UAE VAT REGISTRATION ASSISTANCE & TAX CONSULTANCY

A Guide to VAT Compliance in UAE

Did you know that the Middle East does not tax individuals? They only tax energy companies and foreign financial institutions.

That’s good news for anyone looking to start a business in Dubai. What you should remember is that as of January 1, 2018, Dubai started charging value-added tax or VAT on the majority of goods and services.

As a business, you’ll have to charge VAT in Dubai on almost all goods and services, from food at restaurants to hardware tools. If you’re surprised about VAT and want to learn more, you’ve come to the right place. Keep on reading for a complete guide to VAT in Dubai.

Why Should You Consider Starting a Business in Dubai?
There are several reasons to start a business in Dubai, including the funding initiatives by the government to accelerate business growth and its vibrant economy. But if you talk to anybody, the tax benefits are probably at the top of their list.

The Middle East still has zero tax on personal and corporate income. The only thing you need to pay is the value-added tax at a low rate of 5%.

You can set up in a free zone, which means you pay 0% corporate and income tax rate, no customs duties, and you have the option to repatriate 100% of the profits from the business.

What Does Value-Added Tax Mean?
Value-added tax, or VAT, is a tax based on consumption. Unlike taxes levied on income, VAT applies to purchases of goods and services. It’s added at every point in the manufacturing and distribution process where value is added to the product.

It’s generally paid by the customer on any purchases. The business must collect the VAT and remit it to the government. Not doing so can lead to penalties or even criminal charges.

VAT is the most common type of consumption tax. Over 150 countries, including European Union members, Canada, and New Zealand, have implemented VAT.

History of VAT
VAT only came to Dubai in 2018. It applies to all online purchases and traditional store purchases received in Dubai.

As of January 1, 2018, the UAE required businesses to register for VAT. They were required to collect and remit the amounts to the government. It’s the first time that there has been VAT in the Middle East.

The Federal Tax Authority (FTA) was established to manage and collect federal taxes. VAT was implemented to provide a new source of income to help the government provide different services, including hospitals, parks, and waste control. The vision behind implementing VAT was to reduce its dependence on income derived from oil.

7 Things to Know About VAT in Dubai
The reality is that there are several steps you need to take before starting a business in Dubai. You want to make sure you get your business formation right from the start. This can save you a lot of trouble in the future.

One of the most important considerations is understanding your VAT obligations, registering as needed, and paying your VAT on time. Without knowing your obligations, you can end up paying a significant amount of penalties and interest. Interest can increase up to 300% of any unpaid VAT liability.

1. VAT in Dubai Is Levied at a Rate of 5%
The first thing you need to know is that the VAT in Dubai applies at a flat rate of 5%. It applies to all taxable supplies of goods and services, including imports. Some services are exempt, so you need to find out whether you have a taxable supply.

A taxable supply is any supply of goods or services for consideration from a person conducting business in Dubai. This includes all retail businesses, food at restaurants and hotels, and other entertainment activities. Any business that you’re thinking of starting would likely be considered a taxable supply.

2. Certain Services Have 0% VAT
If you’re wondering whether the 5% VAT applies to you, you first need to determine whether any of your supplies are 0% VAT or exempt supplies.

Even if you have a taxable supply, certain services have a 0% VAT rate. These businesses must include zero value in their invoices.

The 0% VAT applies to goods and services that are exported outside the Gulf Cooperation Council (GCC) member states. GCC member states include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE.

Zero-rated VAT also applies to international transportation and the supply of crude oil or natural gas. The supply of investment-grade precious metals such as silver and gold with 99% purity. Certain areas like healthcare and education also benefit from the 0% VAT rate.

Newly constructed residential properties will also be subject to 0% VAT if they are supplied for the first time within 3 years of their construction.

You may also be subject to 0% VAT if you are considered “outside of the state.” A person is “outside of the state” if:

– They have been in the state for less than a month.
– The reason they are in the state is not connected with the supply.

Zero VAT isapplicable to specific categories, so it’s essential to understand the specific regulations and exemptions that apply to your business.

3. VAT Registration is Mandatory for Eligible Businesses
If your business meets the criteria set by the authorities, you must register for VAT. The registration threshold is based on the total value of your taxable supplies over the preceding 12 months or your anticipated taxable supplies for the next 30 days.

As of my knowledge cutoff in September 2021, the mandatory registration threshold was set at AED 375,000. However, please note that tax laws and regulations are subject to change, so it’s crucial to consult with the Federal Tax Authority (FTA) or a professional advisor for the most up-to-date information.

If your business falls below the mandatory threshold but exceeds the voluntary registration threshold, which is set at AED 187,500, you have the option to register voluntarily for VAT.

4. Keep Accurate Records and Maintain Compliance
Once registered, you are required to keep accurate records of your business transactions, including invoices, receipts, and other relevant documents. Proper record-keeping is crucial to ensure compliance and facilitate the VAT return filing process.

Your records should include details such as the VAT registration number of your customers and suppliers, the VAT amount charged or paid, and the date of the transaction. It’s also essential to segregate the VAT amounts collected from customers separately from your business funds to avoid any commingling.

5. Submit Regular VAT Returns and Pay VAT on Time
As a registered business, you are required to submit regular VAT returns to the FTA, usually on a quarterly basis. The VAT return summarizes the VAT collected from your customers and paid on your purchases during the reporting period.

You must calculate the net VAT payable or refundable and submit the return along with the payment of any VAT due within the specified deadline. Late filing or non-payment of VAT can result in penalties and interest charges.

6. Consider Input Tax Recovery
One of the key benefits of VAT is the ability to recover input tax, which is the VAT you pay on your business purchases and expenses. You can offset the input tax against the output tax (VAT collected from customers) and only pay the net difference to the tax authorities.

To claim input tax recovery, you must ensure that the expenses are directly related to your taxable supplies and that you have the necessary supporting documents, such as valid tax invoices.

7. Seek Professional Guidance
Navigating VAT regulations can be complex, especially if you are unfamiliar with the requirements. It’s advisable to seek professional guidance from tax consultants, accountants, or legal advisors who specialize in VAT compliance in Dubai and the UAE.

These professionals can help you understand your specific obligations, assist with VAT registration, provide guidance on proper record-keeping, and ensure accurate VAT return filing. They can also keep you updated on any changes in tax laws and regulations that might affect your business.

Final Words

Understanding and complying with VAT regulations is crucial for businesses operating in Dubai and the UAE. By familiarizing yourself with the basics of VAT, registering as required, and maintaining proper records, you can ensure compliance and avoid penalties.

However, it’s essential to note that tax regulations are subject to change, and this information is based on my knowledge cutoff in September 2021. To stay up to date and ensure accurate compliance, it’s recommended to consult with the relevant tax authorities or seek professional advice.