Most notable update is the addition of a definition for “Virtual Assets”.

The FTA goes on to confirm that digital representations of Fiat currencies (e.g. the UAE dirham) should not be considered a Virtual Asset (this could for example be a Central Bank backed stable coin akin to the UAE dirham).

However, it is unclear whether (commercial) stablecoins pegged to Fiat currencies should also be excluded.   

Article 4(4) of the Executive Regulation was amended to clarify that, in order for a single composite supply to exist, the different components must be supplied by a single supplier and the price of the different components must not be separately identified or charged by the supplier.

The clarification highlights two things in this regard:

1. Even if the supplier charges a single price for all the components, it would not be regarded as a single composite supply if the price for each component is separately identified, e.g., if the tax invoice, quote, or underlying contract reflects the price of each component separately.
2. If the supplier subcontracts some of the components to a third party, but remains contractually responsible for the supply to the recipient, then the supplier is still regarded as supplying such components, and the first condition that all the components must be supplied by a single supplier could still be met.

The clarification makes it clear that taxpayers can’t artificially bundle the price of separate components on the invoice when the price can be separately identified in the underlying contract or even quotation.

This could be relevant for insurance companies providing life insurance covers along with non-life covers as a rider, where the price of the rider is known separately to both parties.

The clarification also clarifies the change in Article 46(1)(1), where a single composite supply is made which does not contain a principal component, the tax treatment is based on the general nature of the supply as a whole.

The clarification highlights that:

- A supply of samples or commercial gifts would not constitute a deemed supply if the value of such goods supplied within a 12-month rolling period does not exceed AED 500 per recipient.

- Furthermore, if the total output tax payable on all deemed supplies is AED 2,000 or less within a 12-month rolling period, the supply would not be regarded as a deemed supply. Where this monetary threshold is exceeded, only the amount in excess of AED 2,000 would be considered payable tax, i.e., the related supply would be regarded as a deemed supply.

- For government entities a threshold of AED 250,000 is appliable.

Key takeaway from the clarification is that taxpayers will need to closely monitor deemed supply limits and that when a breach of the threshold takes place, only the excess amount over AED 2,000 would be considered a deemed supply.

In practice, we tend to see that businesses block all input tax e.g. in relation to corporate gifts.  Depending on the volume and values involved, there may be an opportunity now to claim back additional input tax, if appropriate processes are setup for monitoring such expenses.

The FTA also makes it clear that the above will need to be monitored on a 12-month rolling period, rather than e.g. per tax year, taking away any ambiguity, if any, on the administration of these rules.

The clarification highlights that a UAE resident can only register for VAT on a voluntary basis where it can evidence that it carries on a business in the UAE and can evidence the intention to make taxable supplies.

The FTA provides examples that the intention can be evidenced e.g. by way of (customer) contracts, purchase orders, etc.

The clarification seems to follow what we already are seeing in practice by the FTA, specifically when it comes to registering new businesses for VAT.

The authority is taking a stricter approach on the matter and will want to see clear evidence substantiating the intention to do business.

Specifically, in the context of M&A this update could be a key point to consider, e.g. where a business is being transferred to a new entity; Failing to register could lead to VAT being charged upon non-fulfilment of the conditions of ‘transfer of a going concern’ provisions.

Key aspects clarified by the FTA are:

1. The FTA has the power to deregister a person who created a deregistration application in Emaratax and saved it as a draft without completing the process, if the person continuously submitted nil returns or no returns because they stopped making taxable supplies.
2. The FTA can determine the effective date of tax deregistration to be different from the date requested in the tax deregistration application by the registrant, or the date on which the tax deregistration request was submitted.
3. Tax deregistration does not absolve a person from complying with the provisions of the Decree-Law and its Regulation, including filing another tax registration application when the tax registration requirements are met.
4. The FTA’s power to deregister to protect the integrity of the tax system may be used where any of the following conditions are satisfied:

- The registrant does not meet the tax registration requirements.

- The registrant has not applied for tax deregistration where they were required to, or the registrant has created a tax deregistration application with the FTA but has not completed such application.

- Any other conditions specified by the FTA.

This amendment, together with the increased authority for the FTA to deregister taxpayers will be an interesting one to monitor.  More specifically, we are aware that in practice, the FTA had approved VAT groups somewhat loosely perhaps during the early days of VAT e.g. where a member did not make any taxable supplies on its own and was mainly added to the group to avoid a sticking VAT cost due to recharges.

These updates make it clear that taxpayers should review their structures and de-group where members do not qualify (anymore), or face the potential risk during an FTA audit.

The definition of ‘purchase price’ in the context of the Profit Margin Scheme has been amended to not only include the purchase price of the goods themselves, but also costs and fees incurred to purchase such goods.

The FTA clarifies that such “costs and fees” could include customs duties, shipping, handling, wrapping, and installation costs charged/re-charged by the seller of the good.

However, where such costs are charged by a VAT registrant, the VAT component of that cost should not be included in the purchase price, as the recipient may recover input tax based on the tax invoice issued by the supplier of such services.

This clarification by the FTA is an important one, as most companies would generally account for all ‘purchase-related costs’ (excluding the recoverable VAT portion) as the acquisition price and usually consider that to determine the profit margin earned on a particular unit.

Further, there is still a grey area whether internal costs that are directly related to acquiring the products (such as buying commissions paid to staff, etc.) can be included in the purchase price (as no VAT would be chargeable on such costs).

The FTA clarifies that prior to November 15, 2024, taxpayers had to obtain and retain an exit certificate in order to evidence that goods were exported out of the UAE.

From November 15, 2024 onwards, evidence to substantiate that goods are exported can be either:

1. A customs declaration and commercial evidence (both required).
2. A shipping certificate and official evidence (both required).
3. In the case of customs suspension, a customs declaration proving that the goods were placed under the applicable customs suspension regime.

The definition of official evidence has also been expanded. It now includes:

- An exit certificate.

- A clearance certificate issued by the relevant Local Emirate’s Customs Department or by the competent authorities in the UAE, after verifying that the goods left the UAE.

- Any document or clearance certificate certified by the competent authorities in the country of destination confirming that the goods entered that country. (Note: The certification should be clearly reflected on the document, for example, an official stamp or seal, and the document should be either in Arabic or English, or a certified translation should be retained in one of these languages.)

Furthermore, the clarification highlights that there can be scenarios in which FTA can decide to reject documents that do not sufficiently prove that the goods have exited the UAE.

This could, for example, be the case where the text is not readable, or the particulars required under Article 30(5) of the Executive Regulation (namely: the supplier, the consignor, the goods, the value, the export destination, the mode of transport, and the route of the export movement) cannot be determined based on the documents submitted.

The zero-rate for export of goods is probably one of the most litigated provisions in the VAT Law by both the FTA on the one hand and taxpayers on the other.

Consequently, the prospective changes to these provisions provide for some welcomed easement on taxpayers when it comes to the burden of proof regarding ‘official evidence’.

That said, the clarification unfortunately makes it very clear that a similar relaxation does not exist for exports prior to the 15^th of November.

Consequently, we highly recommend that companies in the export business stringently review their export documentation for the past five (5) years in case of an audit.

Remedial action can be considered still by taxpayers e.g. in the form of audit defence files and/or action to ascertain the necessary customs documentation retrospectively.

The clarification highlights that the word ‘personal’ was removed from the text of Article 31(1)(a)(2) to reflect that export of services may not be zero-rated if these are supplied directly in connection with ‘movable assets’ located in the UAE at the time the services are performed.

The clarification goes on to provide examples of services to non-residents that do not qualify for zero-rating, such as:

- Services supplied on goods (e.g., installation services) located in the UAE at the time the services are performed.

- The supply of a means of transport to a lessee who is not a taxable person in the UAE and does not have a tax registration number in an implementing state if the means of transport was in the UAE when it is placed at the disposal of the lessee.

- The supply of restaurant, hotel, and food and drink catering services performed in the UAE.

- Cultural, artistic, sporting, educational, or any similar services performed in the UAE.

- The supply of services that are directly connected with real estate located in the UAE.

- The supply of transportation services (and transport-related services) where the goods or passengers are transported from the UAE.

- Telecommunication and electronic services used and enjoyed in the UAE.

We consider the change in the text of Art 31(1)(a)(2) to mainly be confirmatory in nature, as the FTA – in practice – already interprets the words ‘movable personal assets’ as ‘goods’.

Consequently, we do not consider this as a change in policy per se, and more of an alignment of the law. 

The same is applicable for the examples provided by the FTA in the clarification. i.e. it is not new that any service provided to a non-resident recipient, but for which the place of supply is determined to be the UAE under the special place of supply rules, cannot be zero-rated.

In addition to the above, the clarification also discusses the so-called ’30-day rule’ when determining whether the zero-rate for export of services can be applied. 

More specifically, the clarification states that the total number of days the non-resident recipient of services is present in the UAE during a rolling 12-month period should be considered to determine whether the non-resident is regarded as being “outside the UAE” at the time the services are rendered.

The FTA also provides for a helpful example in the clarification:

‘in case of a supply of services provided throughout a year, if the non-resident recipient’s director is in the UAE for more than 30 days during the 12 months period preceding the date of supply, the recipient is regarded as being in the UAE’.

The 30-day rule is a highly discussed matter by businesses, and an area that taxpayers will need to carefully monitor and evaluate on a case-by-case basis.

Interestingly, the FTA provided another (indirect) example in the clarification in a different section, stating that:

‘[…] a person with a short-term presence in the UAE of less than a month is only regarded as being outside the UAE if this presence is not effectively connected with the supply, e.g. if the person is in the UAE for a short holiday or transits through the UAE and does not have any meetings related to the supply while in the UAE.’

The implication of the above is that where a person is on long holiday in, or where a person works remotely from the UAE for more than 30 days, that the zero-rate cannot apply in a lot of instances, even where that person is not connected in any way or form with the provision of the services.

The above can especially be burdensome for big global groups, and companies that allow for global mobility, as depending on the location of people, there clearly can be a VAT impact.

Three key aspects are clarified by the FTA:

1. Same Supplier Rule: The provision of local transportation of goods (UAE to UAE) will only be zero-rated if provided with and by the same supplier who is responsible for providing the international transportation of the goods (UAE to outside UAE).
2. Place of Supply: The place of supply of transportation services (and transport-related services which begin from a place outside the UAE) is out of scope and not zero-rated.
3. Services provided during international transport: If services are supplied in respect of an international transportation service and are provided during the course of such transport to a person other than the recipient of the international transportation service, the supply would not qualify for zero-rating.

Clarification Regarding the Same Supplier Rule: The FTA has historically adhered to the "same supplier rule," issuing numerous private clarifications and enforcing it during audits. However, since the change in the regulations is effective from November 15, 2024, onwards, the clarification lacks explicit guidance on its prospective or retrospective application.

Place of supply: Due to the wording in the previous version of the Regulations, most businesses in the logistics industry were reporting international transport and transport-related services from outside the UAE as a zero-rated supply in their VAT returns instead of treating these as out of scope. Taxpayers may need to assess whether they would need to do a Voluntary Disclosure (VD) to correct their incorrectly reported zero-rated supplies.

The clarification confirms that only ships, boats, or other floating structures that are designed or adapted to be used for the commercial transportation of passengers and goods constitute qualifying means of transport.

Consequently, where a ship is used for commercial purposes, but its main purpose is not to transport goods or passengers, the ship would not constitute a means of transport, e.g., a ship used for commercial fishing, a drilling ship, or a dredger.

The supply or importation of such a ship would, therefore, not qualify for zero-rating under Article 34 of the Executive Regulation, read with Article 45(4) of the Decree-Law.

The overarching rule that the means of transport must be designed for commercial use of transport of passengers or goods was already present in the VAT law, and regulations were meant to be read in tandem with the law.

With the amendments to the regulations, the same has been clarified, and any ambiguity around zero-rating floating structures (offshore vessels, barges, drill ships, etc.) has been removed.

The updated regulations limit zero-rating in respect of services supplied directly in connection with a qualifying means of transport to the following:

1. Repair services carried out on board the qualifying means of transport.
2. Maintenance services carried out on board the qualifying means of transport, including the cleaning, repainting, inspection, and testing of the means of transport, their parts, and equipment, as well as other similar services.
3. Conversion of the means of transport, provided that, after the conversion process is completed, the means of transport continues to meet the conditions of Article 34 of the Executive Regulation to be regarded as a qualifying means of transport.

Services such as cleaning the hangar where the qualifying means of transport is parked would not qualify to be zero-rated, as it does not relate to a particular qualifying means of transport.

Whilst the clarification provides for much needed guidance, it also remains silent on a few critical areas;

Specifically, the updated regulations seem to narrow the application of the zero-rating in respect of repair and maintenance services by adding that these need to be carried out 'onboard’ of a qualifying means of transport.

The management of investment funds, i.e., services provided for consideration by an independent fund manager to funds licensed by a relevant UAE competent authority, including the management of the fund’s operations, the management of investment for or on behalf of the fund, and the monitoring and improvement of the fund’s performance, shall be exempt from VAT.

Fund managers need to consider whether they are still eligible to be registered for VAT or need to apply for deregistration.

The main aim of the fund management exemption is to promote the local establishment of funds over foreign ones.   It is not uncommon for the fund manager to be in the UAE.  However, the fund itself would generally still be setup aboard e.g. in the Cayman Islands or similar.

The exemption aims to incentivize fund managers to consider the UAE as the establishment country for the fund over others, as otherwise fund management fees and performance fees charged by the fund manager could attract a sticking 5% VAT cost, especially in scenarios where a fund is effectively managed from the UAE.

An interesting point that the FTA has not commented on is “what” essentially constitutes a fund. For example, the AGDM allows for the registration of certain investment vehicles which are not considered traditional funds but seen as “non-financial investment companies”. It will be interesting to see whether these will be treated similarly to funds in the context of the VAT fund management exemption.

The transfer of ownership of virtual assets, including virtual currencies (e.g., Bitcoin), and the conversion of virtual assets were specifically exempted from VAT from January 1, 2018. Registrants must consider the impact on their historical VAT position, e.g., whether a tax credit note should be issued (e.g., where 5% VAT was applied on the supply).

Further, the keeping and managing of virtual assets and enabling control thereof (e.g., managing crypto wallets) have also been exempted, provided it is not done for an explicit fee, commission, or similar charge.

From a VAT perspective, cryptocurrencies are neither regarded nor treated as money.

The retrospective application warrants substantive business change for companies operating in this sector. Companies who have already registered for VAT may now have to de-register if their business operations allow them to do so, having due regard to zero-rating provisions under the VAT law.

Further, the FTA states in the clarification that cryptocurrencies are not treated as money. This raises questions for businesses allowing cryptocurrencies as payment (and subsequently converting these into Fiat/AED), specifically:

- Would the conversion of crypto (post receipt as payment for services) be an exempt supply? If so, would this make fully taxable businesses partially exempt even?

- Would the original transaction (i.e. crypto in exchange for services) be considered a barter transaction?

- If yes, would the retrospective application mean a requirement to update and amend prior VAT returns?

It is clarified that the regulations now allow VAT-registered employers to recover input tax incurred to provide health insurance to their employees and employees’ families (if applicable), regardless of whether there is a legal obligation to provide such health insurance or not, and includes health insurance top-ups.

The term “family” is limited to a husband, one wife, and up to three children younger than 18 years.

It is further clarified that this amendment is only effective from November 15, 2024, and shall not be applied retrospectively. Consequently, only the VAT incurred on the portion relating to the period falling after November 15, 2024, may be recovered to the extent the employer incurs these costs to make taxable supplies, and provided the relevant supporting documents are retained.

This is, overall, a positive change in the regulations. Now taxpayers who are providing dependent medical insurance to their staff would have to update their internal checks to limit input tax recovery for up to one (1) spouse and three (3) children only till the age of 18.

Also, it is still not clear whether the insurance cover provided to Emirati staff and their families (who are already covered under Thiqa and Enaya coverage) will be allowed under the ‘enhanced health insurance’ wording as amended in the regulations. It is advisable not to claim the input tax credit on the same until specifically clarified.

Specifying tax year-end:

The clarification highlights the following special cases that trigger the end of a tax year:

This update is significant in the context of M&A, and/or other types of (internal) restructurings.

More specifically, it is now clear that every time an amendment is made to an existing VAT group, or a VAT group is formed/ disbanded, consideration should be given to year-end adjustments (i.e. annual wash up and actual use), due to the end of tax year that is triggered by this new article in the regulations.  

Standard Method

The FTA has clarified a very important aspect: for the standard method of input tax apportionment, even though the regulations were amended to refer to the “sum of input tax for the tax period,” the simplified calculation referred to in the Input Tax Apportionment VAT Guide (“VATGIT1”) should still be used.

This is a very important clarification for taxpayers performing input tax apportionment. Most taxpayers, post-amendment, started using the updated formula for calculating the eligible input tax recovery percentage as (T) / (T+E+C+B) or (T) / (T+E+B), where:

- T - input Tax wholly attributable to taxable supplies

- E - input Tax wholly attributable to exempt supplies

- C - cannot be wholly attributed

- B - blocked input tax

However, the FTA effectively clarified that there should not be any change when calculating the eligibility percentage as per the standard method, and accordingly, it should still be T / (T+E).

Taxpayers that did amend their method in the interim (i.e. from 15 November onwards), may now have a Voluntary Disclosure requirement.

Limit to check for actual use:

It is clarified that the AED 250,000 threshold in Article 55(11) to determine whether an actual use adjustment is required should be apportioned on a pro-rata basis if the tax year is shorter than 12 months.

If a tax year is shorter than 12 months, say 5 months, then to check for variance between the standard method and the actual method, instead of AED 250,000, a threshold of AED 104,166.67 (250,000 x 5/12) will apply, and adjustments (if need be) should be done accordingly.

Mandating a special method:

It is clarified that the FTA has the right to require a taxable person to apply a specific apportionment method, considering the nature of the taxable person’s business and transaction types.

For example, if the FTA finds during an audit that a financial institution is using the standard input tax-based apportionment method although the taxable person has multiple sectors, including real estate, retail banking, and investment banking, the FTA may require that the taxable person apply to use the sectoral apportionment method.

Introducing a specified rate of recovery:

Taxable persons may apply to use a specified recovery percentage to apportion input tax, which is subject to the FTA’s approval.

The specified recovery percentage is determined based on the recovery rate at the end of the preceding tax year and applied to the following tax periods for the current tax year, instead of calculating an apportionment rate for each tax period.

The rate shall be based on:

The approval for using the specific recovery percentage shall be valid for 4 years, and the registrant will not be allowed to change the method for at least 2 years following the approval. As a precondition, the registrant should have been registered for VAT in the preceding tax year.

The introduction of a specified recovery percentage is a welcome change and, if implemented correctly, could simplify the overall VAT compliance process and process of calculating the eligible input tax credit for each tax period.

It is important to note that even in a scenario where a fixed rate is approved, the taxpayer would still need to perform an actual use calculation and make necessary adjustments after the end of each tax year.

It is clarified that, for an internally developed capital asset, the first tax year shall be the year in which that asset is brought into use, even if the capital asset was ready for use in a prior year

Major clarifications include the following:

1. Administrative exceptions may be granted to exempt a registrant from having to deliver tax invoices, subject to the conditions the FTA considers necessary.
2. When agents issue invoices on behalf of a principal, both the agent and the principal must retain sufficient records to determine the name, address, and TRN of the principal supplier and agent, vice versa.
3. Registrants are required to issue the relevant tax invoice within 14 days from the date of supply, except:

- Simplified tax invoices - They must be issued on the date of supply.

- Summary tax invoices - They must be issued and delivered to the recipient of the supply within 14 days from the end of the calendar month in which the date of supply of such supplies occurred.

1. The FTA may withdraw a previously granted administrative exception if the conditions under which the exception was granted are not met.
2. Self-invoicing: The clarification reaffirms the FTA’s view regarding the issuance of full tax invoices (invoice raised by the supplier on itself or self-invoicing) for transactions where the reverse charge mechanism applies (for example, import of services), unless an administrative exception was approved by the FTA.

As per Article 48(1) of the UAE VAT Law, where a taxable person imports goods or services from outside the UAE, that person is deemed to be making a taxable supply to themselves and must account for the due VAT.

The FTA have reaffirmed (again – by way of this clarification) that in those instances all VAT obligations, including the requirement to issue a tax invoice, should be fulfilled by the UAE recipient/importer, i.e., the taxable person would be required to issue a valid tax invoice to itself, as the recipient of the supply.

In practice, we are aware that most taxpayers do not take action on this requirement, especially as most ERP systems are also not setup to systematically cater for this (as it can also lead to double entries etc.).

It is clear now that failing to do this will be seen as non-compliance by the FTA and businesses should consider how to best manage this risk.

There are cost efficient ways of managing this requirement which A&M can support with.

Grants (of transfer of right to use/exploit), disposals, and other transfers of ownership of government buildings, real estate assets, and other similar projects from one government entity to another will not be regarded as supplies, and would, therefore, fall outside the scope of VAT.

"Government buildings, real estate assets, and other projects of similar nature” means:

- Government entities’ premises.

- Government capital projects.

- Government infrastructural projects.

- Real estate assets used by government entities.

- Real estate assets allocated and used to serve a public utility and for public use.

- Developed government land.

The scope of buildings, real estate assets, and other projects of similar nature qualifying for this exception shall be determined under a decision issued by the Minister, and the exception mentioned above would not automatically apply.