VAT Updates: The new list of designated zones, eligible goods under profit margin scheme and the VAT treatment of various compensation-type payments and labor accommodations

The new list of designated zones

Continuing the lines of the Cabinet Decision (59) of 2017 on Designated Zones, the UAE Federal Tax Authority (FTA) announced that it has granted the following free zones as designated zones last June 18, 2018:

1. Al Ain International Airport Free Zone in Abu Dhabi
2. Al Butain International Airport Free Zone in Abu Dhabi
3. International Humanitarian City, Jebel Ali in Dubai

Businesses registered and situated within these designated zones are eligible to the special provisions for supplies of goods under the UAE VAT law.

Should you want to discuss this article in further details and you want to know the impact in your business or planning to set-up a business in a free zone, please get in touch with some of our VAT consultants in Dubai.

VAT treatment on various compensation-type payments

The Federal Tax Authority (FTA) issued a Public Clarification VATP001 in order to provide guidance on the VAT treatment of compensation-type payments such as compensation for the loss, settlement of a dispute, payment made for damaged goods, penalty or fine. The said Public Clarification states that if there is a payment for the consideration for supply, a VAT is due on such payment.

In determining whether a payment is consideration for any supply, it is necessary to consider the contractual and legal arrangements in full to determine the reason for the payment.

Eligible goods for the profit margin scheme

The Public Clarification VATP002 provides a list of goods that are eligible to the profit margin scheme. The FTA also clarified that only those particular goods which has previously been subject to VAT before the supply in question are included in the profit margin scheme.

As a result of this Public Clarification, stock on hand of the used goods that have been purchased or acquired before the effective date of Federal Decree-Law No. (8) on Value Added Tax (VAT law), or which have not previously been subject to VAT for some reasons, are not qualified to be sold under the profit margin scheme. Hence, the VAT is due on the full selling price of such goods.

VAT treatment on labor accommodation

Based on FTA’s Public Clarification VATP003, a clear distinction is required in determining whether the labor accommodation is a supply of residential property or a serviced accommodation. VATP003 states that the services for the supply of residential property are exempt from VAT (or zero-rated if it is related to first supply of residential property). On other hand, a serviced accommodation is subject to 5% VAT.

All suppliers need to check the extent on which the additional services have been supplied related to the accommodation in order to determine the nature of the supply. Some additional services like telephone, internet access, room cleaning, catering, and laundry service could be counted as indicators for service accommodation. Whereas, if the cleaning of communal areas, maintenance services of the property, pest control, utilities or access to the facilities have been supplied, the same could be considered as supply of residential property.