A presentation at Finance, accounting in in Dubai - United Arab Emirates by Shuraa Tax
DON’T GET TAXED BY SURPRISE VAT RULES FOR UAE FINANCIAL SERVICES
VAT can feel confusing on its own, and when you add financial services to the mix, things get even trickier. VAT in UAE applies to most goods and services, but financial services don’t always follow the same rules. That’s because many of these services involve interest, margins, or complex fee structures, so the VAT treatment is a little different from regular transactions. If you’re a bank, insurance company, lender, fintech startup, or even a business that deals with financial transactions from time to time, understanding these VAT rules is really important. A small mistake like charging VAT when you shouldn’t, or missing VAT when it should apply, can lead to compliance issues or penalties. That’s why staying updated with the rules related to the VAT on financial services in the UAE and the latest Federal Tax Authority (FTA) guidelines matters.
WHAT COUNTS AS FINANCIAL SERVICES UNDER UAE VAT LAW? To get the tax treatment right, you first need to know if your activity actually qualifies as a “Financial Service” in the eyes of the Federal Tax Authority (FTA). According to UAE VAT Executive Regulations (specifically Article 42), Financial Services are broadly defined as services connected to dealings in money (or its equivalent) and the provision of credit. Essentially, if your business involves exchanging currency, providing loans, or managing accounts where money is stored, you are likely operating in this sector.
TRADITIONAL FINANCIAL SERVICES VS FINTECH/DIGITAL FINANCIAL SERVICES The line between a “tech company” and a “finance company” is blurrier than ever. However, for VAT purposes, the distinction is vital because the nature of the income often dictates the tax rule.
WHAT IS THE VAT ON FINANCIAL SERVICES UAE Financial services in the UAE don’t all fall under one type of VAT treatment. Depending on how the service earns its income – whether through margins, interest, or clear fees, it may be zerorated, exempt, or standard-rated at 5%. A. ZERO-RATED FINANCIAL SERVICES (0% VAT) B. EXEMPT FINANCIAL SERVICES (NO VAT CHARGED) C. STANDARD-RATED FINANCIAL SERVICES (5% VAT)
MARGIN-BASED TRANSACTIONS – EXEMPT FROM VAT Margin-based transactions work differently. Instead of charging a fixed fee, the financial institution earns money from the margin or difference in price, such as interest or spread. Because there isn’t an explicit fee tied to the service, these transactions are treated as exempt from VAT. Examples of margin-based financial services include: Interest earned on loans or credit facilities Currency exchange margins Trading securities where income comes from price differences Returns on fixed deposits or savings accounts
VAT TREATMENT ON ISLAMIC FINANCE PRODUCTS IN UAE Islamic finance works differently from conventional banking because it follows Sharia principles, which prohibit interest (riba). Instead of traditional lending, Islamic financial institutions use alternative contract structures like profitsharing, leasing, or cost-plus financing. Even though these products look different from a legal or religious perspective, the UAE VAT Law focuses on the “economic substance” of the transaction, meaning how the product actually works in practice, not just what it is called. In other words: If an Islamic finance product serves the same purpose as a conventional financial product, the VAT treatment will usually be the same.
EXAMPLES OF ISLAMIC FINANCE PRODUCTS AND THEIR VAT TREATMENT 1. MURABAHA (COST-PLUS FINANCING) Therefore, the income earned is usually exempt from VAT, unless there are additional service fees involved (which would be taxable at 5%). 2. IJARA (ISLAMIC LEASING) Ijara is similar to a leasing arrangement where the bank owns the asset and leases it to the customer. 3. MUDARABA (PROFIT-SHARING PARTNERSHIP) In Mudaraba, one party provides capital and the other provides expertise, and profits are shared. 4. SUKUK (ISLAMIC BONDS) Sukuk represent ownership in an asset or project, and returns come from profit, not interest.
VAT ON INSURANCE SERVICES IN THE UAE 1. LIFE INSURANCE — EXEMPT FROM VAT Life insurance products are exempt from VAT in the UAE. This means: No VAT is charged on premiums Insurers cannot recover input VAT on related costs 2. GENERAL INSURANCE — STANDARD RATED AT 5% All general or non-life insurance products are taxable at the standard 5% VAT rate. Unlike life insurance, general insurance involves clear premiums and specific risk-based services, making VAT applicable.
VAT COMPLIANCE REQUIREMENTS FOR FINANCIAL SERVICE PROVIDERS To stay compliant and avoid penalties, financial services must follow clear rules around documentation, reporting, and classification. 1.Proper Record Keeping: Providers must maintain clear records of all transactions – fee-based, margin-based, and cross-border, and keep them for at least five years. 2.Issuing Tax Invoices (When Required): Tax invoices must be issued for standard-rated services. 3.Correct VAT Classification of Services: Every service must be classified accurately as exempt, zero-rated, or standard-rated. 4.Filing Accurate VAT Returns: VAT returns must be submitted on time and must correctly show all VAT collected, VAT recoverable, and any adjustments related to exempt or zero-rated supplies. 5.Input Tax Recovery and Apportionment: Since financial institutions make both taxable and exempt supplies, they must use an apportionment method to calculate how much input VAT they can recover. 6.Applying the Reverse Charge Mechanism (RCM): When financial services are imported from outside the UAE, the business may need to apply the reverse charge mechanism.
STAY ON TRACK WITH THE RIGHT VAT SUPPORT VAT on financial services in the UAE can get complicated quickly. With different treatments for fees, margins, crossborder transactions, Islamic finance, and insurance, it’s easy for businesses to feel overwhelmed. If your business deals with financial activities in any form, it’s always a good idea to get proper guidance instead of trying to figure everything out on your own. At Shuraa Tax, we help businesses cut through the confusion. Our team helps businesses with everything – from VAT registration and advisory to compliance, return filing, and ongoing support. We make the rules easy to understand and handle all the technical work for you. If you ever need expert help with VAT, we’re just a call away.
CONTACT US Phone +(971) 44081900 Email info@shuraatax.com Website shuraatax.com
If you’re a bank, insurance company, lender, fintech startup, or even a business that deals with financial transactions from time to time, understanding these VAT rules is really important. A small mistake like charging VAT when you shouldn’t, or missing VAT when it should apply, can lead to compliance issues or penalties. That’s why staying updated with the rules related to the VAT on financial services in the UAE and the latest Federal Tax Authority (FTA) guidelines matters.
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