Implication of VAT on Financial Services in the UAE

As a tax adviser in the UAE, when someone asks me, “How does VAT apply to financial services in the UAE?”, I don’t jump straight to definitions. I usually start with a simple question instead -

“How does your business actually earn money?”

Because in the UAE VAT, that answer decides everything.

Understanding VAT In UAE (And Why It Matters Here)

VAT in UAE was introduced on 1 January 2018 at a standard rate of 5%, making it one of the lowest VAT rates globally. Now, if you’re selling products or offering services like consulting or marketing, VAT is straightforward - you charge 5% and move on. But not every earning in finance is a “fee.”

Sometimes you charge a visible fee, sometimes you earn through interest, sometimes it’s a margin hidden inside a transaction - and VAT treats each of these differently.

Some of the examples of financial services include the following:

• Providing loan or any other credit facilities
• Interest received on deposits
• Bank accounts Credit card and Debit card services
• Insurance policies and many more 

Why Are Financial Services Treated Differently?

Imagine two scenarios -

• A consultant charges AED 1,000 for advice
• A bank earns AED 1,000 as interest on a loan

In the first case, the fee is clear. But in the second, the earnings are spread over time and built into the structure of the transaction.

Because of this difference, calculating VAT on each transaction becomes difficult. To keep the system practical -

• If the income comes from interest or margin, it is usually exempt
• If the income comes from a clearly defined fee, it is usually taxable

This approach keeps things manageable for both businesses and regulators.

Taxable Financial Services (Subject to 5% VAT)

If a financial institution charges a specific fee for a service, that service is normally taxable at 5% VAT. This can include -

• Bank fees - If a bank charges you for maintaining your account or processing a transaction, that is a service. This can include ATM usage charges, Credit card annual fees, etc.
• Advisory and Consultancy Services - If you hire a financial advisor or wealth manager and they charge you a fee for their service, that fee is taxable. Because in this case, you are paying for expertise, not for a financial product.

Exempt Financial Services (Where VAT Is Not Charged)

Many core financial activities are exempt from VAT. This includes services where income is earned through interest or margin rather than service fees. Examples include when a bank gives you a loan and earns interest, or if you earn interest on your savings account, no VAT applies. However, exempt here means that businesses providing exempt services cannot recover VAT on related expenses.

For instance, if a bank spends money on office rent or software used for loan services, the VAT paid on those costs may not be recoverable. And this is where financial planning becomes important.

Mixed Supplies (Where Things Get Complex)

In real business situations, financial institutions rarely provide only one type of service. Most offer a combination of services. For example, a bank may:

• Earn interest from loans (exempt)
• Charge advisory fees (taxable)
• Collect card service fees (taxable)

Now, as the business is dealing with both taxable and exempt income, this creates a situation called mixed supplies. Because now the business cannot simply claim all the VAT it pays on expenses. It has to split its expenses into -

• Those related to taxable income
• Those related to exempt income

And only the portion linked to taxable income can be recovered.

My Professional Advice

I always ask my clients to remember just one thing about implementing VAT into their transactions -

VAT in financial services depends on how money is earned, not just what service is provided. Once you start looking at transactions through that lens, the decisions will become easier. Because when it comes to VAT and financial services, small details often make a big difference.

Get VAT Implication on Financial Services Sorted with CDA 

CDA’s VAT experts have been providing the VAT assistance to the clients in Dubai for over a decade and hence have become one of the leading accounting and auditing firms in Dubai. The financial service providers looking for VAT consultation and VAT guidance can approach our team, as our team would assist your firm in identifying the taxable and non-taxable services, the accurate calculation of VAT returns and timely filing, the streamlined application of the VAT regime over the multiple services, etc. Through these services you can ensure compliance with the regime and can maintain proper cash flow for the business.

To know more about the services, connect to our experts today.

Mitesh Maithia

Tax Manager

Mitesh is a Tax Professional with expertise in direct, indirect, and international taxation, including transfer pricing, since 2018. Passionate about making complex tax matters simple, he shares insights to help businesses stay compliant and forward-looking.