UAE VAT update: Can businesses reclaim VAT costs from past cryptocurrency transactions?

Dubai: With the UAE removing VAT on cryptocurrency transactions, companies that have used virtual assets have got another task on their hands.

They have to ‘reassess’ the VAT part on any crypto-based transactions they entered into since January 1, 2018 to the FTA.

There is a chance open for them to reclaim some of those past costs.

“Financial assets had been an exempt category under the UAE VAT rules – but there was some ambiguity whether crypto/virtual assets fall under that,” said Girish Chand, Senior Partner at MCA Management Consultants. “With the new VAT updates issued by the Ministry of Finance, that ambiguity is no longer there.

“Digital asset based transactions would fall into ‘exempt supplies’ for VAT if provided in the UAE. If it is provided to customers outside of the country, it would be zero-rated VAT.”

This is what the Ministry specified on VAT exemptions on virtual assets:

The new rules come into effect November 15, but the best part for entities that have engaged in cryptocurrency transactions is they get a chance to reclaim the VAT on what they had paid on these over the years.

But there is some work involved to make those reclaims possible.

“Companies must retrospectively evaluate their ability to recover input tax (on crypto-based deals) from January 2018,” said Nimish Goel, Partner at Dhruva Consultants. “It is expected that a large percentage of the VAT incurred on these associated expenses may not be recoverable.”

What’s needed to reclaim VAT

Eligible VASPs (virtual asset service providers) must submit documentation for financial transactions and other required information from 2018 onwards and submit it to the FTA for review. This must be done through the FTA portal to claim the refund.

“VASPs will need to assess their positions regarding VAT paid on eligible transactions dating back to 2018, which may introduce practical challenges in the process,” said Carolina Rios, Associate Partner - Head of Virtual Assets at Karm Legal Consultants. The move may necessitate some VASPs to undertake voluntary disclosures

“The complexity of navigating the requirements for reclaiming VAT from past transactions can be particularly challenging for VASPs with extensive transaction histories to review and prepare documentation.

"The move may necessitate some VASPs to undertake voluntary disclosures."

Easing crypto adoption and use

What the UAE has done is lower the tax related expenses for businesses on any future crypto deals. At some point in immediate future, digital currencies will have a much bigger base of users, whether businesses or individuals. Cryptocurrencies remain one of the most heavily traded by local investors – even with all the IPOs coming to market in the UAE.

“The VAT exemption aligns with the global trend that recognizes the unique nature of digital currencies,” said Goel. “As a result, the sale of cryptocurrencies is not subject to VAT, similar to regulations in Canada, Denmark, Italy, Japan, Norway, Poland, Portugal, Singapore, South Africa, Spain, and the UK.

“This is intended to foster the growth of the digital economy in the UAE, attracting investment in the blockchain and cryptocurrency sectors.”