Bank interest and dividends not subject to VAT in the UAE

The UAE’s Federal Tax Authority (FTA) has clarified that ‘passively earned interest income’ from bank deposits and dividend income are not subject to value added tax (VAT) in the country.

There is no requirement to report them in the VAT return.

“VAT is imposed on the import and supply of goods and services at each stage of production and distribution, therefore, VAT implications arise only when there is a supply – if there is no supply, there is no VAT implication,” the FTA explained.

For instance, if a retail business deposits its income into a bank account and earns interest on the deposited amount, and the business does not do anything to earn this income aside from merely depositing the money in the account, it can then be said that the interest was earned passively, the authority said.

In this case, the retail business is not considered to have made a supply to the bank, and the interest income received is not a consideration for a supply.

The FTA also noted that under the VAT law, the payment or collection of any amount of interest and dividend is considered to be a financial service and is therefore exempt from VAT.

However, the authority also noted that the ruling only applies to interest derived from bank deposits and does not have any bearing on the interest generated from extending loans or credit, which are exempt supplies for VAT purposes.

The UAE implemented 5 per cent VAT on the supply of most goods and services in the country on January 1, 2018.

A total of 296,000 businesses registered for VAT in its first year of implementation in the UAE, according to the FTA.

The FTA also expects 2019 to witness a “significant leap forward for the UAE tax system”, with the authority planning to further improve tax compliance rates, promote registration among taxable businesses, and combat tax evasion.

Read more: First year of VAT in the UAE: FTA reveals the key details of implementation