Understanding VAT Implications on Customer Loyalty Schemes in the UAE: Key Insights for Retailers and Tax Professionals

Introduction: Loyalty programs have become ubiquitous in the UAE retail landscape, from supermarket points to airline miles, as powerful tools to drive customer retention. However, beneath the marketing benefits lies a web of VAT implications that can trip up businesses if not managed properly. The UAE VAT Law and its Executive Regulations contain specific provisions on vouchers, discounts, and deemed supplies that directly impact loyalty schemes. The goal is not just compliance, but leveraging correct VAT treatment for strategic value.

Loyalty Program Structures and VAT Basics

Loyalty programs generally reward customers with points, miles, or credits that can be redeemed for future discounts or free products. Importantly, when a customer earns loyalty points (for example, 1 point per AED spent), no additional consideration is paid for those points, so no separate VATable supply of the points occurs. The points are an incentive bundled with the primary sale. VAT is charged on the original transaction (e.g. the retail purchase) that generated the points, not on the issuance of the points themselves. In UAE practice, loyalty points are often treated akin to vouchers or rights with a face value that can be used later; as long as they are given for free (or sold at or below their face value), their issuance is outside the scope of VAT. This aligns with the UAE VAT legislation’s definition of vouchers, if you’re not charging extra for the points, you haven’t made an additional taxable supply at the time of award.

The VAT implications arise when the customer actually redeems those points for rewards. There are two common redemption scenarios:

• Points as a Discount (Partial Redemption): This is when points partly pay for a purchase, with the customer paying the balance in cash/card. Here, the points effectively function as a discount or tender on the price. The business should charge VAT only on the net amount paid in money after the points discount. For example, if a customer has points worth AED 50 applied to a AED 300 purchase, the taxable amount becomes AED 250, and VAT (5%) is computed on AED 250 (i.e. AED 12.50). The points reduce the consideration, so the customer enjoys a tax-inclusive discount on the reward portion.

• Points as Full Payment (Free Reward): In some cases, a customer may redeem loyalty points to fully cover the price of a reward item, with no cash or card payment involved. From a VAT perspective, this does not constitute a supply made for no consideration, as the reward is primarily linked to points earned through the customer’s previous taxable purchases from the same supplier. Provided this link is clearly established within the structure of the loyalty programme, the full redemption of points does not trigger a Deemed Supply. The earlier consideration paid for those taxable purchases is treated as covering both the original goods/services and the reward item. As such, no additional output VAT arises on the reward item, since its value is already included in the original taxable transaction.

Key point: Businesses should distinguish whether point redemptions are reducing a sale price or constituting a free giveaway, as the VAT treatment diverges. If it’s a price reduction, just charge VAT on the reduced price.

Who Funds the Loyalty Reward? Why Funding Source Matters

One critical aspect of loyalty programs that UAE tax professionals emphasize is identifying who actually bears the cost of the reward, the retailer (supplier) itself, or a third-party (such as a parent company, separate loyalty scheme operator, or an outside partner). This funding source drives the VAT characterization of the redemption:

• Supplier-Funded Rewards (In-house Loyalty Program): If the same company that sold the original goods is also bearing the cost of the loyalty reward, then the points function as a straightforward incentive or discount from that company’s perspective. There is no reimbursement coming from elsewhere. In such cases, when points are redeemed, the retailer is essentially giving up part of its own revenue or providing a free good. The VAT outcome aligns with the discount/free supply treatment discussed above. The retailer will charge VAT on the net amount the customer pays, or account for VAT on the free item if required, and absorbs the cost of the reward as a marketing expense (with input VAT on that cost generally recoverable as it’s for business promotion.
• Third-Party Funded Rewards (Outsourced or Multi-Partner Program): Loyalty schemes often involve a separate entity funding or reimbursing the reward. For example, a retail group might have a dedicated loyalty company, or several independent retailers participate in a coalition program where a central operator or the original issuing company funds the rewards. In these setups, when a customer redeems points at Retailer A’s store, Retailer A is not actually losing the value of those points, instead, they receive compensation for the points from the program operator or another company. Perhaps Retailer A gets paid for the redeemed points by the parent company that runs the loyalty program, or by the third-party issuer of the points. In effect, Retailer A ends up with full value: part paid by the customer (if any cash), and the rest paid by the third party covering the points.

In VAT terms, this third-party funding makes the points akin to a form of tender or consideration. The redemption is no longer a true “discount” from Retailer A’s standpoint (because Retailer A isn’t bearing that discount cost). Instead, the points portion is an alternate form of payment to the retailer, coming from the loyalty operator. Consequently, the sale by Retailer A should be taxed on the full value of the goods/service supplied, as they did receive full consideration (just from two sources). A UAE tax analysis would say the retailer must “discharge VAT on the full value of goods/services supplied”, treating the loyalty points redeemed as cash equivalent (tender) rather than a markdown.

Actionable Steps to Assess and Manage VAT Risks in Loyalty Programs

Managing VAT in loyalty programs doesn’t have to be daunting if approached systematically. Here are some practical steps for tax professionals and retail executives to consider:

1. Map Out Your Program Structure: Begin with a clear picture of how your loyalty scheme works. List all parties involved, the issuing entity, redeeming entities, any third-party platform or partners. Diagram the flow of points issuance and redemption. This mapping will highlight whether it’s a single-entity program or multi-entity, which is critical for VAT analysis.
2. Determine Who Funds the Rewards: For each type of reward redemption, identify who ultimately bears the cost. Is it your company (treating points as a self-funded discount), or do you receive funds from elsewhere to cover it? This distinction drives the VAT treatment. If the retailer bears the cost, plan for a discount or deemed supply approach. If a third party reimburses it, treat the points value as additional consideration for the sale, meaning likely full-value VAT needs to be accounted. Document these funding flows clearly.
3. Review Contracts and Consider VAT Grouping: Examine the legal agreements governing the loyalty program. Do they specify the nature of payments between entities (e.g., “reimbursement of discount” vs. “purchase of goods”)? Ensure the language supports your intended VAT position. If you have multiple entities under common ownership, evaluate the pros and cons of forming a VAT Group. VAT grouping can simplify compliance by consolidating the VAT treatment of loyalty transactions, but it needs to be weighed against other business factors. If grouping isn’t feasible, consider adding clauses in contracts that clarify the VAT handling of loyalty settlements, and make sure both sides treat it consistently.
4. Check VAT on Redemption Scenarios: Analyze a few realistic redemption scenarios. For partial redemptions, verify that your point-of-sale systems apply discounts before VAT calculation (so VAT is charged only on the cash portion). For full redemptions (point-paid freebies), monitor their values.

Takeaway: By diligently assessing loyalty program structures against VAT rules and proactively managing any risks, UAE businesses turn compliance into a competitive advantage. They ensure that loyalty incentives truly cost what they budgeted (no hidden tax costs), improve their cash flow by claiming legitimate input credits, and avoid the downsides of non-compliance. In short, getting the VAT treatment right for loyalty programs is not just a finance chore, it’s a smart business move that safeguards profitability and enables sustainable loyalty strategies. As the adage goes, tax efficiency is sound business strategy, and loyalty programs are no exception to that rule. By aligning your program with UAE VAT law and FTA guidance from the outset, you gain both peace of mind and a stronger platform to build customer loyalty, all while staying squarely within the boundaries of the law.

Disclaimer: Content posted is for informational and knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.