In depth
Key VAT amendments include:
- Funds and Funds Managers – Fund Management Services
Article 42(2): The definition of financial services has been expanded to include in paragraph (j): [t]he management of investment funds, which means "services provided by the fund manager independently for a consideration, to funds licensed by a competent authority in the State, including but not limited to, management of the fund’s operations, management of investments for or on behalf of the fund, monitoring and improvement of the fund’s performance".
Article 42(3): Fund management services as specified in Article 42(2)(j) is now specifically exempt from VAT, effective from 15 November 2024.
This brings about a significant change in the existing VAT treatment of fund management services. While it has an immediate positive financial impact for the funds and return on investment for investors, this change in VAT treatment results in fund manager ultimately bearing the cost of VAT in relation to its own operational expenditure. This change results in fund managers now requiring to reassess their VAT registration obligations, pricing strategy and overall fund investment strategy as additional funds are now available to be reinvested.
- Inclusion of "Virtual Asset" Definition and Exemption
Article 1: The term "Virtual Assets" is defined as "Digital 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): The definition of financial services has been expanded to include "transferring ownership of Virtual Assets, including virtual currencies, the conversion of virtual assets and keeping and managing Virtual Assets and enabling control thereof."
Article 42(3): Transferring ownership of Virtual Assets, including virtual currencies; and converting Virtual Assets as specified in Article 42(2) is now specifically exempt from VAT, effective from 1 January 2018. With the advent and increased popularity of the metaverse, a virtual economy has emerged, offering businesses and individuals new opportunities to monetize products and services, such as virtual real estate and digital assets like NFTs. Recognizing these developments, the Federal Tax Authority (FTA) in the UAE acknowledges the changing landscape of business operations and the necessity for a robust tax framework to address these innovations. The recent changes to the UAE VAT Executive Regulations reflect the FTA’s commitment to identifying and regulating Virtual Assets and ensuring that the creation, sale, and transfer of these assets are effectively taxed.
Individuals and businesses who are engaging in the creation and trading of Virtual Assets need to carefully its VAT registration and compliance obligations, with retrospective effect from 1 January 2018 d the impact these transactions have on their historical VAT reporting and input tax recovery positions, potentially resulting in a VAT cost being incurred and a need for voluntary disclosures being required to be submitted.
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