Offshore companies in the Jebel Ali Free Zone Authority (JAFZA) are a special breed in the UAE. An offshore company incorporated under the recently amended 2018 JAFZA Offshore Companies Regulations (“Regulations”) is not subject to the federal commercial laws in the UAE and is not able to conduct any commercial business activities in the country. They are considered as non-resident for commercial purposes but are in fact treated as resident for VAT purposes.
The benefit of incorporating a JAFZA offshore company, amongst others, is to allow foreign investors to hold shares in other companies within the UAE as well as to own property in freehold areas in Dubai.
Assessing the VAT Impact
Like many other companies in the UAE, JAFZA offshores have been impacted by the introduction of VAT on 1 January 2018. Although for all intents and purposes JAFZA considers such companies as “offshore”, for VAT purposes they are not.
JAFZA offshore companies still need to determine whether they need to register for VAT with the UAE's Federal Tax Authority (FTA). Any business making taxable supplies with a total value exceeding the mandatory threshold of AED 375,000 (+/- USD 100,000) must get registered. Whether or not the JAFZA offshore companies need to get registered will depend on their activity. Although they are not allowed to conduct business in the UAE as per the Regulations, from a VAT perspective they may still receive a business income.
JAFZA Offshore and Rental Income through Property Ownership
In accordance with the Regulations, JAFZA offshore companies are allowed to own property in Dubai, and therefore many offshore companies choose to exercise this right. The purpose of such property ownership would most likely be to obtain some form of rental income.
Any rental income obtained from a residential property is exempt from VAT (in most cases) and does not trigger an obligation to register for VAT.
The situation differs however for offshore companies leasing commercial units and obtaining their rental income as such, since the leasing of commercial properties is considered a taxable supply for VAT purposes, and is subsequently subject to 5% VAT. When the value of such supplies exceeds the VAT mandatory threshold, VAT registration is required. Therefore, any JAFZA offshore company which owns property in Dubai needs to carefully assess the criteria they fall under in order to determine their VAT liability.
Receiving Dividends and Selling of Shares
Since such JAFZA offshore companies act as holding companies, they will often be receiving dividends or income from selling participations.
The receiving of dividends from UAE companies and the sale of shares to UAE companies are transactions which are VAT exempt. They impact negatively the right to recover input VAT of the holding company.
The fact that the receiving of dividends is exempt in the UAE is unusual from a VAT perspective. Generally, the payment of dividends is out of scope of VAT, like for example in the Kingdom of Saudi Arabia or like in all EU countries.
As such, if the JAFZA offshore company only receives dividends from UAE companies or only sells shares to UAE companies, it will not have to get registered for VAT purposes.
However, when these same transactions are done with non-resident recipients, they are no longer VAT exempt, but they are zero rated. Accordingly, dividends paid to a JAFZA offshore company by a foreign company and shares sold to foreign investors are, for VAT purposes, treated as taxable supplies. Therefore, if the total amount of these transactions exceeds AED 375,000, the JAFZA offshore company needs to register for VAT. Since one of the purposes of setting up a JAFZA offshore company is holding participations, this will often occur.
The rationale behind this rule copied from the EU is not to disadvantage the financial sector when it has to compete with businesses in countries which do not have VAT. However, the unusual position taken by the UAE on dividends has the strange consequence that these JAFZA offshore companies may be required to register for VAT purposes.
Due to the nature of its revenue, more often than not, a JAFZA offshore company will indeed have to register for VAT.
The FTA does provide certain exceptions from registration in the event a taxable person’s supplies are exclusively zero rated. Therefore, if the offshore company solely exports financial services - by virtue of receiving dividends from participations abroad or selling shares to non-residents - an alternative is to apply for this exception from registration for VAT with the FTA, in order to mitigate the impact of the offshore company’s VAT obligations.
The exception from registration cannot be granted when the offshore company is leasing commercial property and it cannot be granted retroactively.
Penalties and Consequences
All JAFZA offshore companies need to assess whether they need to register for VAT with the FTA. In practice, most JAFZA offshore companies have been under the impression that they do not need to register.
The FTA imposes very strict fines for companies which have not yet registered for VAT. The penalty for late registration is AED 20,000. In addition, a penalty of up to AED 2,000 per return will apply for not filing the VAT return.
Furthermore, in case VAT is due (e.g. leasing of commercial property) and is not paid to the FTA, a daily penalty of 1% may be charged on any amount that is still unpaid one calendar month following the deadline for payment (with a maximum of 300%). In addition to that, a penalty of 50% on the amount unpaid to the FTA will be imposed as well.
On 10 October 2018, Bahrain published its VAT Decree law (No. 48) in its Official Gazette. The Bahraini VAT law was written mainly by the Ministry of Finance and borrows largely from the GCC VAT Framework and the KSA VAT legislation. In addition to the VAT Decree law, Decree No. 47 approves the GCC VAT Treaty and Decree No. 45 establishes the Bahraini Tax Authorities. As a next step, Executive Regulations will be adopted in Bahrain to provide further detail on all provisions.
As is expected the VAT rate is 5% and businesses making taxable supplies in excess of BD 37,500 are required to register for VAT purposes. Bahrain has adopted a similar stance to financial services as the UAE and KSA. With respect to Real Estate, Education, Health Care and Local transport it has borrowed more from the UAE. Contrary to both the UAE and KSA, it has zero rated a number of foodstuffs. Regretfully it has taken over the too strict conditions to apply the zero rate on "exports of services" (in fact services' which place of supply takes place abroad) like the UAE and KSA have. These conditions are not in line with modern international EU VAT practice or the guidelines of the OECD in this matter.
Unfortunately it has also implemented the obligation to appoint a fiscal representative in some cases, whereas experience has taught that in KSA this structure is practically difficult to implement and leads to less compliance. No automatic reverse charge on imports of goods has been foreseen, contrary to the UAE. Remarkably, the sale of pearls in Bahrain has been zero rated, relatively similar to the wholesale of diamonds in the UAE where a reverse charge applied.
In line with KSA and UAE, steep penalties have been adopted to deter any non-compliance. A specific prison sentence has been determined as well for tax evasion. Extremely long transitional provisions have been foreseen for supplies to governments.
Businesses in Bahrain have to prepare for the introduction of VAT now and UAE and KSA businesses with subsidiaries in Bahrain have to compare their current implementation with the Bahraini framework. In addition, businesses in the other GCC States will have to analyse the impact of the implementation on their dealings with Bahrain, such as the exchange of VAT numbers but also the different Customs framework which will apply.
The United Arab Emirates’ (“UAE”) Federal Tax Authority (“FTA”) has published a new Value Added Tax (“VAT”) public clarification on tax invoice requirements. The new public clarification is relevant to all businesses making taxable supplies and provides further clarity on the issuance of tax invoices.
VAT Public Clarification VATP006 addresses the application of article 59 of Cabinet Decision No. (52) of 2017 on the Executive Regulations of the Federal Decree Law No. (8) of 2017 on Value Added Tax, which sets out the requirements for when a tax invoice must be issued and the particulars that must be included.
A tax invoice can be defined as a written or electronic document in which the occurrence of a taxable supply is recorded with details pertaining to it and is generally issued by the supplier of goods or services.
The tax invoice plays a crucial role for the supplier as it may dictate the date if supply, thereby determining the tax period in which the output VAT is to be paid. On the other hand, a recipient will need the VAT invoice for the recoverability of the input VAT.
The Federal Tax Authority (FTA) prescribe certain criteria for who is obligated to issue a tax invoice.
- VAT registered person making a taxable supply (excluding zero rated supply)
- VAT registered person making a deemed supply
The FTA requires suppliers to issue the tax invoice within 14 calendar days of the date of supply, providing flexibility to compound multiple monthly transactions for the same customer under a single invoice.
As per the FTA guidelines, there exist certain situations when the obligation of producing the tax invoice is shifted from the supplier. It may be the responsibility of the recipient to issue a “Buyer-created tax invoice”. In cases of consignment of goods to an agent, the agent may issue a tax invoice in relation to that supply with the particulars of the agent as if that agent had made the supply of goods or services itself with a reference to the principal supplier (e.g including the supplier’s name and tax registration number “TRN”).
Where the recipient is not registered for VAT, or where the recipient is registered for VAT and the consideration for the supply is under AED 10,000, optionally a simplified tax invoice can be prepared with requirements as follows:
- the words “Tax Invoice” clearly displayed on the invoice;
- the name, address, and TRN of the registered supplier;
- the date of issuing the tax invoice;
- a description of the goods or services supplied; and
- the total consideration and the VAT amount charged.
In addition to the above, supplies over AED 10,000 necessitate additional requirements for a full tax invoice as follows:
- where the customer is registered for VAT, the name, address, and TRN of the customer;
- a sequential tax invoice number or a unique invoice number;
- the date of supply (where different from date of issue of the tax invoice);
- for each good or service, the unit price, the quantity or volume supplied,
- the rate of VAT and the amount payable expressed in AED;
- the amount of any discount offered;
- the gross amount payable expressed in AED;
- the tax amount payable expressed in AED together with the applied exchange rate;
- where an invoice relates to a supply under which the recipient is required to account for VAT, a statement that the recipient is required to account for VAT, and a reference to the relevant provision of the Law.
The public clarification clarifies that there is no requirement for line items to be shown on the simplified tax invoice at a net value. This means that the total gross amount and the VAT amount should be stated in separate lines at the bottom of the simplified tax invoice.
However, for full tax invoices, the line items must show the tax value and net value, but there is no need to present the gross amounts for each line item as this is reflected in the total gross amount payable.
Whenever a taxable supply is made, a tax invoice must be issued and delivered to the recipient. If the conditions for a simplified tax invoice are met, then a simplified tax invoice can be issued and delivered instead. It is not acceptable to offer only an option of providing an invoice upon request and thus not provide one if the customer does not request one. A tax invoice must be provided in all circumstances where a taxable supply is made.
However, the Cabinet Decision No. (3) of 2018 on Tax Invoices provides issuers of tax invoices the flexibility of using the mailing address of the recipient as an alternative to their physical address.
Furthermore, the clarification requires that all tax invoices must have the tax amount converted and stated in UAE Dirham even if the transaction is made in some other currency. The invoice may still contain information regarding prices in the original currency. The exchange rate used must be a rate determined by the UAE Central Bank.
Another important thing to note for a tax invoice is the rounding of amounts to the nearest Fils (that is up to two decimal places) where the invoice amount is a fraction of a Fils (1 Dirham = 100 Fils). The clarification guide instructs to follow the mathematical principles for rounding off. The general rules for rounding off are as following,
- If the number you are rounding is followed by 5, 6, 7, 8, or 9, round the number up.
Example: 4.5387 rounded upto 2 decimals as 4.54
- If the number you are rounding is followed by 0, 1, 2, 3, or 4, round the number down.
Example: 6.7234 rounded to 6.72
This publication is important as the tax invoice process is relevant to all businesses making taxable supplies, and tax invoices received must be compliant with the UAE’s VAT legislation to enable input tax recovery on the VAT return. In this regard, it is important to note that these requirements are mandatory rather than optional.
Failure to comply with the stated requirements can have a number of implications for the business, ranging from commercial (such as the customers may not be entitled to a Tax Credit for VAT incurred), to the imposition of penalties for the failure to issue and deliver compliant tax invoices. The FTA has prescribed a penalty of AED 5,000 for each tax invoice in case of failure by the taxable person to issue a tax invoice when making any supply.