How the UAE’s VAT system is evolving and improving

The recent amendments to the UAE’s VAT Executive Regulations represent a significant step forward in aligning the country’s tax regime with the evolving global business landscape.

VAT exemption for fund management and virtual assets

Among the most impactful updates is the introduction of specific provisions for virtual assets. This change is particularly significant given the rapid growth of digital assets such as cryptocurrencies, NFTs, and smart contracts.

Previously, the VAT treatment of these assets was ambiguous, but the new regulations explicitly offer retrospective exemptions for the transfer of ownership and conversion of virtual assets. By defining “virtual assets” and offering exemptions, the UAE acknowledges the importance of this sector in the economy. However, further clarity might still be required as digital assets continue to evolve, particularly in Web 3.0.

The new exemption for the management of investment funds (which need to be licensed by the “Competent Authority” in the UAE) is another welcome development. This change further strengthens the local fund management industry, reducing tax burdens and enhancing the UAE’s appeal as a global financial centre.

By supporting the financial services sector through targeted exemptions, the UAE continues to build on its strategy of becoming a top-tier financial hub, attracting both local and international investment.

A significant change has been introduced regarding partial exemption recovery rules, impacting how businesses recover input tax using the standard method of apportionment.

The new rules also allow businesses to apply for a fixed apportionment recovery rate based on the previous year’s figures, subject to approval by the Federal Tax Authority (FTA). While this change provides flexibility, the FTA can now mandate businesses to adopt “special methods” for input tax recovery. The area may require further clarification, but the changes are likely to help businesses manage their tax liabilities more predictably.

Zero-rate for the export of good

Another notable change concerns the zero-rating of international transportation services and qualifying means of transport. The updated rules offer further clarity on services connected to such means of transport, which qualify for zero-rating, ensuring greater accuracy in VAT reporting for businesses in the logistics and transportation sectors.

The helps ensure that these businesses can comply with the latest regulations while maintaining transparency in their operations.

From a procedural standpoint, the amendments introduce updates to tax invoice and tax credit note rules, as well as self-issuance of tax invoices for imported goods and services. This change underscores the need for businesses to reassess their internal processes to ensure compliance, as failure to do so could result in penalties.

The updated VAT regulations also prompt businesses to re-examine their VAT group structures. The FTA is now empowered to disband VAT groups where significant revenues are impacted by grouping. The change is particularly relevant for large businesses and conglomerates that benefit from VAT grouping to reduce their tax liabilities. Companies will need to carefully review their group structures to ensure they comply with the new rules and avoid potential penalties or disruption to their tax arrangements.

Looking ahead, these amendments suggest that VAT in the UAE will continue to evolve in response to the needs of its business environment. For companies, the changes necessitate a thorough review of tax treatment, ERP systems, and operational processes.

Businesses will need to update their accounting systems to reflect new rules, particularly around self-invoicing for imports and special methods for input tax recovery. The changes to VAT grouping rules and input tax recovery provisions may also require businesses to rethink their overall organizational structure and tax planning strategies.

As the UAE continues to evolve as a global business hub, further refinements to VAT laws can be expected, particularly in response to developments in the economy as well as digitalization more generally, such as the expected introduction of e-Invoicing in 2025.

Read: The newest VAT exemptions for UAE crypto, investment firms

The author is managing director and head of Middle East Indirect Taxes, Alvarez and Marsal