Dubai recently launched a Metaverse Strategy to foster innovation in new technologies. The goal would be to raise the number of metaverse and blockchain entities based in the city to 5,000 and create 40,000 jobs by 2027, and which will eventually generate an additional $4 billion to Dubai’s GDP.
While it is promising that many businesses are investing in the metaverse, it is inevitable not to consider how the virtual transactions will be treated from a tax perspective, especially with the introduction of corporate tax in the UAE. As we know, the metaverse is a parallel virtual world where one can do anything such as buy virtual real estate, shop, attend events, and many more. Recently, a Dubai couple got married in the metaverse, becoming the first in the UAE to tie the knot on the virtual platform.
One of the points worth pondering under VAT is whether the transactions in metaverse fall within the purview of e-services. And whether the special place of supply rules under the UAE VAT on e-services apply. If so, how to determine the place of use of the virtual goods and services supplied in the metaverse?
Further, there may be cases wherein a supplier is based outside the UAE and providing services to an individual in the UAE. Does this create a place of residence for the foreign supplier in the UAE and a requirement to register under UAE VAT?
A key question also comes to mind with real estate dealings. As per the UAE VAT regulations, the place of supply of real estate is where the goods are located. Take the example of renting a plot in the metaverse - Will the digital land be considered as a real estate or as e-supply of services considering that the land is virtual?
Another point is the payment in cryptocurrencies. If you are buying a ticket to a virtual concert, it needs to be evaluated whether cryptos will be treated as akin to fiat currencies and outside the scope of VAT or as a commodity and trigger the nature of a barter transaction?
Corporate Tax is proposed to be implemented in the UAE with effect from June 1, 2023. The public consultation document on the UAE corporate tax, which gives a broad overview of the coverage of the tax, does not provide any tax exemption to metaverse and blockchain-related activities. Therefore, the profits of UAE entities arising from activities conducted in the metaverse may be taxable.
Exemption from CT may be available if the activities are carried out from a qualifying free zone, subject to meeting certain conditions. With Dubai widely promoting the metaverse and blockchain technology, foreign entities would also want to participate and be part of it. Such foreign entities need to be mindful of the potential tax implications, i.e., whether they could constitute a permanent establishment in UAE, or their income could be considered as UAE-sourced income and hence taxable in the UAE.
With business being transacted across different geographies, businesses might need to consider the tax implications on cross-border transactions including whether the customer is required to withhold any tax on the payment made, and whether businesses can benefit from any tax treaty.
The UAE tax authorities have not yet published any guidance on taxability of the transactions in the metaverse. Therefore, it is noteworthy for businesses to consider and be aware of the possible tax implications of transactions in the virtual world.