No VAT charges on bank interest or dividends

UAE Federal Tax Authority issues a clarification on income earned passively by taxpayers on bank deposits and share holdings

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Passively earned interest from bank deposits or dividend income cannot have VAT applied, the UAE Federal Tax Authority said on Tuesday.

The government body said the income was “outside the scope of VAT”, as it issued a public clarification on bank interest and dividends in a bid to educate taxpayers on all technical issues concerning taxes.

Khalid Al Bustani, the FTA’s director general said the Public Clarifications service, offered through the authority’s official website, “helps raise tax awareness among businesses and consumers alike, promoting compliance in the process”.

Banks began charging VAT on various services last summer following a June circular from the Central Bank of UAE detailing 43 new caps on fees and commission charged on consumer-related banking services. The circular specified that "all fees set out in this amendment are exclusive of VAT charges". It rescinded a December 2018 Central Bank notice informing banks they should absorb VAT charges until they received further instructions.

Explaining the latest amendment, the FTA said there is no requirement for taxpayers to report the two types of income – bank interest and dividends – in a VAT return because the tax is only imposed on the import and supply of goods and services at each stage of production and distribution. “If there is no supply, there is no VAT implication,” it added.

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As an example, the FTA said if a retail business deposits its income into a bank account and earns interest on the deposited amount – without doing anything to earn this income aside from merely depositing the money – then the interest was earned passively.

“In this case, the retail business is not considered to have made a supply to the bank, and the interest income received is not a consideration for a supply, which, in turn, means that the retail business is not required to declare this income on its VAT return, as it is outside the scope of VAT,” the FTA said.

However, the authority said this specific clarification only applies to interest derived from bank deposits rather than any interest generated from extending loans or credit, which are exempt supplies for VAT purposes.

Dividend returns are also considered passive income, the FTA said, because it is only paid to shareholders who own them if the company makes a profit and declares a dividend.

“The shareholder then receives the dividends and does not make any supply in order to be eligible for a payment of dividends, making the dividend a generally passive income. Accordingly, dividend income is outside the scope of VAT and is, therefore, not required to be reported on the VAT return," the FTA said.

However, any amount charged as a “management fee” – such as fees charged by a holding company to its subsidiaries – are subject to VAT.