The Value Added Tax in the UAE was introduced in 2018. With the introduction of VAT, all UAE businesses supplying goods or services are mandated to collect a VAT of 5% on the value of goods and services supplied and must remit the VAT to the Federal Tax Authority (the “FTA”). The collection and remittance of VAT in the UAE is governed by Federal Decree-Law No. 8 of 2017 amended by Federal Decree-Law No. 18 of 2022 (the “VAT Law”) and its executive regulations Cabinet Decision No. 99 of 2022. The procedural aspects of VAT accounting and record keeping and the penalties for the non-compliance of VAT law are provided in Federal Tax Procedures Law No. 28 of 2022 (the “Procedural Law”) and its executive regulations Cabinet Decision No. 74 of 2023.
The VAT Law applies to all industries, sectors, businesses, and establishments except for a few exceptions. A product can be taxed at a VAT rate of 0% (Zero-Rated) or at 5% (Standard Rated) or Exempt. The VAT in the UAE is based on accrual method, which means the taxable event of 5% VAT on supplies occurs on the date of raising the invoice or on the date advance is received or on the supply is provided, whichever is earlier. In annual or long- term contracts, VAT is payable in advance. On purchases, the VAT payable on the invoice can be claimed in the VAT returns only if there is an intention to pay or the invoice is actually paid.
Under the VAT Law, the businesses are the agents to the FTA to collect VAT from the customers. Any non-compliance or delay in payment of VAT will result in penalties stated in Cabinet issued Decision No. 49 of 2021.
Generally, free zones are considered tax free. However, in the UAE, only the transactions by and between Designated Zones listed in Cabinet Decision No. 59 of 2017 (as amended) are outside the scope of VAT. A designated Zone according to the VAT law is a fenced geographical area having customs control borders. ADGM and DIFC are jurisdictions with no fence or custom control borders, and therefore, they are not Designated Zones within the meaning of the VAT law and consequently, is not listed in Cabinet Decision No. 59 of 2017 (as amended). All ADGM and DIFC entities are required to register for VAT purposes with the FTA upon reaching the mandatory threshold of AED 375,000.
