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The United Arab Emirates (UAE) implemented a 5% Value Added Tax (VAT) on the supply of goods and services in 2018. This tax is applicable to all business setup in Dubai operating within the country, including those located in free zones. As a result, holding companies in the UAE need to consider their VAT implications for transactions.
The applicability of VAT on a holding company’s business in the UAE depends on its specific activities and the nature of the supplies it makes. In this blog post, we will discuss the impact of VAT on holding companies in the UAE.
VAT-Exempt Activities
If a holding company’s activities fall under VAT-exempt categories, the company’s supplies are not subject to VAT in the UAE. Some of the common VAT-exempt activities in the UAE include:
- Financial services: This includes transactions such as loans, credit facilities, and interest-related services.
- Residential properties: Supply of Residential Buildings through Sale or lease is exempt from complying with certain conditions.
- Exempt Services also include the Supply of bare land and Supply of local Passenger Transport.
If providing only VAT-exempt supplies, a holding company may not need to register for VAT in the UAE. However, this could limit the company’s ability to reclaim VAT on its own expenses related to those exempt activities.
Taxable Activities
If a holding company is involved in taxable activities, it must register for VAT if its annual taxable supplies exceed the mandatory registration threshold set by the UAE tax authorities. The current threshold is AED 375,000/- in the last 12 months.
Taxable activities may include:
1. Management and Administration Services to Affiliated Companies
A holding company may provide management and administration services to its subsidiaries or affiliated companies. In such cases, the holding company is considered to be making taxable supplies for VAT purposes. Therefore, the holding company is required to register for VAT and charge VAT at the applicable rate on its taxable supplies.
2. Buying and Selling Shares or Securities
Buying and selling shares or securities can be subject to VAT if specific conditions are met. VAT applies when the transaction takes place between two taxable persons or entities and the securities are not held for investment purposes. In such cases, the holding company must register for a commercial license in Dubai and charge VAT at the applicable rate on the buying and selling of shares or securities.
3. Other Taxable Services that are not VAT-Exempt
If a holding company provides services that do not fall under the exempt category, it is required to register for VAT if its annual taxable supplies exceed the mandatory registration threshold set by the UAE tax authorities. The holding company must charge VAT at the applicable rate on its taxable supplies, file VAT returns with the Federal Tax Authority (FTA), and remit the collected VAT to the tax authority as per the prescribed schedule.
VAT Implications for Holding Companies
Input Tax Recovery
A holding company registered for VAT can reclaim VAT paid on its expenses, also known as input tax. Input tax can include VAT paid on goods and services purchased by the holding company, such as rent, office equipment, and legal fees.
If a holding company provides both taxable and exempt services, input tax recovery can be a challenge. The holding company must determine the proportion of input tax that relates to its taxable supplies and exempt supplies. It can only recover input tax incurred on goods and services used for its taxable supplies.
VAT Grouping
To minimize the impact of VAT on holding companies, the UAE allows VAT grouping. VAT grouping enables companies to register as a group and submit a single VAT return. The group can include two or more companies that are related, such as subsidiaries or holding companies.
By registering as a VAT group, the companies can eliminate VAT on certain transactions, such as those between group members. Further, VAT incurred on transactions between group members can be set off against the VAT charged to customers.
Conclusion
In summary, the applicability of VAT on a holding company in the UAE depends on the nature of its activities. If a holding company’s activities are entirely VAT-exempt, it may not need to register for VAT. However, if it is involved in taxable activities, it must register for VAT and charge VAT at the applicable rate.
Holding companies and new company registration in UAE must keep track of their VAT implications and file VAT returns on time to avoid penalties. Further, it is important for holding companies to consider input tax recovery and VAT grouping opportunities to minimize the impact of VAT on their overall business. For further information about company registration in Dubai or commercial license in Dubai, feel free to contact A&A Associate LLC. We assure you that our experts will assist you with incredible corporate tax services in Dubai which gives you a hassle-free tax experience.
