The FTA (Federal Tax Authority) has recently confirmed that VAT (Value Added Tax) will not be charged for donations, grants and sponsorships only in cases when they are made for no return benefit. It further added that if any benefit is received in the return of a donation, then VAT will be charged.
On the official website of FTA, a new update has been released by the authority on VAT treatment for donations, grants, and sponsorships in order to make the taxpayers aware about the changes in technicalities and procedures in the tax system.
FTA has today released a statement saying that the VAT eligibility for payments such as “donation”, “sponsorship” and “grant” cannot be simply determined by the definition, as businesses must consider the associated facts and terms before making a decision. Khalid Ali Al Bustani, Director-General FTA, further added that VAT has been designed such as to encourage charity and social activities with a focus on keeping the underlying principles in mind.
Consideration has been defined under Article (1) of the Federal Decree-Law No. (8) of 2017 on VAT as, “All that is received or expected to be received for the supply of Goods or Services, whether in money or other acceptable forms of payment.”
According to that definition, donations should not be treated as considerations only if no exchange of services or benefits is taking place.
FTA further said that payment in the form of donations and grants can be received by any registered taxpayer from any third party such as an employee, relative, customer and others. The eligibility of such payments for VAT will depend on whether these payments can be treated as a payment against taxable supplies/services.
As has already been clarified several times before, the VAT can be implicated only in the case when a taxable supply is made, as the definition of consideration is quite wide under the VAT system. If a donation, grant or sponsorship is made in exchange for a direct benefit in the form of a service, VAT would be levied on such payments. However, if a donation or similar act is made without any implied benefit or service, no VAT is levied on that.
In short, a donation or grant must be unconditional and unrestricted in order for it to be eligible for VAT exemption.
As an example, FTA said that if a business is donating money to a hospital and in exchange getting space to market its offerings/products/services, it would be considered as a taxable supply and VAT would be levied on the same.
Similarly, sponsorships are usually made in exchange for a benefit or supply, such as business advertisements or promotion, then this kind of supply would not be exempted from VAT.