Taxes in the UAE: VAT and Excise Taxes explained
One of the most significant and frequently asked questions we get from our clients is what are the types of taxes that will be incurred when you register a company in the UAE and how much the company will have to pay. This is understandable since, even for business owners’ taxes can be scary because of their complexity and numerous contingencies.
If you’re not fully familiar with the UAE Taxation system, you may be surprised to learn that UAE is almost a tax-free country. Yes, you read that right. There is no personal income tax and 0% corporate tax.
So, with that happy knowledge in mind, let’s take a look at the taxes that you do have to worry about as I decided to give you some practical tips which will help you register and run your business in the UAE free from any fear regarding the local tax system.
The types of taxes incurred when you open a company in UAE mostly depend upon the nature of your business. However, there are two types of Tax Regimes in UAE: Value Added Tax (Federal Decree law No.8 of 2017) and Excise Tax (Federal Decree law No.7 of 2017).
Let’s take a closer look at both of these.
What is VAT?
Value Added Tax (VAT) is a consumption tax that is levied from each stage of goods supplied, and services bought and sold. The administration of VAT in the UAE is managed by the Federal Tax Authority (FTA).
The VAT which businesses charge to their customers is also known as “Output Tax”. VAT, which is incurred on expenses, is also known as “Input Tax”. Where the conditions to allow recovery of Input Tax are met, the taxpayer is able to deduct the Input Tax from the value of the Output Tax, this results in the net VAT payable to the FTA in each tax return period.
Should Your Company be Registered under VAT?
The first question to agitate the mind of an entrepreneur after company formation in UAE is: should my company be VAT registered? If yes, then how and where should I get registered? Allow me to make your life easier — VAT registration is only compulsory once the turnover of your company is likely to exceed the government mandatory threshold of 375,000 AED for any rolling 12-month period.
There is a voluntary threshold of 187,500 AED, and once your revenue crosses that voluntary threshold limit you can go for registration also. If you do not opt for VAT registration after reaching the voluntary threshold you should keep a close eye on your expected revenue and once you feel that your revenue will exceed 375,000 AED based on some upcoming contracts than before crossing the mandatory threshold you need to apply for VAT registration.
Be really careful about this. The last thing you want is to pass this threshold before being registered. You can be fined up to 20,000 AED by FTA for late registration.
What are the VAT Rates?
Now let’s look at how much are you going to pay, and whether your goods or services even qualifies as a taxable supply.
First and foremost, remember that VAT is a tax that is calculated on the sale of the items you buy and sell through your business. A standard VAT rate in UAE of 5% is applicable on most supply of goods or services.
However, with some products & services like certain means of transportation (such as trains, trams, vessels, airplanes), certain healthcare and educational services and related goods, all export of goods and services, the applicable VAT rate is 0%.
In another scenario, if all supplies you make are exempt, you do not have to register for VAT, but in such a case, you cannot recover tax incurred on business purchases.
Examples of this would be owners of property who rent their properties for residential purposes, suppliers of local passenger transport, and those who purchase goods from outside the UAE and sell it outside the UAE only doing invoicing from the UAE.
A question you might now be asking is whether there is any difference between zero-rate supplies and exempt supplies in the UAE VAT? This is a good question, because at face value, both situations sound like the same thing: at the end of the day, whether you have zero-rated supplies or exempt supplies, VAT is not charged.
The terms are there for a reason, however, it is important to note that the difference is huge in terms of claiming the input tax. Input tax can be claimed back in case your supplies are zero-rated and it cannot be claimed in case of exempted goods and services supply.
Finally, it is quite common for a company to have goods and services which fall under the category of standard rated sales, zero rated sales, and exempt supplies. If this is the case, details about each category should be mentioned in the VAT Return form separately at the time of submitting the VAT
How to Get Registered under VAT?
This is the moment you’ve all been waiting for. Often times the frustration in taxes is not when they should be paid, or, even how much to pay, it’s how you go about paying them.
Understanding this frustration, I’m going to provide you with a set of steps that will hopefully unravel the frustrating mystery that registering for something like VAT can be. In order to pay and claim Vat from FTA you need to be registered which is most easily done through the FTA Online Portal.
Follow the steps below to complete the registration process:
- Go to the FTA Online Portal
- Create a New Account to Login
- Login and register
- Provide the details about the applicant
- Provide the name and identification of the applicant (Trade License & certificate of Incorporation)
- Provide the details and attach the documents of the owner and manager (Passport & EID)
- Provide Business Contact details (P.O Box number and Contact number)
- Provide the banking details (Bank Name/Bank Account number/IBAN number)
- Provide the details of senior management relationship with other entities (are they involved in a capacity of director with any other entity in last 5 years)
- Provide the details about primary activities of the business
I would advise that you have the documents and information in hand prior to starting the VAT registration. This makes the whole process a whole lot simpler on your end.
After uploading all the information and documents on the portal, FTA requires minimum 21 working days to process your application. Once the application is approved you will receive a unique TRN number which can be used to generate TAX Invoices for the customers, but the most important thing to keep in mind that once you receive your TRN number from FTA, after that you can only start issuing the Tax Invoices to the customers from the first day of your first Tax Return period mentioned on your TRN certificate issued by FTA.
How and When to Pay VAT?
Most companies pay VAT on a quarterly basis to the FTA, however the FTA may, at its discretion, assign a different Tax Period other than the standard one, to a certain group of Taxpayers. A Tax Return must be submitted no later than the 28th day following the end of the Tax Period concerned or else by such other date as directed by FTA.
At the end of each VAT period a company must complete a VAT return form, using an online FTA portal with the appropriate payment by using any one of the below-mentioned ways:
- E-Dirham Credit Card
- Local Bank Transfer using GIBAN – (GIBAN is a unique IBAN number given to every taxpayer
- Direct cash submission through currency exchange offices
The VAT return filing submission form includes a series of boxes where you can input the total VAT collected on your Emirate-wise sales and the VAT you are reclaiming on your purchases along with several other boxes for sales and purchases made in GCC Member States. Hopefully this has answered all your questions regarding VAT. Now let’s look at the other category of taxes business owners have to be concerned about.
What is the Excise Tax?
Public health has always been one of the top priorities of the UAE government. To enhance physical well-being and help prevent fatal or chronic diseases, the UAE government took an initiative and introduced the Excise Tax across the UAE in 2017.
The Excise Tax is a form of indirect tax levied on specific goods, typically those that are harmful to human health or the environment. In the UAE, Excise Tax is currently applied on the following goods at the following rates:
- Tobacco & Tobacco products 100%
- Carbonated drinks (note that this excludes sparkling water) 50%
- Energy drinks 100%
- Sweetened drinks 50%
- Electronic smoking devices and tools 100%
- Liquids used in electronic smoking devices and tools 100%
Do you Need to Register under the Excise Tax?
The answer to this question is very simple. If your business is involved in any of the below activities, you must register for Excise Tax:
- Importing of excise goods
- Production of excise goods
- Releasing goods from an excise tax designated zone
- Stockpilers of excise goods in UAE, in certain cases
- Warehouse keepers in certain cases
Based on one particular point on the above list, you might be wondering, who is the stockpiler. Allow me to elaborate. As per the explanation given by FTA a Stockpiler is a person or business which holds a stock of excise goods for business purposes and cannot prove that Excise Tax has been previously paid on these goods.
Now that we’ve settled whether you have to register, what are the requirements to register for Excise Tax?
The simplest answer to this question is that unlike VAT there is no registration threshold for Excise Tax, therefore any person or business involved in the above-mentioned activities needs to register for excise tax as soon as possible. Failure to register your company under Excise tax before starting dealing with excisable goods can lead to fines, you don’t want that; they will be far worse than the tax.
The registration process is fairly straight forward like for VAT. You’ll be required to register with FTA through an online portal by creating an e-service account and uploading the required documents. These will consist of a trade license, certificate of incorporation, share certificate and documents which show the details of the manager of the business such as a passport copy, Emirates ID, and visa page.
The only difference in the registration process of Excise Tax and VAT is that during Excise Tax registration you need to mention whether you are an importer, producer, or a stockpiler, and which excise goods like tobacco, carbonated drinks and energy drinks you import, produce or stockpile.
Once your application is reviewed and approved by FTA you will receive a unique TRN number which will be used for business activities.
Who Will Pay Excise Tax to FTA?
Just in case you have any more doubts regarding who pays this tax, the below illustration of how the process works, will give a complete overview regarding who will pay for Excise Tax to FTA:
Factory or Importer dealing in excisable goods registers with FTA and pays excise tax on goods to FTA.
Wholesaler or distributor buys the duty paid excisable products from the importer or factory
Retailer buys from wholesaler or direct from importer or factory, including cost of excise tax.
Excisable goods stocked on shelves with duty included in price.
Consumer pays higher price inclusive of excise tax at till for excisable goods.
In summation, only the importer, producer, or stockpiler needs to register for excise. Retailers and consumers are not required to register for Excise Tax as they will be buying the excisable goods inclusive of excise Tax.
Excise Tax Return and Payment
After successful registration with FTA for Excise Tax, you are required to file your excise tax returns on a monthly basis online no later than 15th day following the end of each Tax Period.
Excise Tax returns are automatically populated based on the information completed by you in the following declaration forms (as applicable) submitted during, or at the end of the Tax Period:
- Excise Tax import declaration forms
- Excise Tax production declaration forms
- Excise Tax release from designated zone not requiring customs clearance declaration forms
- Deductible Excise Tax declaration forms
Once your Tax Liability is established after completing the above-mentioned forms, you can pay your Tax liability and other administrative penalties using any of the following options:
- E-Dirham Credit Card
- Bank Transfer (GIBAN) – Local Transfer (GIBAN is a unique IBAN number that is given to every taxable person)
And that concludes our overview of takes for Entrepreneurs in the UAE. Hopefully this answers all your questions regarding UAE taxes and you can fill out forms with the confidence that comes with understanding the system.
In case you are interested to get professional support for your business – check out our cost-effective Accounting, Bookkeeping and Tax Return Filing packages.