VAT Impact on Financial Services in the UAE

The introduction of Value Added Tax (VAT) in the UAE under Federal Decree-Law No. 8 of 2017 and its Executive Regulations significantly reshaped the financial services sector. Given that financial activities often involve complex dealings in money, credit, securities, and insurance, determining the correct VAT treatment is essential for compliance and for minimizing tax risk.

This article provides a structured explanation of VAT implications for financial services in the UAE, covering taxable, exempt, and zero-rated activities, insurance transactions, Islamic finance, and the rules on input tax apportionment.

1. Key VAT Definitions Relevant to Financial Services

Under UAE VAT Law:

● Goods include physical property such as real estate, water, and energy.

● Services refer to anything supplied other than goods.

● Taxable Supply means any supply of goods or services made for consideration

during business activities, except exempt supplies.

● Consideration includes all forms of payment received or expected, monetary or

otherwise.

● Exempt Supply refers to supplies where no VAT is charged and no input tax can be recovered.

These definitions set the foundation for the treatment of financial services under VAT.

2. What Constitutes Financial Services? (Article 42 Executive Regulations)

Financial services are broadly defined as activities connected to money or the provision of credit. The Executive Regulations list the following as financial services:

Dealings in Money and Credit
● Exchange of currency
● Issue or transfer of cheques or letters of credit
● Issuing, transferring, endorsing, or accepting a debt security
● Provision or renewal of loans, advances, or credit
● Provision or release of guarantees, indemnities, or bonds

Account and Financial Instrument Operations
● Operation of current, deposit, or savings accounts
● Trading or transfer of financial instruments such as derivatives, swaps, options, futures, and credit default swaps

Income Payments
● Payment or collection of interest, principal, dividends, or similar returns Virtual Assets
● Transfer of ownership of virtual assets, including cryptocurrencies
● Conversion of virtual assets
● Custody, management, and enabling control of virtual assets

Arrangement Services
● Agreeing to do or arranging the above activities, excluding advisory services

These provisions ensure that VAT treatment is based on the nature of the underlying financial transaction.

3. Exempt Financial Services

Under Clause 3 of Article 42, financial services are exempt from VAT when they are supplied without an explicit fee, commission, discount, or similar charge.

Exempt services include:
● Financial services remunerated by implicit margin (e.g., interest-based income)
● Issue, allotment, or transfer of equity or debt securities
● Provision or transfer of life insurance and related reinsurance
● Transactions involving virtual assets under Clause 2(k) and 2(l)

Input VAT on expenses related to exempt supplies cannot be recovered.

4. Taxable Financial Services

Financial services become subject to 5% VAT when supplied for an explicit fee, such as:
● Commissions
● Service charges
● Processing fees
● Arrangement fees

Islamic Finance Treatment
Islamic finance products are taxed based on the economic outcome, not the contractual form:

● Islamic products are treated similar to corresponding conventional products.
● If an Islamic financial instrument mirrors a conventional taxable product, VAT applies.
● Profit elements and Shariah-compliant fees may be taxable if they constitute explicit consideration.

Zero-Rated Financial Services

Certain financial services are zero-rated, including:
● Services supplied to a recipient established outside the GCC VAT system
● Supply of investment-grade precious metals (gold, silver, platinum with 99% purity)

5. VAT Impact on Insurance Services

Insurance services are treated distinctly under UAE VAT law. Only two categories receive special VAT treatment:

(1) Life Insurance and Related Reinsurance
● Exempt if the policyholder is a UAE resident.
● Zero-rated if supplied to non-UAE residents and no part of the service is consumed within the UAE.

(2) International Transport Insurance
● Zero-rated only when linked to transportation of goods or passengers internationally.

General Insurance (Standard Rate)
All other insurance lines fire, medical, motor, property, liability, accident, indemnity are generally standard-rated at 5%, unless specifically zero-rated.

Travel Insurance
● Standard-rated for UAE residents
● Zero-rated for non-residents when services are effectively used outside UAE

Islamic Insurance (Takaful)

The VAT treatment mirrors conventional insurance:
● Family takaful (long-term savings + protection) is treated like life insurance therefore exempt.
● If a savings component involves separate fund management fees, those fees may be taxable at 5%.

6. Input Tax Apportionment for Financial Institutions (Article 55)

Financial institutions often make both taxable and exempt supplies, requiring apportionment of input VAT.

Apportionment Rules
● Input VAT directly linked to taxable supplies → fully recoverable
● Input VAT linked to exempt supplies → non-recoverable
● Mixed-use input VAT → recoverable in proportion using approved methods

Approved Apportionment Methods

1. Outputs-Based Method
○ Ratio of taxable supplies to total supplies
○ Commonly used by insurance companies and banks

2. Transaction Count Method
○ Ratio of taxable transactions to total transactions
○ Suitable for banks engaged in wholesale/investment activities

3. Floorspace Method
○ Ratio of area used for taxable activities to total area
○ Used by real estate and property management companies

4. Sectoral Method
○ For complex businesses operating multiple divisions
○ Each sector uses an appropriate method independently

Correct application ensures compliance and minimises VAT exposure during audits.

7. Summary of VAT Treatment in Financial Services

● Implicit margin-based financial services → Exempt
● Explicit fee-based financial services → 5% VAT
● Cross-border financial services → Zero-rated
● Life insurance → Exempt
● General insurance → 5% VAT
● International transport insurance → Zero-rated
● Islamic finance → Same treatment as equivalent conventional products
● Input VAT must be apportioned based on approved methods

Conclusion

The VAT landscape for financial services in the UAE is multifaceted and requires careful interpretation of the law and executive regulations. Financial institutions including banks, insurers, Islamic finance entities, fintechs, and virtual asset service providers must assess each transaction based on its underlying nature and consideration structure.

Correct classification of supplies, application of exemptions, and accurate apportionment of iinput VAT are essential for compliance, minimising financial risk, and ensuring smooth operations within the UAE regulatory framework.

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.