Value Added Tax, usually known as VAT, is an indirect tax that is categorised as a general consumption tax. One of the most prevalent types of consumption taxes in use worldwide, countries levy VAT on the majority of purchases and sales of goods and services. The UAE implemented Value Added Tax (VAT) in January 2018 at a rate of 5%.
Recently, changes were made to a few of the clauses of the Value Added Tax (VAT) law that the Ministry of Finance introduced in 2018. Beginning on January 1, 2023, the adjustments will be in force. According to Decree-Law No.18 2022 on VAT’s Arabic translation, which was made public in the official gazette, there were a total of 24 modifications made (issue no. 736 of 28 September 2022).
A provision in the Federal Decree Law No. 8 of 2017 on VAT that allows registered people to request for an exclusion from VAT registration if all of their supplies are zero-rated or if they no longer manufacture any supply other than zero-rated supplies is one of the amendments made to the law.
Supplies that are taxed at 0% for both goods and services are known as zero-rated supplies. As established by the taxing authority, some examples of zero-rated items are specific meals and beverages, exported goods, donated goods sold by charity stores, equipment for the disabled, and prescriptions.
Other modifications include establishing a 14-day window for the issuance of a tax credit note to pay output tax, in keeping with the window established for the issuance of tax invoices. According to the ministry statement, the Federal Tax Authority (FTA) may forcefully deregister people in some circumstances if it is judged appropriate.
Additionally, it includes changes to specific laws that reword, clarify, or improve the order in which certain legal provisions were passed into law. The VAT rate, which is 5 percent, has not been altered and will remain unaltered. The modifications were made in accordance with global best practises in light of the GCC Unified VAT Agreement. The statement said, “They are based on prior experiences, difficulties faced by various business sectors, as well as the recommendations received from the appropriate parties.”
UAE VAT amendments explained
• The right to request an exemption from VAT registration is available to those who are registered and make taxable supplies. However, they must only produce zero-rated supplies going forward or cease producing any other types of supplies altogether.
• In accordance with the deadline for releasing tax invoices, a 14-day window will be set aside for issuing tax credit notes to settle output tax.
• If necessary, the Federal Tax Authority may in some circumstances forcefully deregister registered individuals.
These modifications comply with the GCC Unified VAT Agreement’s worldwide best practises. They are based on a range of difficulties and experiences encountered across industries, as well as suggestions from pertinent parties. With a 5 percent tax on the majority of products and services, value added tax was first implemented in the UAE in 2018. This was implemented as a part of the country’s efforts to diversify its economy and lessen its dependency on oil.
In addition to these adjustments, which take effect on January 1, the UAE will also enact a federal corporation tax of 9% on business profits beginning with the fiscal year that begins on or after June 1, 2023, according to information released by the Ministry of Finance on January 31.
UAE business VAT regulations
A business must register for VAT if its taxable imports and supplies are greater than the statutory registration threshold of AED 375,000. If a company’s supplies and imports total more than AED 187,500, it can also opt to register for VAT on a voluntary basis.
In a similar vein, a company may voluntarily register if its expenses surpass the voluntary registration level. In order to enable new firms with no revenue to file for VAT, this was created. In the UAE, companies are expected to keep current records of their financial transactions and to document them.
UAE sectors exempt from VAT
The following supply types are exempt from VAT:
• Providing specific financial services
• Residential structures
• Empty space
• Transporting people locally
Typically, VAT is applied to purchases made by governmental organisations. By doing this, it is made sure that governmental organisations do not have an unfair edge over commercial enterprises. According to the UAE Ministry of Finance’s public consultation document mentioned earlier, “the related party is an individual or entity that has an existing relationship with a business that is subject to the UAE corporate tax (CT) regime through ownership, control, or kinship (in the case of natural persons”).
To identify the associated parties, the text defines seven criteria. Two or more people who are “connected to the fourth degree of kinship or affiliation, whether by birth, marriage, adoption, or guardianship,” according to the first criterion in the agreement, will be regarded as related parties for corporate tax reasons. Businesses and other legal entities are not covered by the first criterion since it only applies to natural beings.
The aforementioned level of kinship can be proven through birth, marriage, adoption, or guardianship. According to the second degree of kinship, if the father of a girl adopts a boy, the children are regarded as related parties. On the basis of guardianship, the kinship may also be determined. A guardianship order is a court appointment that allows a person to act or make decisions on behalf of a person who lacks capacity, such as a mother of a girl who has been named as the guardian of any other girl by the court. The second degree of kinship will classify both girls as related parties.
According to the second criterion in that document, an individual and a legal entity are considered related parties if the individual, alone or jointly with another related party, directly or indirectly holds at least 50% of the company’s shares or otherwise has control over the legal entity. For instance, Mr. X and Company B will be regarded as related parties if Mr. X owns 51% of the stock in Company B. If Ms. GG has full control over Rix Ltd. And has the authority to make all decisions, as indicated by a board resolution or the company’s memorandum, then Ms. GG and Rix Ltd. Will be regarded as related parties.
According to the third requirement, two or more legal entities that control or own at least 50% of the shares of another legal entity, either individually or jointly with a related party, are deemed to be related parties. Beta Ltd is owned by Like Alpha Ltd to the tune of 60%. Since Alpha Ltd owns more than 50% of the stock in Beta Ltd, it will be assumed that the two companies are related.
Additionally, if a person is engaged in both exempt and non-exempt business activities, the exempt operations of the same person must be included in the definition of related parties in order to meet the final criterion for determining whether two parties are linked.
The management of the companies will need to comprehend the link between the parties involved in the transaction and apply the aforementioned factors appropriately to determine whether those parties are related parties. Arm’s length principles should be used in accordance with clause 7.3 of the agreement if it has been determined that the transaction is between related parties.
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