VAT on Dividend Income

Dividend income is one of the major income streams for many in the region and there are also companies here which pay excellent dividends every year. Being a major contributor within the investment income, receiving the dividend income and accounting it properly as per the applicable laws, will be of concern to a lot of investors. Apparently, the first step then in the process will be to determine the VAT treatment of it to record the receipt of dividend income as per the relevant VAT provisions. In this blog we will discuss more about VAT on dividends and financial services.

Why is it important to know the VAT treatment on dividend income?

Every type of business transaction has to be analyzed under the purview of VAT to follow the correct treatment of accounting and reporting in compliance with the VAT regulation. Also determining the VAT impact is necessary to ensure proper classification in VAT return and finding out the eligibility for an input VAT claim for expenses incurred in connection with each of the transactions. A wrong tax classification can cause financial losses, reconciliation errors with counterparties or penalties in terms of non-compliance. 

Can dividend income be treated the same as financial services for VAT?

VAT regulation classifies dividend income as financial services and financial services are exempt from VAT, subject to conditions. However, in order to determine the VAT on dividend and VAT impact as exempt, there should be a supply of goods or services. FTA has explained in its public clarification in this regard that receiving dividend income has to be considered as earning a passive income, as the receiving person is not supplying anything in exchange of it and declaration of dividend is purely based on the profits of the giving company. Since there is no supply, any dividend income received has to be taken as out of scope of VAT and not taxable.

How does dividend income qualify under the passive income concept?

The general rule as per the VAT regulation to determine taxability is identifying the supply of goods or services in the transaction. VAT can be applied only if there is any of such supply of goods or services. In the case of dividend income, similar to bank interest, the person receiving the income is not performing any supply of goods or services to earn it, other than just holding the shares of a company from which the dividend is received. Such types of incomes are referred to as passive incomes and are considered out of scope for VAT purposes.

Is it required to report dividend income in VAT return?

To be reported in VAT return, an income has to be either taxable at standard rate/zero rate or exempt. Once dividend income is determined to be out of scope of VAT, it is not required to be reported in VAT return. Hence any person or a company receiving dividend income passively on account of holding shares in a company, will not have to include it in the VAT return. 

How does VAT treatment of management fee differ from that of dividend income?

While VAT on dividend is out of scope, it is to be noted that the management fee charged of any sort is taxable at standard rate as per the regulation. For example, “ABC team” is a holding company to which the subsidiaries of the group “ABC” reports to and if “ABC team” charges each of its subsidiary a management fee every reporting period, the fee is taxable at the rate of 5% and “ABC team” has to issue a tax invoice for the same. In this case, apart from holding the shares in the subsidiaries, the holding company is performing a management service which qualifies to be categorized as a supply of service, hence taxable.

Want to know more about VAT treatments on your financial services? Feel free to contact CDA.

Determining the VAT treatments for the business transactions can become challenging, especially when complex and multiple levels of activities are involved. That is where the VAT experts can pitch in and help you to interpret the regulatory provisions to apply VAT correctly. CDA has experience of successfully serving many clients in the financial service sector of UAE, from which our professionals are competent enough to assist you in completing your VAT functions smoothly. May it be VAT implementation services or regular assistance for routine VAT practices, we have certified VAT experts who can guide you in each step to ensure compliance with the rules of the region.