There is something that all business people should know if they want to invest in the UAE. We are talking about the VAT in the UAE, which is a fee that the government charges for different purposes. This fee will have a significant impact on your business, which is why you must be aware of it.
In this article, you will learn everything you should know about VAT in this country and its basics. Besides, you’ll also discover useful information about VAT registration in the UAE and the process to register your business. Furthermore, here you will find some other relevant detail that all companies should know about the VAT. Let’s observe:
- What is the VAT (Value Added Tax) in the UAE and how does it work?
- How can investors complete the VAT registration process in the UAE?
- Is it true that not all companies need to pay VAT in the UAE?
- Why not all services and goods are subject to Value Added Tax?
- Why are there some free zones that are exempted from this fee?
- How much is the standard Value Added Tax in the UAE?
- How can Connectfz help you obtain more information about VAT registration in the UAE?
1. What is the VAT (Value Added Tax) in the UAE and how does it work?
The government charges a fee known as the Value Added Tax or VAT in the United Arab Emirates. And the main reason why this fee exists is that it works as a method to finance public services. Besides, it is also used to finance government expenditure. This fee can be charged on several elements, including goods, income, services, among many other transactions.
You can find two main tax categories that exist in the UAE, which are the following ones:
- A direct tax that the taxpayer pays directly to the UAE government.
- And an indirect tax that an intermediary pays to the government. On behalf of the government, this intermediary is a person that collects the tax from the taxpayer.
The VAT in the UAE is an indirect fee imposed on the consumption of goods or use of services. During each step of the supply process, this tax is charged. Nonetheless, the person who bears the VAT costs is the end consumer. On the other hand, registered companies collect and account for it. In other words, they act as collectors on behalf of the government.
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1.1. How does the Value Added Tax work in the UAE?
The UAE government introduced this tax in the country in 2018. And the main purpose of the VAT in the UAE is to provide a source of income to the country. It will contribute to the improvement of public services. Also, it’ll be an alternative of source revenue for the government to reduce dependence on oil and other hydrocarbons.
Having said that, it’s now important to be aware of the way in which this tax works. Let’s see an example that explains it:
- If a farmer grows vegetables and wants to sell them to a factory, the farmer needs to collect the VAT. For example, if the farmer sells all their products at a certain price, 5 percent of it must be added.
- After the factory gets the products, it starts processing them to manufacture goods. And then, the factory sells the goods to retail chains at a specific price. Just like before, the factory should collect 5 percent of that price.
- The retailer that bought the manufactured goods will sell them to the end consumers. And the process is repeated; the retail will sell the products and add 5 percent to the base price. And lastly, consumers will purchase the product and cover the tax fee.
To summarize, all traders will charge VAT to their customers on behalf of the government. And similarly, they’ll pay VAT when buying goods or services that their suppliers offer. In other words, there are three key tasks that registered companies must do:
- They must charge this tax on the services and goods that they supply.
- Also, they could also reclaim any VAT that they have paid on business-related services or goods.
- All businesses must keep records to allow the authorities to check that everything’s right and there are no misunderstandings.
2. How can investors complete the VAT registration process in the UAE?
All companies with a turnover of a minimum of AED 375,000 per year must register for VAT in the UAE. If your company meets this condition, then you have to register it for VAT. Therefore, you must complete two main processes; the creation of an e-service account and then the VAT registration.
Creating an e-service account on the FTA website is important before registering for VAT. All you have to do is to click on the “sign up” option and fill out all fields. After that, you’ll receive a verification email and then you’ll be able to log in with your credentials. Now, you can register for VAT once you log in to your account.
Follow these steps to complete your VAT registration process:
- Click on the “register for VAT” option after logging in.
- After that, you’ll read a guide called “Getting Started Guide”, which will provide information to complete the registration process. After reading it, click on the “click here to confirm you have read the getting started guide” option.
- Then, click on “proceed” to open the VAT registration form. This contains eight sections that you must complete.
- After completing all sections and submit all required information, you must click on “submit for approval” to finish the process.
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2.1. What documents will you need to provide when registering your company for VAT?
Some of the documents that the registration process requires from the applicant are the following ones:
- The certificate of incorporation.
- Contact information.
- Articles of Association or Partnership Agreement, if applicable.
- Bank account details.
- Financial statements.
- Description of the company’s business activities.
- Expected values of exports and imports or custom details, if applicable.
- Passport and Emirates ID of the owner, the manager, and the senior management.
3. Is it true that not all companies need to pay VAT in the UAE?
There is one main condition to register a company for VAT in the UAE. This condition is if your company has taxable supplies and imports exceeding AED 350,000 per annum. In other words, if your business falls under this VAT threshold UAE, it won’t be mandatory to register for VAT.
However, you can opt for registering your company voluntarily if you desire. Nonetheless, this is an option only in case your taxable imports and supplies exceed AED 187,500. And although voluntary registration can be a positive thing, it can also represent an unnecessary cost. Therefore, make sure to analyze if you really need to register before.
On the other hand, you can be subject to several penalties and fines if you don’t register when you should. Having said that, you must learn how to complete the registration process and gather the required documents. In case you still don’t quite understand this threshold condition, you can always ask for professional advice.
4. Why not all services and goods are subject to Value Added Tax?
There are exceptions from VAT for some goods and services, and it means it isn’t a blanket charge for all businesses. In other words, your company will not have to pay any VAT fee on these goods or services. Subsequently, you cannot charge customers this fee or claim VAT back on the services or goods that you have paid for.
Some of the services and goods that obtain this exemption are education and healthcare services, exportation outside the GCC, certain investment-grade precious metals, etc. Besides, there are also some VAT-exempt sectors, which include local passenger transport, bare land, and residential property. In cases like these, you don’t have to pay VAT fees.
Nonetheless, you still have to record these zero-rated supplies within your company’s VAT record-keeping. The main reason for this is that the law considers these services and goods as VAT taxable at 0 percent. Therefore, it can be a little complicated if you don’t obtain the necessary information and guidance about this matter.
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5. Why are there some free zones that are exempted from this fee?
In some cases, it can be a serious complication to register for VAT in the UAE. And depending on your kind of business and customers, the VAT fee can damage your brand. For example, if you sell a product/service to a business that’s registered, they can claim back VAT. In a situation like this, your VAT charge on them makes no difference.
On the other hand, if you sell your products to end consumers or smaller businesses, they won’t claim the VAT back. In other words, it makes your products or services 5 percent more expensive. If you want to avoid this type of complication, you can set up your business in a free zone. Luckily, there are several VAT-exempt free zones in the UAE.
It is highly suggestible to request help from tax specialists to make the right decision when it’s about the VAT. If you already have set up your business elsewhere, moving might be a worthless decision. Therefore, make sure to calculate all pros and cons before making your final decision regarding this affair.
6. How much is the standard Value Added Tax in the UAE?
The VAT in the UAE is among the lowest in the world; only 5 percent. And the best part of it is that the government is not planning to increase it any sooner. This is one of the reasons why many foreign investors and entrepreneurs look forward to setting up in the UAE.
Compared to other countries, the UAE is one of the most tax-efficient countries in the world. On the other hand, other nations have higher VAT rates. For example, the VAT rate in Russia is 18%; in France and the UK 20%; in China 17%, in Sweden 25%, and so on.
Moreover, there’s the advantage of choosing to register voluntarily for VAT if you’re not over the AED 350,000 threshold. However, it is always suggestible to consider all options and request help from a tax specialist before making important decisions.
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7. How can Connectfz help you obtain more information about VAT registration in the UAE?
Operating a company can be an easy task if you are aware of all rules and regulations. And having a professional business partner by your side can also bring you several benefits. With Connectfz as your partner, you can obtain the guidance you need to understand the laws and obligations.
With our help, you can also improve your company’s internal operations, making your business more efficient in time. Some of our available services that you can request include staff outsourcing, banking services, HR consultancy, among many others. Feel free to contact our team and request more information about our services.
Would you like to contact Connectfz to obtain more information about the registration process for Value Added Tax in the UAE? If you have any questions, call us on +97143316688. You can email us at email@example.com, and you will talk to one of our representatives who will answer your questions.