Vat Implications On Donations, Grants and Sponsorships
Practices of donations, grants, sponsorships, etc. are very commonly seen and appreciated as part of social responsibility activities performed by entities. Amounts getting transferred in such exercises are to be properly classified to ensure compliance with the rules as laid out in the region. Once they are adequately classified, it is important to know the applicability of VAT and respective implications to follow the required accounting and reporting procedures. Here we discuss about the various aspects to be considered for determining the VAT treatments on transactions involving donations, grants or sponsorships.
Is VAT applicable on payments received as donations, grants or sponsorships?
VAT treatment upon receiving donations, grants or sponsorships will depend upon whether the donor, grantor or sponsor is receiving any benefit in exchange for making that payment or not. If there is no benefit attached and the payment was made without any supply of goods or service, in such cases, it will be out of the scope of VAT as the payment cannot be considered as a consideration against any kind of supply. If the payment was made considering any kind of benefit or endorsement in return, then the VAT is applicable. Hence no general rule can be applied to all the donations, grants or sponsorships as the situations may vary and a detailed assessment of each case is required to determine the VAT impact.
What are the considerations to be given on determining the VAT treatment on donations?
There are various factors to be considered while assessing whether a donation made is out of scope or not. Some of such matters are listed below:
- Whether the donor will receive any benefit in return for the donation?
- Whether any other person other than the donor will receive any benefit in return for the donation?
- Are there any conditions attached with the donation for its intended way of use that may benefit the donor or any other person?
- Is there any agreement between the parties involved in the donation? If yes, what are its implications?
What are the considerations to be given on determining the VAT treatment on sponsorships?
In most of the cases, when it comes to sponsorships, the person receiving the payment makes supplies to the sponsor in one way or another. Given below are few points which are indicative that the sponsor is receiving some benefit out of the sponsorship.
- The receiver displays the sponsor’s logo
- The sponsor gets the privilege to use the name of the receiver of sponsorship for any kind of endorsement
- The receiver provides any kind of entertainment services to the sponsor
- The receiver arranges for hosting the sponsor in restaurants
- Sponsor receives access to tickets or events
Hence it is very important to analyze the transactions of sponsorships on a case-to-case basis holistically based on the available facts and circumstances to determine the appropriate VAT treatment.
What are the considerations to be given on determining the VAT treatment on grants?
For grants as well, the key to determine the applicability of VAT is to check whether the grantor receives any kind of benefit in return for making the grant. If there is a perceived benefit, VAT will apply and in other cases where the grant is offered without any kind of benefit in return, it will remain out of the scope of VAT. For example, Company “XY” offers a grant to a person named “Z” to perform a particular type of research on a condition that the results out of the research can be used in the business of “XY”. Here it is clearly evident that the grant is made by “XY” to “Z” in return for an expected benefit and hence the transaction falls within the scope of VAT.
Do you need further clarification about VAT treatments on your transactions? Feel free to contact CDA
Considering the fact that VAT in UAE is relatively new and rapidly evolving, there are many scenarios and transactions here in the region which are yet to be explored in detail in the light of VAT perspective. During the conduct of business activities, now and then, a new matter may come up which requires the determination of VAT treatment in order to follow the right procedures. It is always suggested to consult with subject matter experts in the region when it comes to VAT or any other regulatory-specific areas to ensure compliance. We at CDA, provide bespoke consultancy services in UAE and are happy to engage with you and help you in achieving your VAT-related objectives in a systematic manner.