UAE’s VAT exemption for crypto assets creates whole new possibilities

The recent amendment to the UAE’s Value Added Tax (VAT) regulations - exempting transactions involving virtual assets from VAT - is a significant step towards fostering a favorable environment for the burgeoning digital asset industry.

It removes ambiguity in relation to many virtual asset-related transactions and promotes much-needed transparency, ahead of many other jurisdictions in the region.

What is the change?

The new regulations define virtual assets as digital representations of value that can be traded or converted for investment purposes. (Excluding digital representations of fiat currencies and financial securities.)

Importantly, the transfer and conversion of virtual assets, including virtual currencies, are now exempt from VAT, effective retrospectively from January 1, 2018. Additionally, the keeping, managing, and enabling control of virtual assets can also be exempt from VAT (subject to conditions) with effect from November 15, 2024.

Competitive advantage for UAE

The decision to exempt the exchange and trading of virtual assets and currencies from VAT enhances UAE’s competitiveness as a global financial hub. By reducing the tax compliance burden, the government aims to attract more businesses and investors, stimulate innovation, and solidify the UAE’s position as a global financial hub.

This move is expected to drive economic growth and stimulate the development of new products and services, such as decentralized finance (DeFi) applications and blockchain-based supply chain solutions.

While the tax break provided could be considered a metaphorical rocket, the other regulatory changes happening in the UAE’s crypto landscape provide a solid launchpad for it.

In Dubai, the Virtual Assets Regulatory Authority (VARA) has full responsibility for the supervision of the cryptocurrency sector.

Further, various financial free zones, such as Abu Dhabi Global Market (ADGM), Dubai Multi Commodities Centre (DMCC), and the newly established Ras Al Khaimah Digital Assets Oasis are also playing crucial roles in enhancing the UAE’s digital asset ecosystem.

Retrospective application

While retrospective changes to legislation generally present unique challenges, in this case, given the position adopted by most players in the industry, the amendment may be seen more as a clarification rather than a substantive change to the law.

Nonetheless, careful consideration should be given to the potential implications of such a retroactive application. For example, companies operating in this space, who have already registered for VAT, may now need to consider de-registering if their business operations require them to do so under these new provisions.

Also, if companies were treating digital currencies at par with fiat currency may now need to consider reporting requirements retrospectively.

Some uncertainties exist

Stablecoins

While the definition excludes digital representations of fiat currencies and financial securities, it raises questions about the treatment of stablecoins. These cryptocurrencies, often pegged to a traditional currency, could be seen as a hybrid of both, for example, USD Coin (USDC) and Tether (USDT).

A more precise definition is needed to avoid ambiguity and ensure consistent application of the exemption. Singapore’s GST law, which specifically excludes stablecoins from the definition of Digital Payment Tokens, provides a useful reference.

Tokenizing real world assets

Additionally, the amendment opens up the possibility of tokenizing real-world assets, such as real estate or carbon credits. If these tokens are considered virtual assets, their transfer, conversion, and custody would be exempt from VAT.

This could incentivize the tokenization of various assets, leading to increased liquidity and efficiency in capital markets. However, it also raises concerns about potential regulatory challenges and investor protection issues.

Future of virtual asset custody

The exemption provided for managing and storing virtual assets seems broad enough to cover custodian services as well. This move could attract more and more custodians and service providers to the UAE.

It would be important for the custodian service providers to consider the taxability of the service fee and charges explicitly charged to customers in and outside the UAE as they may fall outside the exemption.

Possible barter considerations

We have all heard or seen of instances of transactions involving cryptocurrency payments, where goods or services are bought and payments for the same is made in form of crypto currencies rather than fiat currency.

Given that now there is a specific exemption provided for transferring the ownership of virtual currencies, a question arises for business transaction done this way.

Would business making payments via cryptocurrencies need to report the payments made under exempt supplies in their VAT returns? Could this be considered as a barter?

If yes, would the retrospective application mean a requirement to update the VAT returns?

What to expect next?

The new VAT exemption in this space is definitely a key milestone for the evolving virtual assets industry. While the new rules provide much-needed clarity around the VAT treatment, they also raise several questions for taxpayers around implementation of the provisions.

The overall intent of the amendment is positive, aiming to reduce costs and compliance burden for the industry. Given that this industry is nuanced, there will be a need to properly assess the implications of the amendment to properly align the tax positions.

We can expect the Federal Tax Authority to most certainly release business-friendly guidance around the implementation of these provisions given the FTA’s continuous commitment to ensure compliance with optimum collaboration with the taxpayers.