New UAE VAT rules

New UAE VAT rules: Exemptions for businesses and registration for the 5% tax explained

UAE’s VAT changes will come into effect on January 1, 2023

Value Added Tax (or VAT) is an indirect tax, also referred to as a type of general consumption tax. Countries impose VAT on most supplies of goods and services that are bought and sold, and it is one of the most common types of consumption tax found around the world.

On January 2018, the UAE introduced Value Added Tax (VAT) at the rate of 5%.

Amendments were recently made to some of the provisions in Value Added Tax (VAT) introduced in 2018 by The Ministry of Finance. The changes will take effect from 1 January, 2023.

A total of 24 changes were made, as per the Arabic version of Decree-Law No.18 2022 on VAT, which was published in the official gazette (issue no. 736 of 28 September 2022).

Among the changes made to Federal Decree Law No.8 of 2017 on VAT, is the provision that registered persons are allowed to apply for an exception from VAT registration if all of their supplies are zero-rated or if they no longer make any supplies other than zero-rated supplies.

Zero-rated supplies are supplies of property and services that are taxable at the rate of 0 percent. Some examples of zero-rated items include certain foods and beverages, exported goods, donated goods sold by charity shops, equipment for the disabled and prescription medications and is determined by the taxing authority.

Other changes include setting a 14-day period to issue a tax credit note to settle output tax, in line with the time frame set for issuing tax invoices.

The ministry statement said the Federal Tax Authority (FTA) may forcibly deregister persons in specific cases if deemed necessary.

It also includes amendments to certain provisions to clarify and confirm the intended meaning of the text; to rephrase; or to improve the legislative sequence of legal provisions.

No changes were announces to the VAT rate, which remains unchanged at 5 percent.

The amendments have been made in line with international best practice in light of the GCC Unified VAT Agreement. They are based on past experiences, challenges faced by various business sectors as well as the recommendations received from the relevant parties, added the statement.

Here’s a complete overview:

• UAE VAT changes explained
• UAE VAT rules for businesses
• UAE VAT-exempt sectors

UAE VAT changes explained

• Those persons who are registered and make taxable supplies are permitted to apply for an exception from VAT registration. However, all of their supplies must be zero-rated and/or if they no longer make any supplies other than zero-rated supplies.
• A 14-day period to issue a tax credit note will be set to settle output tax, in line with the time frame set for issuing tax invoices.
• The Federal Tax Authority can forcibly deregister registered persons in certain cases, if necessary.

These amendments are aligned with the international best practice in the GCC unified VAT agreement.

They are based on various challenges and experiences faced across business sectors, as well as recommendations received from relevant parties, the Emirates News Agency (WAM) said.

Value Added Tax in the UAE was first introduced in 2018, with a 5 percent tax on majority of goods and services. This came into effect as part of the nation’s efforts to diversify the economy, thus reducing its reliance on oil.

Aside from these changes that will come into effect on January 1, UAE will also introduce a 9 percent federal corporate tax on business profits from the financial year starting on or after June 1, 2023, according to the Ministry of Finance said on January 31.

UAE VAT rules for businesses

UAE VAT registration:

If the taxable supplies and imports of a business exceed the mandatory registration limit of AED 375,000, the business must register for VAT.

Businesses can also choose to register for VAT voluntarily if their supplies and imports exceed AED 187,500.

Similarly, a business may register voluntarily if its expenses exceed the voluntary registration threshold. This is designed to enable start-up businesses with no turnover to register for VAT.

Businesses in the UAE are required to record their financial transactions and maintain up to date records.

UAE VAT-exempt sectors

The categories of supplies mentioned below are exempt from VAT:

1. The supply of some financial services
2. Residential properties
3. Bare land
4. Local passenger transport

Supplies made by government entities are typically subject to VAT. This ensures that government entities are not unfairly advantaged as compared to private businesses.