UAE vat & tax

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Navigating Taxes, Optimizing Returns: Our VAT & Tax Services

Dubai and the UAE VAT Compliance Guide

Did you know that there is no personal income tax in the Middle East? Only international banks and energy firms are subject to tax.

For anyone planning to launch a business in Dubai, that’s fantastic news. You should keep in mind that Dubai began imposing VAT, or value-added tax, on the bulk of its products and services on January 1, 2018.

In Dubai, businesses are required to charge VAT on practically all products and services, including restaurant meals and mechanical supplies. You’ve come to the correct site if VAT surprises you and you want to know more. Read on for a thorough explanation of VAT in Dubai.

What Are the Benefits of Starting a Business in Dubai?

Starting a business in Dubai is advantageous for a number of reasons, including the government’s funding efforts and the city’s thriving economy. However, if you speak to anyone, they will likely mention the tax advantages first.

The Middle East currently levies no income taxes on individuals or businesses. Only the value-added tax, which is charged at a modest rate of 5%, must be paid.

You can open a business in a free zone, which entails paying no corporation or income taxes, no customs fees, and the ability to repatriate 100% of the company’s revenues.

Things to Know About VAT in Dubai

In order to start a business in Dubai, you actually need to go through a number of stages. Make sure your firm is properly incorporated from the beginning. This will help you avoid a lot of future problems.

Understanding your VAT responsibilities, registering as necessary, and paying your VAT on time are some of the most crucial factors. You risk incurring hefty fines for any interest if you don’t understand your obligations. Any unpaid VAT debt can escalate by up to 300% in interest.

1. Dubai levies VAT at a rate of 5%

The first thing you should be aware of is that Dubai levies a flat-rate VAT of 5%. It is applicable to imports as well as all other taxable supply of goods and services. It’s important to determine if you have a taxable supply because some services are exempt.

Any supply of products or services for payment from a person doing business in Dubai is taxed. This comprises all retail establishments, food at dining establishments and lodging facilities, and other leisure activities. Any enterprise you’re considering launching will probably be viewed as a taxable supplier.

2. A few services are VAT-free

If you’re uncertain about whether the 5% VAT applies to your situation, it’s crucial to determine if any of your supplies fall under the category of 0% VAT or exempt supplies. Even in cases where you have a taxable supply, specific services are subject to a 0% VAT rate, necessitating the inclusion of zero value in your invoices.

The 0% VAT rate is applicable to both goods and services destined for export outside the Gulf Cooperation Council (GCC) member states, which comprise Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE. Additionally, zero-rated VAT extends to international transportation, the supply of crude oil or natural gas, and the provision of investment-grade precious metals like silver and gold with a purity of 99%. Certain sectors such as healthcare and education also benefit from the 0% VAT rate.

Furthermore, newly constructed residential properties will be subject to 0% VAT if they are initially supplied within three years of construction. You may also be eligible for 0% VAT if you are considered “outside of the state,” which applies when:

  1. You have been in the state for less than a month.
  2. The reason for your presence in the state is unrelated to the supply of goods or services.

It’s important to note that zero-rated VAT differs from exempt VAT. If you are providing a zero-rated taxable supply, you are still required to register for VAT with the government and issue invoices, albeit charging a 0% VAT rate.

3. Some Services Are VAT-Exempt

Unlike zero-rated services where businesses must charge 0% VAT, exempt services are entirely free from VAT. There are only four categories that fall under VAT exemption, which include financial services, the supply of residential property, vacant land, and local public transportation.

Financial services, generally linked to monetary transactions, are typically VAT exempt. This encompasses activities like currency exchange, lending or credit provision, as well as deposit-taking or savings accounts. Insurance contracts also fall within this exempt category, but only when fees, discounts, or commissions are charged for providing these services.

The supply of residential buildings, whether for sale or lease, is exempt from VAT. However, structures that are not affixed to the ground and can be moved, such as RVs and motor homes, do not qualify as residential buildings. Additionally, hotels and motels do not enjoy VAT exemption status.

Exempt services extend to local transportation via land, water, or air between different states. If your business is involved in local transportation, it’s essential to determine whether these services qualify for exemption. This exemption even applies to helicopters or airplanes used for local transport.

4. Businesses with an annual income of AED 375,000 are subject to VAT.

If none of your taxable supplies fall under the zero-rated or exempt categories, then you are obliged to apply a 5% VAT rate. It’s important to note that not all businesses are required to register for VAT; there is a minimum threshold that must be met for mandatory registration.

For businesses mandated to register for VAT, they must be engaged in taxable supplies or imports amounting to AED 375,000 or more annually. However, if your taxable supplies or imports reach AED 187,500 or more, you have the option to voluntarily register for VAT.

5. You Can Recover Some of Your VAT

As a business, you are responsible for collecting VAT from your customers, but you also incur VAT expenses when purchasing certain goods and services. The VAT you can reclaim on these expenses is referred to as Input Tax.

To calculate your total VAT liability, you subtract the Input Tax (the VAT paid on purchases) from the total VAT collected from your customers. Input tax represents the amount of money your business paid for certain goods, and you have the opportunity to recover this tax.

For instance, if a business buys 10 computer tablets and pays 5% VAT on the purchase, then sells 20 tablets to a customer who also pays 5% VAT, it can seem like double taxation on the same product. However, the business can recover the VAT paid on the initial purchase. In the end, VAT is only charged once to the end-user.

It’s essential to note that VAT cannot be reclaimed on purchases if your business provides exempt services.

6. Registration for VAT Is Required

Registering for VAT in Dubai is a necessary step for your business, and it’s administered by the FTA (Federal Tax Authority). To begin the registration process, you must first create an e-service account, which requires a valid email address.

Once your account is set up, initiate the registration on the FTA’s portal, providing all necessary information and attaching required documents. This includes details such as your contact information and banking details.

Upon approval from the FTA, you will receive a unique Tax Registration Number, which you’ll use to access your VAT portal.

It’s crucial to continuously monitor your taxable supplies because once you exceed the minimum threshold, VAT registration becomes mandatory. Staying informed about your VAT obligations is essential to avoid any unintentional oversights.

VAT return filing with the FTA is mandatory and must be done online within 28 days after the end of your tax period. The frequency of filing depends on your annual turnover: businesses with an annual turnover below AED 150 million must file monthly, while larger businesses with annual turnovers exceeding AED 150 million must also file monthly to ensure timely and manageable VAT payments.

7. Online payments are available

At the conclusion of each tax period, it is imperative to submit an online VAT return to the FTA (Federal Tax Authority). This return serves as a concise overview of your total taxable supplies during that specific period and delineates the amount of VAT you should have collected, subsequently due for remittance to the government.

VAT returns and payment are conducted quarterly, with a deadline set for the 28th day of the subsequent month. Timely compliance is paramount, as late filing incurs penalties. For the first instance of tardiness, a penalty of AED 1,000 applies, increasing to AED 2,000 for any subsequent late filings.

Penalties for late payments can be substantial, commencing at 2% of the unpaid VAT amount for the initial 7 days, escalating to 4% after the initial 7-day period. In the event of non-payment within a month, a daily penalty of 1% accrues until it reaches 300% of the unpaid VAT amount.

Even if your supplies are zero-rated, it remains imperative to file your VAT returns promptly to avoid incurring late-filing penalties.

For convenience, VAT payments can be settled online through the official FTA website using various methods, including credit card, eDebit, or bank transfer, which can be either local or international.

Ensuring punctual and hassle-free VAT payments is essential to maintain compliance with the regulatory framework.

Ready to Launch Your Company in Dubai?

Indeed, VAT in Dubai became a mandatory requirement in 2018, and it’s essential for businesses to fulfill their reporting, collecting, and remitting obligations under this tax regime. It’s worth noting that Dubai does not impose personal or corporate income tax, which can be advantageous for businesses.

With a clear understanding of VAT in Dubai, it’s vital to comprehensively evaluate all the associated costs when launching a new business. To ensure you are well-prepared, consider using our business cost calculator, which can assist you in estimating the total expenses associated with starting your venture. Make use of our calculator today to plan effectively for your business endeavors.

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