Value Added Tax (VAT) is one of the most significant tax systems implemented in the United Arab Emirates, having come into effect on 1 January 2018 under Federal Decree-Law No. (8) of 2017. This tax is imposed at a standard rate of 5% on the supply and import of goods and services at every stage of production and distribution, and it affects everyone carrying on a commercial, professional, or industrial activity within the State. Given its broad scope and the multiple obligations it entails, understanding its provisions has become essential for every taxable person, business, and individual subject to it, in order to avoid administrative penalties and ensure proper compliance. In this article, we offer a specialised legal reading of the most prominent provisions of this law and the amendments and executive regulations that followed it.

What Is Value Added Tax in the UAE and How Is It Applied Under Federal Law?

First: Definition of the Tax, Its Rate, and Scope

The law defined Value Added Tax as a tax imposed on the import and supply of goods and services at every stage of production and distribution, including deemed supply. The tax is imposed on every taxable supply and deemed supply made by the taxable person, as well as on the import of concerned goods, except as specified by the Executive Regulation.

The law set the standard rate of tax at 5%, imposed on the value of the supply or import. It also assigned liability for the tax to the taxable person making any taxable supply, to the importer of concerned goods, and to the registrant who acquires goods under the reverse charge mechanism.

Second: Types of Taxable Supply

The law addressed supply in its various forms, clarifying that a supply of goods includes the transfer of ownership of goods to another person or the right to dispose of them, as well as the conclusion of a contract between two or more parties that results in the transfer of goods at a later time. A supply of services covers any supply that is not considered a supply of goods. The law also dealt with special cases such as a supply composed of more than one component for a single price, supply through an agent, and supplies by government entities.

Third: Tax Registration, Its Thresholds, and Cancellation

Tax registration is the cornerstone of the tax system. The law divided registration into two types: mandatory registration, which a person must complete upon exceeding the mandatory registration threshold for the value of taxable supplies during the previous twelve months, or when it is anticipated to be exceeded within the coming thirty days; and voluntary registration, which a person may complete whenever the value of taxable supplies or expenses exceeds the voluntary registration threshold.

The law also permitted two or more persons carrying on business to apply to register as a "tax group", subject to certain conditions, including the existence of a place of establishment or fixed establishment in the State, the persons being related parties, and one of them controlling the others. It allowed the Authority to exclude a taxable person from registration if its supplies are subject to the zero rate only — a position reinforced by the amendment introduced by Federal Decree-Law No. (18) of 2022.

As to cancellation of registration, the law required the registrant to apply for cancellation if it ceases making taxable supplies, or if the value of its supplies falls below the voluntary registration threshold. It expressly provided that the cancellation of registration does not waive the Authority's right to claim any tax due or administrative penalties.

Fourth: Supply Rules — Date, Place, and Value

The law established three fundamental rules for determining the tax treatment of each supply:

The law also permitted the registrant, in certain cases specified by the Executive Regulation, to calculate the tax on the basis of the "profit margin" achieved on supplies rather than on the value of those supplies, provided the Authority is notified.

Fifth: Zero Rate and Exemptions

The law distinguished between a zero-rated supply — a taxable supply at a zero rate that allows recovery of input tax — and an exempt supply that does not allow recovery of input tax. Below are the most prominent items subject to each:

The law also addressed "designated zones", which are treated as being outside the State once they meet the conditions specified by the Executive Regulation, and set out the rules for the transfer of goods to and from these zones.

Sixth: Calculating Payable Tax, Input Tax, and Recovery

The payable tax for any tax period is calculated as the total output tax payable, less the total recoverable input tax during that same period. Recoverable input tax is the tax paid on goods and services used in making taxable supplies.

The law permitted recovery of tax in special cases, including: UAE nationals in respect of goods and services relating to the construction of a new residence; non-resident persons carrying on business; and foreign governments, international organisations, and diplomatic missions in accordance with applicable agreements.

Seventh: Tax Invoices and Record-Keeping

The law required the registrant, upon making a taxable supply, to issue an original tax invoice and deliver it to the recipient, within fourteen days of the date of supply. It set out the data that the invoice must contain in accordance with the Executive Regulation, and the rules for conversion into the UAE Dirham where the supply is in a foreign currency.

As to the tax credit note, the law required its issuance upon a reduction in output tax, within fourteen days of the occurrence of the event requiring adjustment — a period introduced by Federal Decree-Law No. (18) of 2022 to align it with the period for issuing the tax invoice.

Eighth: Violations, Tax Evasion, and Statute of Limitations

Without prejudice to the provisions of the Tax Procedures Law, the law required the Authority to issue an assessment of administrative penalties against the person and notify them within five working days of the date of issuance, in cases including: failure to display prices inclusive of tax, failure to notify the Authority when applying tax on the margin basis, and failure to issue a tax invoice or tax credit note.

As for tax evasion, the law defined it as a person's use of illegal means resulting in reducing the amount of tax due, not paying it, or recovering tax to which the person is not entitled. It provided that a person who acquires goods under the reverse charge mechanism while claiming to be a registrant when they are not is deemed to have committed tax evasion.

Frequently Asked Questions About Value Added Tax

Legal References