, whether it is a change in account details or change in business circumstances, the taxable person should notify the FTA of the change, in the relevant manner. In case a change in business details is not notified to the FTA, a penalty could be levied. The administrative penalty for failure to notify the FTA of business changes is as follows:

Hence, it is essential that taxable persons should ensure to inform the FTA in the event of a change in their business details. This change can be a change in account details or a change in business circumstances. Based on the type of change in business details, appropriate actions to notify the FTA need to be taken.

For more information on these services, please contact us:

On bounced cheque cases, Law stipulates how criminal lawsuits can be avoided.

The UAE Cabinet has issued a Decree bringing about changes to the Commercial Transactions Law, including those related to bounced cheques. These come into force in 2022.

This will create mechanisms that will ensure the collection of payments through cheques, such as obliging banks to partially pay the amount after deducting the total amount available to the beneficiary. The Decree also makes bounced cheques an executive document to be executed directly by an appropriate judge in court.

The changes in the Law also aim to bring about an avoidance of criminal lawsuits through encouraging reconciliation and urging the payment of the value of the original cheque as the main condition for the dropping of a criminal lawsuit.

The amendments introduce several other penalties, including cancelling the cheque books of convicted persons and preventing them from obtaining new ones for a maximum period of five years. There will also be a halt to their professional activities.

Additional penalties will be introduced, including the suspension of licenses to practice economic activities for six months.

The amendments also cover the opening of joint accounts. If one of the joint account holders dies or loses legal control, the other holder must notify the bank within 10 days from the date of death. The bank must, from the date of notification, limit the ability to withdraw from the joint account within a party’s share of the account balance on the day of death or loss of eligibility.

News Courtesy : Gulf News

For more information on these services, please contact us:

Changes to help avoid lawsuits, encourage reconciliation

The UAE Cabinet has issued a decree amending the Commercial Transactions Law, including those related to bounced cheques. The amended law comes into force in 2022. The changes will create mechanisms that will ensure the collection of payments through cheques, such as obliging banks to partially pay the amount after deducting the total amount available to the beneficiary. The decree also makes bounced cheques an executive document to be executed directly by an appropriate judge in court.

Main condition

The changes also aimed at avoiding criminal lawsuits through encouraging reconciliation and urging the payment of the value of the original cheque as the main condition for the dropping of a criminal lawsuit.

The amendments introduce penalties, including cancellation of the cheque books and preventing the defaulters from obtaining new ones for a maximum period of five years. Additional penalties will be introduced, including the. suspension of licenses to practice economic activities. for six months. With regard to joint accounts the bank must, in case of one of the joint account holders dies or loses legal control, from the date of notification, limit the ability to withdraw from the joint account within a party’s share of the account balance on the day of death or loss of eligibility.

News Courtesy : Gulf News

For more information on these services, please contact us:

On 24 August 2020, the UAE Cabinet published Cabinet Decision no. 58/2020 on the Regulation of Procedures related to Real Beneficiaries (the “New Cabinet Decision”). The New Cabinet Decision requires companies licensed to carry on business in the UAE to maintain a Register of Partners (or Shareholders) and a Register of “Real Beneficial Owners”. 

A “Real Beneficial Owner” is defined as the individual that ultimately owns and or controls the licensed UAE company, whether directly or indirectly, through at least 25% of its capital.  

What does this mean? 

• Most companies licensed to operate in the UAE will be required to create and maintain a Register of Real Beneficial Owners and a Register of Partners (or Shareholders) by 26 October 2020.
• According to the New Cabinet Decision, new and existing companies are required to submit these registers to the Department of Economic Development of the relevant Emirate (“DED”).
• Under the New Cabinet Decision, the competent licensing authorities are under an obligation to maintain the confidentiality of information submitted to them.

The  New Cabinet Decision applies to all companies licensed in the UAE, except for the following: 

• companies in financial free zones (Abu Dhabi Global Markets and Dubai International Financial Centre), which have their own rules in this regard. For example, Abu Dhabi Global Markets has issued requirements in this regard and which are aligned with the New Cabinet Decision.  
• companies which are wholly owned, directly or indirectly, by federal or Emirate government; and 
• companies licensed in the UAE which are ultimately listed on a market/exchange are exempt from certain of the requirements in the New Cabinet Decision, as they are subject to robust transparency rules on Real Beneficial Owners. 

Although the New Cabinet Decision specifies that penalties may be applicable for failure to comply, such penalties have not been confirmed by the authorities yet.  However, the MOE has confirmed that the Cabinet of Ministers may upon the recommendation of the Minister of Economy issue a new cabinet decision with the various penalties in this regard.  As of today, this has yet to be issued. 

For more information on these services, please contact us:

In UAE, mandatory VAT registration is required only for those businesses whose value of supplies exceeds AED 375,000 in previous 12 months or anticipated to exceed in next 30 days during the current financial year. For businesses with value of Supplies / Taxable Expenses exceeding AED 187,500 in previous 12 Months or anticipated to exceed in next 30 days during the current financial year, the VAT registration is optional.

All those businesses whose value of supplies are less than the defined threshold limit will not be allowed to register under UAE VAT. However, this does not stop or restrict them to obtain VAT registration in the future, when the value of supplies exceeds or is anticipated to exceed the defined VAT registration threshold. This eventually leads to a business situation, in which, businesses were not registered on the 1st January, 2018, the date on which VAT was implemented but over the period of time, they have exceeded the defined threshold and have been registered under UAE VAT.

If you take a close look at the above situation, there are two phases to the journey of the businesses, Pre-Registration and Post-registration. In pre-VAT registration phase, they had to pay VAT on their purchase/expenses but were unable to recover Input VAT. This is because, only the registered business are allowed to recover Input VAT. In the post-registration phase, they are required to collect 5% VAT on taxable supplies and also, they are allowed to recover the Input VAT paid on purchases/expenses.

While the above discussion looks clear, the confusion is about reclaiming the Input VAT paid before registration? Are businesses allowed to recover the VAT paid before VAT registration?

Yes, the UAE VAT laws allows the recovery of input tax paid on goods, services and imported goods prior to the date of VAT registration. This will be allowed, only if the goods and services were used to make supplies that give the right to input tax recovery upon tax registration. This implies that the purchases / expenses on which VAT was paid before registration were used in making taxable supplies after registration.

The recovery of Input VAT will be in accordance with the general provisions of input TAX recovery and more importantly, the recovery should be done in the VAT Return submitted for the first Tax Period following Tax Registration.

However, the UAE VAT also stipulates certain exceptional scenarios in which VAT paid before registration cannot be recovered. The following are the instances:

• Goods and Services purchased for the purpose of making non-taxable Supplies. This implies that, you can recover VAT, only if it is used for making taxable supplies including zero-rated supplies.
• Input Tax related to the part of the Capital Assets that depreciated before the date of Tax Registration. This implies that If part of the asset is depreciated then Input tax cannot be recovered on such assets to the extent such assets are depreciated. For example, if you purchase a fixed asset with an expected life of 10 years and when you register for VAT the asset has only 3 years of use left. In this case, you can reclaim only 30% of the VAT you originally paid.
• Input VAT on service received more than 5 years prior to the date of tax registration will not be allowed to be reclaimed. This restriction is applicable only for services and not applicable for goods.
• If such goods were moved to another GCC country before tax registration.

Except for the instances listed above, in all other cases, you will be eligible to recover VAT paid before registration, if it is used for making the taxable supply.

Conclusion

Allowing the businesses to recover the VAT paid prior to registration prevents cascading of taxes on the end consumers. The businesses registered after 1st January 2018, should be aware of the benefit provided by this provision in reclaiming the Input VAT. Any absence in knowing this provision of law will lead to loss of Input VAT recovery. Also, it is important for businesses to note that reclaiming of VAT paid before registration is allowed only while filing VAT returns for the first return period post registration. Thus, businesses must ensure to file a return for the first tax period after carefully analyzing the provisions discussed above. After, the filing of return of first tax period, recovery of input tax paid before tax registration cannot be made.

For more information on these services, please contact us: