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 It rescinded a December 2018 Central Bank notice informing banks they should absorb VAT charges until they received further instructions.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.
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.
Key changes
Commission caps
For life insurance products with a savings component, Peter Hodgins of Clyde & Co said different caps apply to the saving and protection elements:
• For the saving component, a cap of 4.5 per cent of the annualised premium per year (which may not exceed 90 per cent of the annualised premium over the policy term).
• On the protection component, there is a cap of 10 per cent of the annualised premium per year (which may not exceed 160 per cent of the annualised premium over the policy term).
• Indemnity commission, the amount of commission that can be advanced to a product salesperson, can be 50 per cent of the annualised premium for the first year or 50 per cent of the total commissions on the policy calculated.
• The remaining commission after deduction of the indemnity commission is paid equally over the premium payment term.
• For pure protection products, which only offer a life insurance component, the maximum commission will be 10 per cent of the annualised premium multiplied by the length of the policy in years.
Disclosure
Customers must now be provided with a full illustration of the product they are buying to ensure they understand the potential returns on savings products as well as the effects of any charges. There is also a “free-look” period of 30 days, where insurers must provide a full refund if the buyer wishes to cancel the policy.
“The illustration should provide for at least two scenarios to illustrate the performance of the product,” said Mr Hodgins. “All illustrations are required to be signed by the customer.”
Another illustration must outline surrender charges to ensure they understand the costs of exiting a fixed-term product early.
Illustrations must also be kept updatedand insurers must provide information on the top five investment funds available annually, including at least five years' performance data.
“This may be segregated based on the risk appetite of the customer (in which case, the top five funds for each segment must be provided),” said Mr Hodgins.
Product providers must also disclose the ratio of protection benefit to savings benefits. If a protection benefit ratio is less than 10 per cent "the product must carry a warning stating that it has limited or no protection benefit" Mr Hodgins added.
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- Ensure decoration and styling – and portal photography – quality is high to achieve maximum rates.
- Research equivalent Airbnb homes in your location to ensure competitiveness.
- Post on all relevant platforms to reach the widest audience; whether you let personally or via an agency know your potential guest profile – aiming for the wrong demographic may leave your property empty.
- Factor in costs when working out if holiday letting is beneficial. The annual DCTM fee runs from Dh370 for a one-bedroom flat to Dh1,200. Tourism tax is Dh10-15 per bedroom, per night.
- Check your management company has a physical office, a valid DTCM licence and is licencing your property and paying tourism taxes. For transparency, regularly view your booking calendar.
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