In practice, there are several types of virtual assets available in the market today, and they may include: cryptocurrencies, non-fungible tokens (NFTs), security, utility and commodity tokens, stablecoins, payment tokens and governance tokens to name a few.
Virtual assets are transforming the way we store and exchange value in the digital age. From cryptocurrencies to NFTs, each type of virtual asset offers unique benefits and uses. As technologies , protocols, and of course, enabling legal and regulatory environments continue to evolve, virtual assets are becoming an ever increasing aspect of the digital economy.
The United Arab Emirates (the UAE) has been and is actively positioning itself as a global 'hub' for virtual assets through a number of key initiatives and regulatory developments such as:
- The establishment of the Virtual Assets Regulatory Authority (VARA) in Dubai: the word's first dedicated virtual asset service provider (VASP) sector regulator, established in 2022, covering the Emirate of Dubai (with the exception of the Dubai International Financial Centre (DIFC));
- The DIFC: The DIFC's financial regulator, the Dubai Financial Services Authority (DFSA), has a well-developed regulatory framework for 'Investment Tokens' (i.e., security tokens) and 'Crypto Tokens' (non-'Investment Tokens', with a carve out for certain 'Excluded Tokens' that fall outside of its regulatory framework – such as NFTs and utility tokens – which are still subject to anti-money laundering regulations and supervision). The DIFC has a number of initiatives, including the DIFC Innovation Hub (an innovation economy ecosystem, with a number of accellator programs), as well as the DFSA's own regulatory sandbox regime – its Innovation Testing License (ITL), which enables ITL holders to test new and innovative financial products, services, and business models;
- The Abu Dhabi Global Market (ADGM): The ADGM's financial regulator, the Financial Services Regulatory Authority (FSRA), was the first regulator in both the GCC and wider-MENA region to introduce a comprehensive regulatory framework, token taxonomy and guidance for virtual assets, including licensing requirements for exchanges, custodians and all other types of virtual asset-related activities. The FSRA's regulatory framework covers virtual assets, digital securities, fiat tokens , as well as other digital tokens such as utility tokens. Outside of the activities regulated by the FSRA, the ADGM also has its own Distributed Ledger Technology (DLT) Foundations Framework to specifically cater for Blockchain Foundations and Decentralised Autonomous Organizations (DAOs);
- Central Bank of the UAE (CBUAE): The CBUAE has issued a number of regulations to enable FinTech solutions, including recently issuing its Payment Token Services Regulation with regards to stablecoins (and in particular, UAE Dirham/AED-backed stablecoins – a 'Dirham Payment Token'); and
- The UAE Securities and Commodities Authority (SCA): The UAE's federal-level securities, derivatices, capital markets (and now VASP-sector regulator outside of the Emirates of Dubai and excluding the ADGM) re-issued its own virtual assets regulatory regime in May 2023, introducing regulations for virtual asset exchanges, and introducing amendments to its Rulebook for introduce new regulated activities relevant to virtual assets.
The legal and regulatory developments mentioned above build upon the UAE Government policy-level initiatives (at both a federal and emirate level) to promote the digital economy in the blockchain space. This includes the Dubai Blockchain Strategy (led by Digital Dubai), the Emirates Blockchain Strategy 2021, and Abu Dhabi's Blockchain and Virtual Assets Strategy (led by the Abu Dhabi Blockchain and Virtual Assets Committee (ADBVAC)). These initiatives reflect the UAE's commitment to fostering innovation and creating a robust regulatory environment for virtual assets.
The key extracts of the amended UAE VAT Executive Regulations applicable to virtual assets include:
Article 1: Virtual Assets are defined as "[d]igital representation of value that can be digitally traded or converted and can be used for investment purposes, and does not include digital representations of fiat currencies or financial securities."
Article 42(2)(j)-(l): Financial Services are Services connected to dealings in money (or its equivalent) and the provision of credit and include for instance the following:
(j) The transfer of ownership of Virtual Assets, including virtual currencies.
(k) The conversion of Virtual Assets.
(l) Keeping and managing Virtual Assets and enabling control thereof.
Article 42(3): The following financial services shall be exempted:
(e) Services specified in paragraphs (k) and (l) of Clause 2 of this Article [i.e., see above], including services supplied on or after 1 January 2018.
Key considerations based on wording of the legislation
- Definition of 'Virtual Assets': whilst the definition appears broad and could potentially include a number of digital products and services within its ambit (e.g., NFTs, utility tokens, potentially Real World Asset (RWA) tokens, certain cryptocurrencies, and other potential virtual assets which may be created in future), there appears to be some limitations. We note that this definition is narrower than some of the regulatory instruments cited above – for example:
- Under the CBUAE's Payment Token Services Regulation, a 'Virtual Asset' is defined therein as "a digital representation of value or of a right that can be transferred and stored electronically using Distributed Ledger Technology", and only specifically excludes "Central Bank Digital Currencies" (i.e., CBDCs). As such, in light of the more narrow definition contained at Article 1 of the UAE VAT Executive Regulations, the VAT exemption does not appear to apply to stablecoins (whether AED-denominated or otherwise); and
- Under the law establishing Dubai's VARA – Dubai Law No. 4 of 2022 Regulating Virtual Assets in the Emirate of Dubai – a "digital representation of value that may be digitally traded, transferred, or used as an exchange or payment took, or for investment purposes. This includes Virtual Tokens, and any digital representation of any other value as determined by VARA" – a 'Virtual Token' in-turn being a "digital representation of a set of rights that cab be digitally offered and traded through a Virtual Asset Platform". The VARA definition appears to be wider than what is contemplated within the UAE VAT Executive Regulations.
However, the definition of 'Virtual Assets' contained in the UAE VAT Executive Regulations matches that issued by SCA (contained in SCA Chairman of the Board of Directors' Resolution No. 26/R.M. regarding the Regulation of Virtual Assets Platform Operators), which also excludes digital money.
Therefore, in addition to not applying to stablecoins, it appears that the UAE VAT Executive Regulations also do not cover tokenized 'Securities' (as defined within the SCA Rulebook (which would include tokenized derivative contracts).
- Exemption of transfer and conversion of 'Virtual Assets': taxpayers who now introduce the trading and conversion of virtual assets into their taxable business activities may significantly impact its input tax recovery position, resulting in the need for an apportionment method to be adopted.
- Taxability of the custodial/management services in relation to 'Virtual Assets': similar to other financial services, any custodial services and management services and or brokerage services in connection with the sale and trading of 'Virtual Assets' will be taxable and subject to VAT at either 5% or 0%, as it is a service which is provided in exchange for a fee or commission. A supply of 'Financial Services' will be exempt where a fee is charged only if it is specifically mentioned and included in Article 42(3). This interpretation is aligned with the existing taxability of management, custodial and brokerage services for financial products and other financial services.
Immediate next steps for taxpayers to consider:
- Understand VAT Regulations: Familiarize yourself with the amended UAE VAT Executive Regulations on the intended scope with respect to the term virtual assets and the interaction of this definition with other regulations. It is important to note that the virtual asset market knows many different players with different business models. In practice, such business models may be challenging to qualify for VAT purposes. It is however crucial to assess whether any related activity qualifies as "transferring", "managing", "broking", "negotiating" in respect of virtual assets as this determines the VAT qualification.
- Register for VAT: If your activities meet the threshold for VAT registration, ensure you are registered for VAT. This is crucial for compliance and for claiming input VAT on business expenses.
- Maintain Accurate Records: Keep detailed records of all transactions involving virtual assets. This includes purchases, sales, exchanges, and conversions. Accurate record-keeping is essential for calculating VAT liabilities and for audit purposes.
- Assess input tax recovery position: Assess whether trading in virtual assets impacts your existing input tax recovery position and apportionment position.
- Understand applicability: Understand what type of crypto/digital assets/virtual assets specifically fall within the definition of 'Virtual Assets' under the UAE VAT Executive Regulations, in order to determine which such assets benefit from the VAT exemption.
To speak with us in relation to any of the proposed changes to UAE VAT, or any tax matters or issues more generally, or to speak to us about either financial regulation and/or regulation as they apply to crypto/digital/virtual assets across the MENA region, please contact one of the team members below.
