Understanding VAT and Its Impact on Holding Companies in the UAE

The United Arab Emirates (UAE) implemented a 5% Value Added Tax (VAT) on the supply of goods and services in 2018. This tax applies to all business setups in Dubai, including those in free zones. Consequently, holding companies in the UAE must consider VAT implications for their transactions. This blog post explores the impact of VAT on holding companies in the UAE.

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VAT-Exempt Activities

If a holding company’s activities fall under VAT-exempt categories, its supplies are not subject to VAT in the UAE. Common VAT-exempt activities include:

– Financial Services: Transactions such as loans, credit facilities, and interest-related services.

– Residential Properties: Supply of residential buildings through sale or lease, subject to certain conditions.

– Other Exempt Services: Supply of bare land and local passenger transport.

If a holding company provides only VAT-exempt supplies, it may not need to register for VAT in the UAE. However, this could limit its ability to reclaim VAT on expenses related to those exempt activities.

Taxable Activities

Holding companies involved in taxable activities must register for VAT if their annual taxable supplies exceed the mandatory registration threshold of AED 375,000 in the last 12 months. Taxable activities include:

  1. Management and Administration Services to Affiliated Companies:

A holding company providing management and administration services to its subsidiaries or affiliated companies is considered to be making taxable supplies. Therefore, it must register for VAT and charge VAT at the applicable rate on these supplies

  1. Buying and Selling Shares or Securities:

Buying and selling shares or securities can be subject to VAT if specific conditions are met. VAT applies when transactions occur between two taxable entities and the securities are not held for investment purposes. In such cases, the holding company must register for a commercial license in Dubai and charge VAT on the buying and selling of shares or securities.

  1. Other Taxable Services:

If a holding company provides services that do not fall under the exempt category, it must register for VAT if its annual taxable supplies exceed the mandatory threshold. The company must charge VAT on its taxable supplies, file VAT returns with the Federal Tax Authority (FTA), and remit the collected VAT as per the prescribed schedule.

VAT Implications for Holding Companies

Input Tax Recovery

The UAE allows VAT grouping to minimize VAT’s impact on holding companies. VAT grouping enables related companies, such as subsidiaries or holding companies, to register as a group and submit a single VAT return. By registering as a VAT group, companies can eliminate VAT on transactions between group members and set off VAT incurred on these transactions against the VAT charged to customers.

VAT Grouping

A holding company registered for VAT can reclaim VAT paid on its expenses, known as input tax. Input tax includes VAT paid on goods and services purchased by the company, such as rent, office equipment, and legal fees. If a holding company provides both taxable and exempt services, it must determine the proportion of input tax related to taxable and exempt supplies. It can only recover input tax on goods and services used for taxable supplies.

Unicorn Global Solutions for VAT Services

The applicability of VAT on a holding company in the UAE depends on its activities. If a holding company’s activities are entirely VAT-exempt, it may not need to register for VAT. However, if it engages in taxable activities, it must register for VAT and charge VAT accordingly. Holding companies must track their VAT implications and file returns on time to avoid penalties. They should also consider input tax recovery and VAT grouping opportunities to minimize VAT’s impact on their business.

For further information about company registration in Dubai or obtaining a commercial license in Dubai, contact Unicorn Global Solutions. Our experts will provide exceptional VAT and corporate tax services in Dubai, ensuring a hassle-free tax experience. Text us on WhatsApp or call us today.

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