ANR Accounting & Taxation

Movement of goods within a designated zone and outside of a designated zone is treated differently in the VAT law. Here are three scenarios and their VAT treatment.

Supply of Goods within a Designated Zone:
If the goods are moved within a designated zone, such transactions are treated as transactions outside the scope of VAT because such transactions are considered as taking place outside the UAE. VAT will not be charged for these transactions. However, it is important to remember that goods must remain within the designated zone for businesses to qualify for this rule.

Supply of Goods from a Designated Zone to Mainland UAE:
When the movement of the goods is from a designated zone to the mainland UAE, this movement is considered as an import for VAT purposes. In such cases, the standard rate of VAT would apply on the goods being transferred.

Supply of Goods from Mainland UAE to a Designated Zone:
When the movement of goods is from the mainland UAE to a designated zone that movement is treated as an export. Such a transaction is zero-rated for VAT. This means that there is no VAT charged on such a transaction. However, the conditions prescribed for these transactions must be met by the businesses to avail of this tax rate.

“Qualifying Income” of Freezone Companies

The qualifying income of a taxable person is taxed at zero rate.

What are the criteria to be met for freezone person for qualifying income?

Here they are:
1. Qualifying Free Zone Person Status: The entity must be a juridical person incorporated, established, or otherwise registered in a Free Zone, including a branch of a Non-Resident Person registered in a Free Zone.

2. Engagement in Qualifying Activities: The entity should derive income from activities designated as "Qualifying Activities" by the FTA. These activities are specified in the official guide.

3. Compliance with Substance Requirements: The entity must maintain adequate substance within the Free Zone, demonstrating sufficient assets, personnel, and operations.

4. Adherence to Transfer Pricing Rules: Transactions with related parties should comply with the arm's length principle, ensuring that terms are consistent with those between independent entities.

5. Avoidance of Excluded Activities: Engaging in activities classified as "Excluded Activities" may disqualify the entity from the 0% tax rate on certain income streams.

6. Permanent Establishment Considerations: If the Free Zone Person has a permanent establishment in the UAE (outside the Free Zones) or abroad, profits attributable to such establishments are subject to the standard 9% Corporate Tax rate.

Natural persons must register for Corporate Tax before the end of March 2025.
FTA has clarified this on their website. If you are a natural person doing business, check whether these conditions apply to you.

What is the Capital Asset Scheme under the UAE VAT Law and how it will benefit your business?

As a business when you purchase an asset of high value. You are allowed to recover the VAT you spent on it within the first year when the asset is used for taxable supplies.

This helps your business to ease cash flow and reduce the tax burden by reducing the original cost you paid for the asset.
But, In the course of business, if you decide, for example, to use half of the office space for something that was not originally intended and you don’t use the space for making taxable supplies, a portion of the VAT recovered has to be returned to the authority.

Steps followed for the Capital Asset Scheme

1. Initial purchase of the asset:
The asset value must be AED 5,000,000 or more excluding the VAT amount. The life of the asset must be 5 years and 10 years respectively for assets other than buildings and for buildings.
VAT must have been paid at the time of purchase of the asset.

2. VAT Recovery:
You are eligible to recover the full input VAT paid for the asset in the first year after the purchase.
To claim the input VAT, you must have put the asset for making taxable supplies.

3. Interim period:
However, the assets under this scheme are monitored during their life to make sure they are used for making taxable supplies.
For buildings, this period is 10 years and for other assets, this period is 5 years.

4. Changes to the usage:
If the purpose of use of the asset is changed from making taxable supplies to non-taxable supplies, the VAT amount recovered by the business should be adjusted.
An example is when your original office is used for providing healthcare services, that are exempt.

5. Adjustment:
The nature of the usage of the asset will decide the adjustment and the adjustment is calculated accordingly.
The tax authority has specific rules for the adjustment. On a proportionate basis, if 20% of the asset is used for the purpose of exempt supplies, 20% of the VAT originally recovered would be adjusted.

Is your business making use of the Capital Asset Scheme to recover the VAT paid on capital assets? We can help. Get in touch with us.

Profit Margin Scheme (PMS)

What is the Profit Margin Scheme under UAE VAT Law? Here are some insights into this scheme.

Purpose:
Ø The purpose of this scheme is to help businesses who find it impossible to recover the VAT on purchases when the purchase is from unregistered individuals.

Eligible Goods:
The eligible goods fall under three categories;
Ø Movable second-hand goods that are fit for use with or without repair
Ø Items which are aged above 50 years. These items are known as antiques
Ø Items such as currency notes or coins, stamps, or other items of cultural, historical, or scientific importance

How it is calculated:
Ø The VAT payable under this scheme is calculated on the amount of profit margin (Selling price – Purchase price).
Ø It will be assumed that the profit margin amount includes VAT.

Eligibility to apply this scheme:
Ø This scheme can be applied when the purchase is made from:
>Persons or businesses who are not registered under VAT Law
>A Taxable person who has used the Profit Margin Scheme earlier
>Persons in a situation where the input tax is unrecoverable

Records and documents:
Ø To qualify for this scheme, proper records of transactions have to be kept by the businesses. These include purchase records, sales invoices, and proof of the origin of the items and nature of the items.

In this post, we look into the important points for deciding the taxability of income of a branch of a business.

Permanent Establishment:
>The branches of a foreign company in the UAE are treated as permanent establishments and are taxable.
>The branches may include business conducted other than through a physical office.

Taxable Income:
>The accounting of the branches should follow the International Accounting Standard
>There are specific guidelines to follow for calculating income, expenses, and deductions provided by the tax authority.

Registration and Compliance:
>Branches must register for corporate tax as a taxable person
>The tax authority provides specific guidelines to register including the documentation and deadlines.

Transfer Pricing:
>The transfer pricing rules apply to the transactions between foreign branches and their parent companies.
>Such transactions should be conducted by following the arm’s length principle

Double Taxation Avoidance Agreement:
>Where a double taxation avoidance agreement affects the transactions between foreign branches and parent companies, the terms of the DTAA should be taken into account to decide the taxable income.

Director's compensation is subject to VAT under certain conditions. Here is a flowchart that explains the VAT applicability of director's compensation.

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