The United Arab Emirates (UAE) Federal Tax Authority (FTA) has published a new Value Added Tax (VAT) guide for charities operating in the UAE. Federal Decree-Law No. (8) of 2017 on Value Added Tax(the Decree-Law) defines charities as “societies and associations of public welfare not aiming to make a profit that are listed within a Cabinet Decision issued at the suggestion of the Minister.” The guide sets out the requirements to qualify as a ‘Designated Charity’ for VAT purposes, and guidance on the extent to which charities may recover VAT on costs. We have summarized the main points below.
A major issue facing charities is whether the deemed supply rules in the UAE VAT legislation apply to charities. Under those rules, certain situations may result in a deemed supply, and therefore within the scope of VAT, eg.:
- A supply of goods or services that are used partly or wholly for non-business purposes on which input tax has been recovered; and
- A supply of goods or services for no consideration on which input tax has been recovered.
The FTA considers the definition of “business” for VAT purposes to be broad, and would, therefore, include charities utilizing goods and services within the terms of their charitable activities.
Designated Charities may be able to recover VAT on non-taxable activities under a special VAT refund scheme. There are four criteria which must all be satisfied for a charity to be treated as a Designated Charity:
- Approved by the Ministry of Community Development to carry out a charitable activity in the UAE, or
- established as a charity under Federal or Emirate Decree, or
- otherwise licensed to operate as a charity by an agency of the Federal or Emirate Government authorities to grant such licenses, with its objectives including, for instance, advancing health, education, public welfare, religion, culture, science, and similar activities;
- Operated within the terms of any approval, license or other authorization which has been granted by the aforementioned bodies in respect of its charitable activities;
Operated on a not-for-profit basis; and
- Funded primarily by means of grants or donation.
VAT recovery by charities
Charities other than Designated Charities may recover VAT incurred in the course of making taxable supplies under the normal rules. VAT incurred in making exempt supplies, and blocked expenses such as business entertainment cannot be recovered by any charity.
Both charities and Designated Charities will need to apply an apportionment methodology where exempt supplies are made. Apportionment methodologies are outlined in the guide at Section 3.2 (charities) and Section 3.3 (Designated Charities).