VAT is a tax imposed on the import and supply of goods and services at each stage of production and distribution, therefore, VAT implications arise only when there is a supply – if there is no supply, there is no VAT implication.
The FTA explained that the Federal Decree-Law No. (8) of 2017 on VAT and its Executive Regulations have included specific provisions on what would constitute a supply of goods and a supply of services and also included a definition for taxable supplies. As such, where any transaction falls outside the scope of these provisions, it would, as a consequence, fall outside the scope of VAT. The FTA also noted that although Article (42) of the Executive Regulations outlines the tax treatment of financial services, stating that the payment or collection of any amount of interest and dividend is considered to be a financial service and is therefore exempt from VAT, this would only apply where there is, in fact, a supply.
The Authority had issued the “VAT Public Clarification on Bank Interest and Dividends” as part of its Public Clarifications service, which are available on the FTA website and seek to educate taxpayers on all technical issues surrounding taxes, allowing them to implement the tax system efficiently.
In a press statement issued today, the Federal Tax Authority noted that if, for instance, a retail business deposits its income into a bank account and earns interest on the deposited amount, and the said retail business does not do anything to earn this income aside from merely depositing the money in the account, it can then be said that the interest was earned passively. In this case, the retail business is not considered to have made a supply to the bank, and the interest income received is not a consideration for a supply, which, in turn, means that the retail business is not required to declare this income on its VAT return, as it is outside the scope of VAT.
The Authority noted, however, that the above position only applies to interest derived from bank deposits and does not have any bearing on the interest generated from extending loans or credit, which are exempt supplies for VAT purposes.
As for dividend income, the FTA explained that the payment of a dividend by a company is a distribution of its profits to its shareholders, where the holder of a share is not entitled to a dividend until the company has declared a dividend. Dividend income becomes due for shareholders in a company by the mere ownership of shares in that company and if the company makes any profits and declares dividends. The shareholder then receives the dividends and does not make any supply in order to be eligible for a payment of dividends, making the dividend a generally passive income. Accordingly, dividend income is outside the scope of VAT, and is therefore, not required to be reported on the VAT return. The Authority noted, nonetheless, that while dividend income is generally outside the scope of VAT, any amount charged as a “management fee” would be subject to VAT. For example, management fees charged by a holding company to its subsidiaries would be subject to VAT.
FTA Director General His Excellency Khalid Ali Al Bustani asserted that “the UAE tax system stands out for its transparency and accuracy in all its procedures; it strives to establish a conducive environment, setting up all the necessary infrastructure and legislation to conduct business efficiently and effectively and ensure its growth across all sectors. This includes the banking and finance sector, which enjoys high confidence both locally and internationally, while maintaining a steady growth and contributing to economic development.”
“The Public Clarifications service offers taxpayers a smooth and easy way to familiarise themselves with all topics pertaining to implementing tax laws and their executive regulations. Offered through the Authority’s official website, the service helps raise tax awareness among businesses and consumers alike, promoting compliance in the process,” His Excellency Al Bustani concluded.
The Public Clarifications service can be accessed through the Federal Tax Authority’s official website by clicking the “Help” button, then choosing the “Public Clarifications” tab, and selecting the required document. (https://www.tax.gov.ae/en/public-clarification.aspx)