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How is VAT applied to banking services?

Margin-based services are exempt while fee based services will be taxed

Gulf News

DUBAI: Most financial services are VAT (value-added tax) exempt in the UAE, according to the VAT Law. The Executive Regulation on the UAE VAT law has a detailed definition of financial services and distinguishes products and services on which VAT is applicable.

As a general rule, exempt financial services will include spread-based products and service (for example, foreign exchange spreads) and margin-based products (those generating interest income). And finance facilities with profit rates in the case of Islamic banking are exempt. Thus products such as loans, mortgages, credit cards etc are in the VAT exempt category.

Despite the general rule that most financial services are in the exempt category, the law specifies that on some services customers will be required to pay VAT at the rate of 5 per cent. These include any financial service for which an explicit fee, commission, discount or rebate is applied.

In the case of credit card related services, while the interest is not taxable, annual fees on credit cards will be subject to VAT. In the same manner, while foreign exchange spreads are not going to be taxed, 5 per cent VAT will be applicable on remittance fees.