BDO Update: Amendments to VAT Executive Regulations

On 2 October 2024, the UAE Federal Tax Authority (FTA) released Cabinet Decision No. 100 of 2024, amending the Executive Regulations of the Federal Decree Law No. 8 of 2017 on Value Added Tax (Updated ER). The Updated ER will be effective from 15 November 2024 unless an earlier effective date is specified.

The Updated ER introduces substantial changes to the VAT landscape, impacting several priority sectors, including Real Estate, Virtual Assets (Cryptocurrencies) and Investment Fund Management.

In addition to altering the VAT treatment in these areas, the Updated ER addresses various compliance inconsistencies, aiming to streamline and enhance the overall regulatory framework.

Summary of the key amendments is as follows:

Article No. Topic Amendments
Article 1 Definitions Definitions of Virtual Assets & Business Day have been added. Whereas, other definitions of Decree-Law, Indirect Export, Direct Export, Overseas Customer, etc. have been updated.

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The definition of Business Day is particularly noteworthy as it brings clarity to the timelines applicable for many VAT compliances and filings for the first time since VAT implementation.
Article 2 Expanded Scope of Supply of Goods The ambit of what constitutes the supply of goods has been increased to include the supply of real estate in any other forms of disposal (apart from sale and lease), causing the transfer of ownership from one person to another.

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It will be noteworthy to evaluate whether the term ownership refers to legal ownership, beneficial ownership, or both.
Article 3 (bis) Exceptions of supplies New article added specifying the grant/ transfer/ disposal of ownership or right to use government buildings and real estate from one government entity to another shall not be considered as a supply. Therefore, such transfers will not be subject to VAT.
Article 5 Exceptions related to Deemed Supply Output tax thresholds for supplies made without consideration between Government Entity or Charity have been incorporated.
Article 8 Voluntary Registration A person applying for VAT registration on a voluntary basis will be required to satisfy the following additional conditions:
  • He is carrying on a Business in the UAE
  • Intention to make taxable supplies in the UAE or supplies made outside UAE which would have been taxable supplies if they were made in the UAE (reference made to paragraphs (a), (b) or (c) of Clause 1 of Article 54 of the Decree-Law).
Article 14 (bis) Tax Deregistration to Protect the Integrity of the Tax System New article added which specifies the conditions & grants the power to the FTA to deregister a person if the FTA determines that maintaining such Tax Registration may prejudice the integrity of the Tax system.
Article 29 Accounting for Tax on the Profit Margin It is clarified that for calculating the profit margin i.e. difference between the purchase price & selling price, the purchase price shall include any cost & fees incurred to purchase the good in addition to the price of the good.
Article 30 Zero-rating the export of goods The definition of “official evidence”, “commercial evidence” and “shipping certificate” have been incorporated. This provides more clarity on the export documentation to be maintained in order to avail the zero-rating benefits.
  • “Official Evidence” means the export certificate issued by the customs departments in the State or a clearance certificate issued by these departments or the competent authorities in the State regarding the Goods leaving the State after verifying their departure from the State, or a document or clearance certificate certified by the competent authorities in the country of destination stating the entry of the Goods into the country.
  • Commercial Evidence means the document issued by sea, air or land transport companies and agents, which proves the transfer and departure of the Goods from the State to outside the State, and includes any of the following documents:
    • Air waybill or air manifest.
    • Sea waybill or sea manifest.
    • Land waybill, or land manifest.
  • Shipping Certificate means a certificate issued by sea, air or land transport companies and agents as an equivalent of a commercial evidence where it is not available.
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This clarification is a positive development, addressing the challenges exporters faced in obtaining an Exit Certificate from Customs due to the divergent practices at the Emirate level and limitations of Customs procedures in the UAE.
Article 31 Zero-rating the Export of Services Additional conditions have been added for services to qualify for zero-rating.

Services falling under any of the special place of supply rules such as services of restaurant, hotel, catering, cultural, artistic, sporting events, transportation, telecommunication etc. will not be eligible for zero-rating. Also, services directly in connection with moveable assets in the UAE will not be eligible for zero-rating.

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The additional conditions are primarily clarificatory. Given that these services were consumed in the UAE, it has always been reasonable to conclude that they are subject to VAT at 5%. However, these additional conditions have resolved the long-standing debate on zero-rating certain performance or location-based services.
Article 33 Zero-rating International Transportation Services for Passengers and Goods Transport of goods within UAE will be eligible for zero-rating if they are provided by the same supplier as part of international transportation.
 
Article 34 Zero-rating certain Means of Transport The benefit of zero-rating has been extended to import of means of transport as well.
Article 35 Zero-rating Goods and Services in Connection with Means of Transport Additional zero-rating conditions have been added for services supplied directly in connection with the means of transport for the purpose of operating, repairing, maintaining or converting. These include:
  • Repair & Maintenance services if carried out on board of the means of transport
  • Maintenance to include inspection and testing of the means of transport, its parts and equipment, cleaning, repainting, and other similar services.
  • Converting the means of transport, provided that, after the completion of the conversion process, the means of transport continue to satisfy the zero-rating conditions as a means of transport (Article 34 of the ER)
Article 37 Residential Buildings The definition of Residential Buildings has been restricted to specifically exclude hotel apartments and similar properties.

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This update will significantly impact the local real estate market and businesses involved in providing real estate or related services reclassifying such supplies from exempted to taxable category
Article 41 Zero-rating Healthcare Services The benefit of zero-rating has been extended to import of pharmaceutical products & equipment as well.
Article 42 Tax Treatment of Financial Services VIRTUAL ASSETS
One of the major introductions in the updated ER is the definition of Virtual Assets and inclusion of VAT treatment of the related transactions.

Any transfer of ownership of Virtual Assets, including virtual currencies, conversion, keeping and managing of Virtual Assets and enabling control thereof will be considered as a financial service and the tax treatment should be evaluated accordingly, as exempt supply. This exemption relieves businesses from charging VAT on crypto-related transactions but will limit the VAT recovery on business expenses.

The above will have retrospective effect and shall apply to all services supplied on or after 1 January 2018.

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This major change by the Cabinet demonstrates its adaptability to the evolving financial markets and nature of transactions.
 
INVESTMENT FUND MANAGEMENT
Services provided by fund managers independently for a fee and for UAE licensed investment funds are now exempt. Currently, the services of a fund manager are considered as taxable supplies.

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This major change helps domestic funds manage the VAT costs associated with fund management fees and foster setting-up of several funds along with existing plethora fund managers in the UAE. 

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Fund managers will need to evaluate future of VAT registrations and input VAT recovery positions.
Article 46 Tax on Supplies of More Than One Component The scope of the provision is broadened to include the tax treatment for single composite supplies without a principal component.
Article 53 Non-recoverable Input Tax Businesses can now recover input VAT on health insurance, including enhanced health insurance for employees and their family members (as applicable) up to a husband or one wife, and three children younger than eighteen years.
Article 55 Apportionment of Input Tax The FTA has updated the following provisions:
  • Tax year in case of VAT de-registration, addition/ removal of a member from Tax group is defined
  • Input VAT recovery by Government Entities and Charities considered as fully recoverable for the purposes of input tax apportionment
  • Input VAT not recoverable under Article 53 of the updated ER to be considered Non-recoverable for the purposes of calculating input tax apportionment ratio
  • Businesses can now apply for specified percentages for input VAT recovery based on VAT input recovery percentages for the previous Tax year.
  • The limited of AED 250,000 for input tax apportionment calculations for a period less than 12 months should be proportionately adjusted.
Article 58 Adjustment to Capital Asset It is clarified that the first year for an internally developed Capital Asset shall be the year in which that asset is started to be used.
Article 59 Tax Invoice The FTA has updated a couple of points under this provision:
  • Simplified tax invoices cannot be issued for supplies taxable under Reverse Charge mechanism
  • Simplified tax invoices should be issued on the date of supply
  • The requirement to issue summary tax invoice in the same month as the date of supply is removed
  • Administrative exception is available for both issuance and delivery of Tax invoice.
Article 60 Tax Credit Notes Where the Registrants issues more than one Tax Credit Note in relation to the same Tax Invoice, it is clarified that the value of the supply in the subsequent Tax Credit Note shall be the adjusted value based on the previous Tax Credit Note/(s).

Further, a disclosed agent issuing Tax Credit Note on behalf of the principal is required to meet the following conditions:
  1. the agent maintains sufficient records to determine the name, address and Tax Registration Number of the principal supplier, and
  2. the principal supplier retains sufficient records to determine the name, address and Tax Registration Number of the agent.
Article 68 Tourist Visitor The provision is amended to update the period for export of goods by the overseas tourist to a place outside the UAE within 90 days from the Date of Supply (Earlier 3 months).
Article 69 Foreign Government The provision is amended to provide the timeline for claiming refund by Foreign Governments. The Tax refund claim under Article 69 must be submitted within 36 months from the date the official incurred such Tax or during any other period specified under the provisions of any international treaty or other agreement in force in the State.


This is not the first time the VAT Executive Regulations have been amended. It is indeed gratifying to see that the relevant regulators are attentive to the practical challenges faced by taxpayers and are committed to simplifying compliance with UAE VAT.

These amendments aim to streamline compliance, adapt to global trends, and provide operational clarity for businesses across various sectors, including cryptocurrency and investment management. For more detailed insights, feel free to connect with our tax experts.