Everything Financial Service Businesses must know about VAT on Options & Option Premiums

In general, VAT on financial services in the UAE is subject to the standard rate of 5%. However, there were uncertainties regarding certain aspects such as financial service options and options premiums. A public clarification released by the Federal Tax Authority (FTA) VATP014 clears the confusion regarding the treatment of options and option premiums under VAT in the UAE.  If you are a taxable financial services business, consult with VAT consultants in Dubai for assistance in calculating VAT on options and options premiums.

Read ahead for more insights on the VAT treatment of options and option premiums:

Definition of Options and Option Premiums under VAT in the UAE

A financial option is essentially a contract that grants the holder of the option the right to buy or sell an underlying financial instrument such as debt securities at a specified price on a specific future date or prior to a specified future date. The specified price can be set with reference to the market price of the underlying financial instrument at the time when the option is taken out or it can be fixed at a discount or at a premium.

If the buyer exercises his right for option, the seller ( the holder of the option) must oblige with fulfilling the transaction (buy or sell). An option that conveys to the owner the right to buy the underlying financial instrument at a specific price is referred to as a call option.

An option that conveys the right of the owner to sell the underlying financial instrument at a specific price is referred to as a put option. An “Options Premium” is the fee received for selling/buying an option.

VAT Treatment of Options and Option Premium in the UAE

The FTA’s public clarification states that supplies of options with regard to debt securities and equity securities in return for an option premium are exempt from VAT in the UAE. As per Article 42 of the Cabinet Decision No. 52 of 2017, debt security means any interest in or right to be paid money that is or is to be, owing by any person, or any option to acquire any such interest or right.

The Cabinet Decision defines equity security as any interest in or right to a share in the capital of a legal person, or any option to acquire any such interest or right. As per this definition, debt securities and equity securities include options in acquiring underlying interest and rights. As a result, options related to debt securities and equity securities are exempt from VAT by Article 42(3) of the Cabinet Decision.

The Case of non-debt and non-equity instruments

The FTA clearly states that the treatment doesn’t pertain to options with regard to underlying commodities or other non-debt and non-equity instruments. If options related to underlying commodities or other non-debt and non-equity instruments are supplied in return for an explicit premium, they will be considered taxable supplies. VAT consultants in Dubai can help you provide more clarity on it.

Actions to be Taken by Businesses

Businesses should evaluate how they have been treating such transactions since the implementation of VAT, in order to determine if action must be taken to achieve compliance with the VAT legislation and Public Clarifications. Where such transactions have been treated incorrectly from a VAT perspective, businesses should communicate with suppliers/customers in order to agree on modifying existing arrangements and issuing credit notes for any necessary adjustments. The assistance of VAT consultants in Dubai will come in handy for making the requirement.

How can Jitendra Chartered Accountants Help you?

Businesses operating in the financial services sector must be concerned about properly accounting for VAT, especially when it comes to options and options premiums. The assistance of the best VAT consultants in Dubai such as Jitendra Chartered Accountants (JCA) can be sought to calculate the VAT on options without any error. JCA has the experience of guiding several clients to ensure proper VAT treatments are applied on complex business transactions involving the supply of options.

We have a dedicated VAT team, who have in-depth knowledge and acumen of the regulatory requirements of the region who can help you in deriving the solutions for VAT challenges that you face in your operations in UAE. We can associate with you as your trusted advisors for VAT related matters, ensuring the smooth functioning of the VAT functions including VAT registration, VAT return filing etc. We welcome you to have one on one discussions with us on VAT developments, which will enable you to navigate through your VAT compliance requirements with ease and make informed decisions based on the insightful thoughts that we share.