The UAE’s Federal Tax Authority (FTA) expounded that income earned through Bank interest and Dividends are outside the scope of VAT in the UAE. These are passively earned interest income sourced from bank deposits/dividends and are not subject to value-added tax (VAT) in the country. So, there is no obligation to report them in the VAT return.
“VAT is imposed on the import and supply of goods and services at each stage of production and distribution, therefore, VAT implications arise only when there is a supply – if there is no supply, there is no VAT implication,” the FTA explained.
To understand more clearly let us take an example of a retail business which saves its income into a bank account to yield interest on the deposited amount then the interest earned is the income which arise from solely depositing the money in the account, & the income earned in the form of interest is earned passively because the businessmen put no efforts to earn this income.
For this, the retail business did not make a supply to the bank, and the interest income gained is not a consideration for a supply. It is simply a financial service as stated by VAT law.
“The UAE tax system stands out for its transparency and accuracy in all its procedures; it strives to establish a conducive environment, setting up all the necessary infrastructure and legislation to conduct business efficiently and effectively and ensure its growth across all sectors. This includes the banking and finance sector, which enjoys high confidence both locally and internationally while maintaining steady growth and contributing to economic development,” said Khalid Ali Al Bustani, director-general, Federal Tax Authority.
Under the VAT law, the payment or collection of any amount of interest and dividend is defined to be a financial service and is therefore exempt from VAT.
The rules under the VAT law implies:
- Income derived in the form of interest from the bank is not deemed as supply and not accountable for VAT.
- The interest gained from extending loans or credit are exempt supplies for VAT purposes and does not hold any such bearings.
On January 1, 2018, FTA fixed 5% VAT to be charged on the supply of other Goods and Services, and within the first year of implementation of VAT in the UAE, FTA witnessed a total of 296,000 business registration for VAT
The FTA foresees a “significant leap forward for the UAE tax system”, in 2019 and look forward to, further improvement in tax compliance rates, more registration among taxable businesses, and completely brush off the tax evasion.