We would like to update you with the recent updates introduced by the Federal Tax Authority (FTA) in relation to the VAT implications on interest income from bank deposits and dividend income and taxability of donations, grants and sponsorships.
VAT Implications on Bank Interest and Dividends
• It is clarified that the Interest income generated from Bank Deposits does not constitute consideration for supply and such income can be said to be earned passively. Therefore, Interest income would be considered outside the scope of VAT, and there is no requirement for disclosure of the same in the VAT return.
- It is pertinent to note that the aforesaid position does not apply to Interest other than from Bank deposits (e.g., interest from loans/credit) and the same is considered to be a financial service, which is exempt from VAT.
• Similarly, payment of dividend by a company to their shareholders is considered as a distribution of profits, which accrues to the shareholder by mere virtue of holding shares of the company. Therefore, the shareholder does not make any supply in order to be eligible for the receipt of dividend and the same is outside the scope of VAT. Dividend income is accordingly not required to be reported in the VAT returns by the shareholders.
- Though dividend income is outside the ambit of VAT, it has been clarified that the management fee charged by a holding company to subsidiary company shall constitute a consideration towards supply and would be liable to VAT
Taxability of Donations, Grants and Sponsorship
• The FTA has clarified that the taxpayers may receive a donation, sponsorship and grant but merely selecting a specific term is not in themselves conclusive to determine the VAT treatment. Though donations, sponsorships and grants are typically outside the ambit of VAT, it is necessary to consider all the facts and circumstances before arriving at taxability for a particular supply.
• The underlying principle to determine whether donation, grant or sponsorship amounts to supply is to verify whether the donor/person receives any express or implied benefit from such payment whether in monetary or non-monetary terms. In case a benefit accrues to the donor/person on account of making such donation, grant or sponsorship, such payment may constitute as a taxable supply under UAE VAT. The benefit must have a close nexus to the payment for VAT to be applicable
- For instance in case if pursuant to a donation/sponsorship made to an educational institution, the institute displays the logo and markets products of such person, the donation/sponsorship would be considered as taxable supply under UAE VAT
• The FTA has also provided suggestive principles, which may be referred to in order to determine the taxability of a donation, grant or sponsorship, for instance, being granted unconditionally or the amount could be used for any purpose (unrestricted), etc.
• Additionally, it is also clarified that where donations, sponsorships and grants are given in the form of goods whereby benefit accrues to the donor, the transaction could be construed to be a deemed supply and could be liable to VAT on the value of benefit accrued/market value of such goods.
We would like to highlight that though the aforesaid clarifications are issued in January 2019, the position adopted by the FTA does not imply amendment to any provisions and such clarifications apply from 1 January 2018 (unless specifically provided).
Therefore, it is advisable that the company should evaluate whether the treatment adopted for bank interest/dividend income and donations, grants and sponsorships during the first 12 months of implementation is in line with the clarification provided by the FTA. In case where there is any distinction in the treatment adopted vis-à-vis FTA’s position, the company should evaluate whether a voluntary disclosure is required to be filed to rectify the position adopted earlier. At SKP, we would be glad to assist you in case you require any support in this regard.
We have also enclosed copies of the relevant clarifications for your reference -
Bank Interest and Dividends
Donation Grants and Sponsorships
Please reach out to us for any further clarification or support.