With the implementation of Value Added Tax (VAT) in the UAE from 1 January 2018, the deadline is looming and many charities and non-profit organisations are confused as to their position under the new law. Whilst the position, at the time of writing, remains uncertain for non-profit organisations in the UAE, this article sets out the current status and possible approach that might be taken towards the VAT treatment of non-profit organisations in the UAE.
Current status of the UAE VAT Law and Executive Regulations
Federal Law No. 8 of 2017 on VAT (UAE VAT Law) has been passed and shall come into effect on 1 January 2018. The UAE VAT Law provides for Executive Regulations to be passed, which were issued by the Cabinet on 26 November 2017 (Regulations).
For all practical purposes, whilst the Regulations have been published for the UAE, the position still remains unclear as to how non-profit organisations will be treated for VAT. This situation is somewhat confused by reference in the UAE VAT Law to a possible further Cabinet Decision that will list societies and public welfare associations deemed to be 'Charities' under the UAE VAT Law. This list is not included in the Regulations.
In addition, there is currently no information from the UAE Ministry of Finance on whether another Cabinet Decision is expected to be published or whether any guidance is to be issued for charities and non-profit organisations.
Is the organisation conducting business?
The UAE VAT Law states that VAT shall be imposed where the following occurs:
- the supply of goods and services;
- for Consideration (defined as 'all that is received or expected to be received for the supply of goods and services, whether in money or other acceptable forms of payment'); and
- by an entity conducting Business (defined as ‘any activity conducted regularly, on an ongoing basis and independently’).
The first step for any non-profit organisation is to review their activities and determine whether they are conducting business (further advice is set out below).
Thresholds for registration
The mandatory registration threshold is AED 375,000 of annual turnover of VATable supplies (or an anticipation that the threshold will be met within the next 30 days). The voluntary registration threshold is AED 187,500 of annual turnover (or anticipated turnover) of VATable supplies. The next step for the non-profit organisation will be to review the income and turnover and calculate whether they are over the thresholds for registration (see below).
VAT which a business or organisation is required to account for on its sales or supplies is known as the Output Tax. VAT paid out on purchases is known as the Input Tax. Usually, a business or organisation is able to offset Input Tax against its Output Tax and only pay the balance to the tax authority.
Definition of Charities
Under the UAE VAT Law, charities are defined as ‘Societies and associations of public welfare not aiming to make a profit that are listed within a Cabinet Decision issued at the suggestion of the Minister’ (Charities). As stated above, to our knowledge, this list of defined Charities has not been published. It is possible that the definition of Charities may be narrowly defined to only include registered Public Welfare Associations, or similarly restrictive criteria, rather than non-profit organisations in general.
Special treatment for Charities in the UAE
Article 57 of the VAT Law states that a Cabinet Decision will be issued determining the Charities entitled to recover the full amount of Input Tax paid by them. This suggests that provision is going to be made for defined Charities to recover any VAT that they have paid.
Article 57 states exceptions to this, being: (i) tax excluded from recovery as specified in the Regulations and (ii) tax paid for goods and services used to perform exempt supplies (where no VAT is due and no Input Tax may be recovered).
Article 46 of the UAE VAT Law sets out supplies exempt from tax: (i) Financial services as specified in the Regulations, (ii) supply of residential buildings, (iii) supply of bare land, and (iv) supply of local passenger transport. These activities are unlikely to be common amongst most non-profit organisations. In summary, with the exceptions unlikely to apply, it is possible that a defined list of Charities are going to be given some preferential treatment in being able to recover Input Tax paid by them.
The Regulations do not contain a list of Charities or any detailed provisions in relation to the treatment of Charities for VAT purposes. The Regulations do provide for the zero-rating of buildings, or part of a building, specifically designed to be used by Charities – however this is limited to the first sale or lease of the building.
In addition, the UAE VAT Law (and Regulations) provide no further clarification on whether or not registration is necessary or if some other evidence will be required to show a valid right to reclaim any VAT paid.
Questions to be asked and analogies from other VAT jurisdictions
It is recommended that non-profit organisations review their position and possible requirement to register for VAT. The deadline for all registrations for VAT with the Ministry of Finance was 4 December 2017. Taking an analogy of how the United Kingdom (UK) treats charitable and non-profit organisations for VAT purposes, we set out below an idea of relevant questions to be asked and provide some guidance. However, it should be noted that there is no official guidance from the Ministry of Finance on the approach to be followed in the UAE.
Is the organisation conducting business (the supply of goods or services for consideration)?
The organisation should consider whether it is supplying goods and services for consideration. For example, in the UK income from donations, grant funding and proceeds from fundraising are outside of the scope of VATable supplies. As long as there is no identifiable benefit given in exchange for this income, it is thought that this is likely to be outside the definition of conducting business and Output Tax would not need to be charged.
By contrast, charging membership fees, entrance fees for the admission to events and sponsorship payments has been included within the scope of business in the UK, making it a VATable supply on which Output Tax should be charged. Arguably, this same approach could be taken in relation to the UAE VAT Law (notwithstanding that the organisation is a non-profit making entity).
Is the annual turnover above the threshold limits?
If turnover is below the threshold limits, it will not be possible to register for VAT. If the turnover is over the mandatory threshold, taking into account income from VATable supplies, then registration for VAT should be completed, to avoid penalties. If turnover is over the voluntary threshold limit, the organisation should review whether it is likely to be subject to Input Tax on the goods and supplies it is purchasing, to see whether there is an economic benefit in being able to register for VAT and offset Input Tax against Output Tax.
Is the non-profit organisation likely to come within the defined list of Charities or have the benefit of an exemption?
Although it is uncertain at the moment, it is possible that Charities are going to be defined narrowly, possibly limited to registered Public Welfare Associations or registered charitable or non-profit associations listed with a Federal or Emirati-level authority. There is no indication that any exemptions are going to be extended to all non-profit organisations, however registered. For example, in the United Kingdom charities must provide evidence of their registration of charitable status and the authorisation of this by the relevant tax authority to be afforded special status under the VAT rules.
Also, as stated above, the current wording in the UAE VAT Law refers to a list of Charities entitled to 'recover the full amount of Input Tax paid by them'. It is uncertain whether registration will be required to reclaim this VAT paid out.
Will charities pay VAT on a reduced-rate or zero-rate basis on some defined goods and services?
There is a narrow list of exempt and zero-rate supplies of goods and services under the UAE VAT Law, including the supply of educational services and related goods and services being zero-rated (excluding higher education unless government owned and funded) and the supply of preventative and basic healthcare services and related goods and services. These supplies apply to all taxable entities, not specifically to non-profit entities.
In the UK there is a wider, but specified, list of goods and services that when supplied to charitable organisations are permitted to be supplied at a reduced or zero rate of VAT. At present, there is no indication that this approach will also be followed in the UAE and there is no information on a specified list of goods and services that could be provided at reduced or zero-rates to charitable and non-profit organisations (outside of the standard list of zero-rated supplies).
Is the organisation an end-user of goods and services or a part of a supply-chain for goods and services?
Under the VAT rules, a supplier can only recover VAT that they have paid out (Input Tax) against VAT that they have charged on goods and services that they are supplying (Output Tax). In many cases, non-profit organisations will not be engaged in the VATable supplies of goods and services.
Unless the UAE VAT Law is going to allow for this recovery of VAT paid on goods and services, non-profit organisations can be at a possible disadvantage - in effect the organisation becomes the end-user in the supply chain and will have a 5% increase in their costs of operation. This is similar in other jurisdictions, such as the UK, and is often a bone of contention in the charity sector.
Conclusions and Next steps
Outside of a narrow category of defined Charities, subject to a further Cabinet Decision being published, it is possible that non-profit organisations will be treated the same as other businesses for the purposes of VAT. It is also possible that there will be a future Cabinet Decision published allowing defined or a list of charities to recover VAT paid. The uncertainty is of course unfortunate given the deadlines for registration and implementation of VAT.
With the deadline of 4 December 2017 for all required organisations to register for VAT, notwithstanding the uncertainty that exists, to avoid penalties for non-registration it is recommended that charities and non-profit organisations err on the side of caution. If the organisation has reviewed its operations and concluded that it is suppling goods or services whilst conducting business for consideration, and it is above the mandatory threshold limits, steps should be taken to register for VAT purposes.
For other organisations, not coming within this test and not registering for VAT, unless further guidance is issued by the Ministry of Finance, the purchase of goods and services will get 5% more expensive moving forward.