The United Arab Emirates (UAE) introduced a 5 percent value-added tax (VAT) on a number of good and services in January 2018. The Emirates has issued a detailed law and regulatory framework outlining the tax rules. That said, six months after the roll out of VAT, some investors and businesspeople are still confused about how to apply the rules to certain areas.

Among those confused-about issues, according to discussions Zawya held with a number of businesspeople, is how companies should treat corporate compensation given to employees, such as free executive accommodation, corporate loans and other business incentives.

Below is the list of topics investors and businesspeople are confused about with regards to the implementation of VAT, the law’s guidelines on them and an analyst’s interpretation of the wording.

Issue: Companies offering executives residential accommodation as part of an employment contract.

“Generally speaking, the accommodation itself will not be subject to VAT,” Brian Conn, VAT partner at Dubai-based consultancy firm BDO, told Zawya in a phone interview last week.

“Residential accommodation is always a residential accommodation. If it is a supply to a company, if someone is living in it, it is still residential accommodation. It still has the benefit of exemption or zero-rated,” Conn added.

Article 37 of the UAE’s VAT executive regulations indicates that the first sale or lease of residential buildings is subject to VAT at a zero percent rate, which means that tenants will be exempted from paying VAT and the developers will be able to reclaim the VAT they paid as business costs. With regards to older residential properties, article 43 indicates that tenants will be exempt from paying VAT.

However, Conn said that other utilities, such as electricity, water and internet services are subject to VAT. Article 3 of the UAE law's executive regulations has more details on the definition of services.

Issue: Hotel accommodation for new employees.

According to Conn, there is no clear and straightforward rule as to whether or not companies should implement VAT on hotel accommodation offered for new employees, but he expected that employers would pay VAT on this item and claim it back later.

“I would expect they (employers) would be able to claim the deduction for that VAT. Because it is an overhead (cost) and it is something they are required to provide under the employment contract,” Conn said.

“Unfortunately, the problem here is that we don’t have too much guidance,” he added. Most business costs are subjected to VAT, according to the UAE’s VAT law and executive regulations.

Articles 55 and 56 of the executive regulations give details about input taxes and the recovery of input taxes. However, they don’t have clear guidelines on that specific example.

Issue: VAT and medical insurance offered for employees.

According to Conn, there is also no clear guidance with regards to medical insurance for employees and how VAT is applied. “But I would think at the end it is part of the contractual obligation. It is a legal requirement, therefore you can claim input tax deduction.”

Issue: VAT and employees’ business cards.

“If a company pays for business cards for its employees, it will pay VAT. As this is a normal business overhead it will be able to reclaim the VAT when it submits its VAT return,” Conn said.

For more details on the VAT rules in the UAE, click here.

NOTE: If you have queries you would like answered in relation to business activity and how it applies to VAT please contact our reporter and we will make every attempt to seek out an answer.

(Reporting by Yasmine Saleh; Editing by Shane McGinley and Michael Fahy)
(yasmine.saleh@thomsonreuters.com)

© ZAWYA 2018