On January 1, 2018, the United Arab Emirates (UAE) implemented the Value Added Tax (VAT) system, with a standard rate of 5%. Understanding how VAT functions in the UAE is crucial for both citizens and companies, since it represents a significant shift in the nation’s tax structure. Ten essential facts concerning UAE registration for VAT are provided in this post that every reader should be aware of.
- What is VAT?
Value Added Tax is referred to as VAT. This tax is imposed indirectly on the provision of goods and services. VAT is levied at every manufacturing and distribution stage; nonetheless, the final customer bears the ultimate cost of payment. The way it operates is that a business pays VAT on the items and services it buys to manufacture or deliver its own goods and services. But then, by subtracting it from the VAT it receives from its clients, it may get back the VAT it spent on purchases made for business purposes. Taxed at each level of the supply chain is only the “value added.”
For instance, let’s say a factory pays AED 100 + AED 5 VAT for raw materials. It then creates a final product out of these ingredients, which it sells for AED 150 + AED 7.50 VAT. While collecting AED 7.50 VAT on sales, the producer only pays AED 5 VAT on purchases. After deducting AED 5 from AED 7.50, AED 2.50 remains to be paid to the tax authorities. As a result, only the AED 50 “value added” during the manufacturing process is subject to taxes. The procedure carries on down the supply chain until the product is purchased by the ultimate customer, who must pay the full amount of VAT due and cannot get any of it back.
- Who has to register for VAT?
The Value Added Tax (VAT) system in the United Arab Emirates (UAE) requires certain businesses and individuals to register for VAT if they meet the registration threshold. According to the VAT law, any entity that supplies taxable goods or services in the UAE needs to register if their annual revenue is more than 375,000 AED. This registration requirement applies to all businesses operating and making taxable supplies in the UAE, regardless of whether they are based in the country or abroad. Even overseas companies supplying digital services to non-business customers in the UAE from outside the country need to register if they meet the revenue threshold.
Once vat registration in UAE is done, the business becomes a taxable person under the VAT law and is required to properly account for VAT on all taxable supplies made as well as file regular VAT return submissions. This means charging customers 5% VAT and remitting the tax amount to the federal tax authority. At the same time, the business can reclaim any VAT paid on allowable purchases related to taxable activities. Failure to register for VAT when a business crosses the 375,000 AED annual revenue mark is considered non-compliance which can attract financial penalties under the VAT law. It is important for companies to continuously monitor their revenue and register as soon as they become liable to avoid penalties for late registration.
- What goods and services are subject to VAT?
Most goods and services supplied in the UAE are subject to the standard 5% VAT rate, with a few exceptions. Exempt supplies include basic food items, healthcare, education, residential buildings and local passenger transport. Zero-rated supplies include international transport and related services. Businesses must understand the VAT treatment of all goods and services they supply to correctly apply the tax.
- How does VAT work in practice?
When a registered business supplies taxable goods or services, it charges VAT on the selling price. The VAT amount is then submitted to the tax authority along with the VAT return on a quarterly basis. At the same time, the business can claim back any VAT amounts paid on purchases related to making those taxable supplies. The net VAT payable or refundable is calculated on the return. This ensures only the value added at each stage is taxed while businesses can reclaim VAT on allowable purchases.
- What records must be kept?
Registered businesses must maintain proper VAT records for at least 5 years, including purchase and sales invoices, import documents, payment receipts, bank statements and VAT returns filed. This is to facilitate any audit or verification by the tax authority. Records can be in either hard copy or electronic format but must be made available upon request. Keeping incomplete or inaccurate records may result in financial penalties.
- When are VAT returns due?
VAT returns must be submitted quarterly by the end of the month following the end of the tax period. For example, the return for the period January to March is due by 30 April. Payments of any net VAT due must also be made by this deadline. Businesses anticipating a VAT refund can submit the return earlier to receive payment sooner. Late submission of returns or delayed payments are subject to financial penalties.
- Are there any VAT exemptions or reliefs?
Yes, certain supplies are exempt from VAT while some businesses may qualify for VAT exemptions or reliefs. Examples include export supplies, supplies on domestic vessels/aircraft, investment precious metals, and supplies to designated zones. Newly established businesses can apply for a VAT exemption on supplies for the first three months of operations. Charities may also apply for VAT exemption on eligible activities.
- How is VAT treated on imports?
All imports into the UAE are subject to VAT whether for business or personal use. The VAT is payable by the importer and collected by UAE Customs at the point of importation. Registered importers can reclaim any import VAT paid subject to holding valid import documents. Individuals importing goods for personal use cannot reclaim the VAT paid.
Conclusion
The VAT registration Dubai system introduces some changes but overall aims to operate similarly to VAT in other countries. With the key points covered, businesses and individuals should have better clarity on their VAT obligations and how the tax applies in practice. Maintaining proper records and compliance will help avoid penalties while taking advantage of available reliefs. Following the VAT rules correctly ensures a smooth transition to the new tax regime in the UAE.
