A Comprehensive Guide to VAT Treatment of Charities in the UAE
Charities need to understand the impact of UAE VAT on them under two contexts: its application to the activities of all charities and the approach they should take while determining the amount of VAT on costs (input tax) that they are eligible to reclaim. Specifically, they should know how the VAT will affect the charities that are engaged in both business and non-business activities. Furthermore, certain charities are classified as designated charities in the UAE that are entitled to recovery of VAT under a special regime.
Understanding the complexities of VAT in the UAE may be an intricate process for charitable organisations. Seeking the help of VAT consultants in Dubai can reduce their struggles of ensuring compliance with VAT. Read ahead to know the VAT treatment of charities in the UAE:
How Charities are Treated under VAT in the UAE?
VAT was introduced in the UAE on January 1st 2018 as a general consumption tax imposed on most supplies of goods and services. In this respect, VAT will be charged (by default) on goods and services supplied by charities in the UAE if the charity is registered for VAT. This means charities will be subject to the usual rules of VAT in the UAE in terms of the making of supplies. For further details on the general VAT rules, consult with tax agents in Dubai.
VAT on the Business Activities of Charities
Charitable organisations often make a mixture of supplies of goods and services on which differing VAT liabilities apply. If such goods and services are supplied for a charge, the Federal Tax Authority (FTA) will consider it as a business activity. Since such activities constitute the making of a taxable supply under the UAE VAT regime, VAT will be charged if the charity is considered to be a taxable person. The charity can recover VAT on costs that directly relate to onward activities that are liable to VAT, subject to the normal VAT recovery rules applicable to all businesses.
VAT on Donated Goods and Services
The charitable organisation normally receive donations of goods and services and uses them as part of their onward provision of charitable activities. However, such an activity will be treated as a business activity for VAT if the charity carries out those activities and a charge is made. Moreover, VAT will be charged for such activities.
There will not be any VAT on costs to recover in such cases as the relevant goods or services would be received by a charity free of charge and the charity will not have incurred any costs in relation to these. However, in the case of donations, charities will have to comply with the following regulations:
- Decree-Law No. 20 of 2018 and its Implementing Regulation Cabinet Decision No. 10 of 2019
- Guidelines issued by the UAE Central bank on Anti-Money laundering and combating the Financing of Terrorism and Illegal organizations
Non-business Activities for VAT in the UAE
If the activity carried out by a charity is a ‘relevant charitable activity’(activity carried out in its charitable capacity) and makes zero charges for the supply of goods and services, the activity would not be liable to UAE VAT under normal conditions. Sometimes, the relevant charitable activity will be subsidised by grants or donations.
If the grantor is not entitled to any benefit in exchange for the grant or donation, no VAT would be chargeable. No VAT on direct costs incurred to receive such a free provision of goods and services would be recoverable by the charity in such circumstances. VAT consultants in Dubai can help you further in this direction.
Deemed Supply Provision for Charities
In certain situations, a taxable person will be required to account for output tax even though no supply of goods or services was actually made for a consideration by that person. In such situations, the provisions of deemed supplies as per the UAE VAT Law and its Executive Regulations apply. Such deemed supplies are generally subject to VAT at the standard rate (5%) but can also be subject to VAT at the zero rates, depending on the circumstances.
Charities need to check whether the provisions of deemed supply apply as their activities often require goods and services to be given away or used for non-business purposes. Tax agents in Dubai can offer valuable assistance to determine the applicability of deemed supply provisions. Specifically, the following conditions will trigger a deemed supply:
- Where there is a supply of goods or services for which input tax was recovered (in full or partially) but the goods or services were used, in part or whole, for non-business purposes; and
- Where there is a supply of goods or services for no consideration, where those goods or services formed whole or part of assets of a taxable person but are no longer considered to be as such, for example, if there was a change in use of the asset.
Cases where Deemed Supply don’t Apply
The deemed supply provision will not apply under the following conditions:
- Input tax was not recovered on the relevant goods or services
- The supply is exempt from VAT
- The refunded input tax on the goods and services is amended according to the Capital Assets Scheme
- The value of the supply of goods used as samples or commercial gifts does not exceed AED 500 per recipient within a 12-month period; and
- The total output tax payable on all deemed supplies made by the charity is less than AED 2,000 over a 12-month period
Designated Charities under VAT in the UAE
Charities classified as designated charities are allowed to recover VAT on any expenses if the expenses are not related to exempt supplies made by the charity or the recovery of input tax related to those expenses is not specifically “blocked” from recovery. A charity will be classified as a designated charity if it meets the following conditions:
- Approved by the Ministry of Community Development to carry out a charitable activity in the UAE as a designated charity, or established as a charity under a Federal or Emirate Decree, or licenced to operate as a designated charity by an agency of the Federal or Emirate Governments authorised to grant such licences
- The charity is required to operate within the terms of any approval, licence or other authorisation which has been granted by the aforementioned bodies in respect of its charitable activities
- The charity must operate as a not-for-profit organisation
- The funding should be primarily by means of grants or donations
Should a Charity Perform VAT Registration in the UAE?
Any charity conducting a business activity in the UAE that meets the mandatory registration threshold (AED 375,000) must register for VAT. Charities that carry out business activity and meet the voluntary VAT registration threshold (AED 187,500) may also apply for VAT registration in the UAE. For further details on VAT registration, consult with the best tax agents in Dubai.
Hire the Best VAT Consultants in Dubai, UAE
Even though the objective of charities is not to make profits, they cannot ignore the rules of VAT in the UAE. The best VAT consultants in Dubai such as Jitendra Chartered Accountants (JCA) can advise charitable organisations on how to ensure VAT compliance. JCA has more than 20 years of experience in the UAE and that may help add value to your business.
We are one of the top tax consultants in Dubai serving clients of a wide range of industries. JCA’s tax agent in Dubai is approved by and registered with the Federal Tax Authority (FTA). We can provide robust VAT services in Dubai such as VAT accounting, VAT filing, VAT refunds, VAT reconsideration etc. Talk with us if you need any help on any tax-related matters.