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Questions on VAT answered. Picture used for illustrative purposes. Image Credit: Shutterstock


A weekly column where readers get their queries answered on Value Added Tax (VAT), Economic Substance Regulations (ESR), Customs and other GCC taxes. This week, queries relating to VAT registration in the UAE are answered.

Question #1: I have set up a new company (let’s call it, ‘Company X’) in a Free Zone on July 1, 2020. ‘Company X’ makes its revenue exclusively from business consultancy services provided to customers outside UAE. ‘Company X’ has earned Dh380,000 up to October 12, 2020 from consultancy fee and/or commission from overseas customers. Is ‘Company X’ required to register for VAT?

‘Company X’ must apply for VAT registration because the total value of its services over the previous 12-month period has exceeded the registration threshold of Dh375,000. The value of zero-rated supplies are also counted-in to verify the registration threshold.

What are zero-rated supplies?
Zero-rated supplies in UAE VAT refers to the supply of goods or services on which the applicable VAT rate is zero. Zero-rated supplies are treated as ‘taxable supplies’. Zero-rate is based on either the nature of supply or the nature of specified goods or services

‘Company X’ has an option to ask for an exception from VAT registration if, and only if, all the supplies of ‘Company X’ are zero-rated (i.e. if ‘Company X’ does not make any standard-rated supplies). The option to request for such exception is in the registration application itself. If the request for exception is confirmed, a Tax Identification Number (TIN) suffixed with ‘XC’ will be issued.

What are standard-rated supplies?
Standard-rated supplies in the UAE are those supplies which are currently subject to VAT at 5 per cent.

The value of the supplies over previous 12-month period must be monitored on an on-going basis i.e. daily (and not just at every month-end). Therefore, ‘Company X’ must submit the registration application within (30) days of being required to register.

A delay in the submission of registration application beyond the stipulated time attracts a penalty of Dh20,000.

Question #2: I have a company (let’s call it, ‘Company Z’) in a Free Zone which was set up on October 1, 2019 which is not registered for VAT. The company’s revenue in previous 12-months period (October 1, 2019 to September 30, 2020) was Dh350,000. The total value of supplies in the 30 days period of October 2020 is expected to be Dh50,000. Is ‘Company Z’ required to register for VAT?

A company should mandatorily register for VAT if, among other things, the value of specified supplies (goods or services) exceed Dh375,000 in any of the following two periods: the previous 12-month period; or the next 30-day period.

The above mentioned two periods are mutually exclusive. The value of supplies (goods or services) of the two periods should not be aggregated. As of October 13, 2020, ‘Company Z’ should determine the value of its supplies: from October 13, 2019 to October 12, 2020 (i.e. previous 12-month period); and, from October 13, 2020 to November 11, 2020 (i.e. next 30 days period)

If the value of supplies (goods or services exchanged or provided) in either of the two periods exceed Dh375,000 then ‘Company Z’ must apply for VAT registration within next 30 days.

A delay in the submission of registration application beyond the stipulated time attracts a penalty of Dh20,000.

Question #3: I have set up a new company (‘Company N’) in a Free Zone on January 1, 2020. ‘Company N’ is developing a software and is not expected to issue any sales invoice for the next 2 years. However, ‘Company N’ is regularly incurring VAT costs on its expenses such as setting-up costs, hardware purchase, local consultants which has already exceeded Dh250,000 in July 2020. Can ‘Company N’ register for VAT? Will there be a penalty for late registration?

‘Company N’ has an option to apply for a ‘voluntary VAT registration’.

What is ‘voluntary VAT registration’?
A voluntary VAT registration can be applied for if, among other things, the total value of expenses which are subject to VAT, incurred during the previous 12-month period, has exceeded Dh187,500.

A voluntary registration can be applied for at any time upon satisfaction of the aforesaid condition. Being voluntary in nature, there is no statutory timeline to submit the application.

For voluntary registration, the value of the supplies over previous 12-month period must be monitored at the end of every month and not on a daily basis.

Question #4: We have two UAE companies (‘Company G’ and ‘Company L’) which are owned by the same shareholders. ‘Company G’ is already registered for VAT. The annual turnover of ‘Company L’ is less than Dh300,000 and it is not registered for VAT. The corporate group is incurring VAT costs on services provided by ‘Company G’ to ‘Company L’, which are not available as input credit to ‘Company L’. Is it possible to save such costs?

What is input tax credit?
You can claim a credit for any VAT paid in the price of any goods and services, subject to certain exceptions, you buy for your business. This is called a VAT credit (or an input tax credit—a credit for the tax paid in the price of your business inputs/expenses).

‘Company G’ and ‘Company L’ can form a 'VAT Tax Group'. The transactions between the members of a Tax Group are considered outside the scope of VAT. The VAT registration as a Tax Group can be sought if one prospective member alone, or all prospective members together, crosses the registration threshold of Dh187,500 or Dh375,000, as the case may be.

- You can send your tax queries to Selected queries on a particular topic are being answered by the team of experts from AskPankaj Tax Consultants. The answers are for general guidance and does not constitute a legal advice.

Pankaj S. Jain

Pankaj S. Jain, is the Managing Director of AskPankaj Tax Consultants and Tax Agency.