VAT Treatment of Options and Option Premiums
Options are often found to be part of financial management and investment decisions by entities in the modern business world. There are frequent transactions involving Options in large organizations, where it is essential to know about the VAT implications and related monetary impact to apply the right treatments. To avoid the ambiguity regarding the VAT application over transactions relating to Options, FTA has issued a public clarification, highlights of which are discussed here.
What is meant by Options and Option Premiums?
Options refer to the rights to buy or sell the underlying financial instrument in exchange for an agreed consideration. The underlying financial instrument can be a debt security, equity security or commodity or any such tradable financial asset. The consideration received on sale of such Options are called Option premiums.
What is the VAT treatment for supply of Options?
As per the VAT regulation in UAE and the detailed public clarification issued by FTA on this matter, the supply of options with respect to debt or equity securities in return for premiums are exempt from VAT. This means any sale or purchase of options with an underlying right to any debt or equity security is not taxable, the supplier involved in the transaction shall not charge VAT on the same and the recipient does not require to pay VAT as well. The regulation specifically exempts the transfer of ownership of an equity or debt security, which includes the supply of Options relating to such securities.
When can the supply of Options become taxable under UAE VAT?
It is to be noted that the exemption applies only to those Options where the underlying financial instrument or asset is a debt or equity security. In all other cases where there is a different type of asset or commodity other than debt/equity security, such supplies of Options are taxable and VAT should be charged on the respective Option premiums. For example, when a sale occurs of an Option in which the underlying asset is a commodity, the transaction by default is taxable and the supplier in this case should charge VAT over the Option premium either at standard rate or zero rate based on other relevant factors in the transaction.
How to rectify the incorrect treatment of VAT by the supplier of the Options?
FTA has clarified the steps to be taken by a supplier who has wrongly charged VAT on an exempt supply of Option. When such a scenario occurs, once the supplier identifies the mistake, a tax credit note shall be issued to the recipient to reverse the wrongly charged VAT. This reversal shall be reported in the VAT return of the period in which the tax credit note was issued as a VAT adjustment. It is important that the supplier shall maintain all the related records to demonstrate that the VAT was already accounted for, was reported and paid as part of previous VAT return.
How to rectify the incorrect treatment of VAT by the recipient of the Options?
Once the recipient receives the tax credit note from the supplier to reverse the wrongly charged VAT on an exempt supply of Option, it obligates the recipient to make necessary rectification adjustments for the input VAT already claimed in this regard. The recipient has to make a negative adjustment for the input tax in the VAT return of the period in which the tax credit note is received in order to nullify the input tax credit taken in the previous VAT return.
CDA offers VAT advisory services for transactions involving Options
CDA has the experience of guiding several clients to ensure proper VAT treatments are applied on complex business transactions involving the supply of options. We have a dedicated VAT team, who have in-depth knowledge and acumen of the regulatory requirements of the region who can help you in deriving the solutions for VAT challenges that you face in your operations in UAE. We can associate with you as your trusted advisors for VAT related matters, ensuring the smooth functioning of the VAT functions including VAT accounting and reporting of your organization. We welcome you to have one on one discussions with us on VAT developments, which will enable you to navigate through your VAT related activities with ease and make informed decisions based on the insightful thoughts that we share.