
Introduction to the UAE and Its VAT System
The United Arab Emirates (UAE) is seen as a premier global business center that has remained very investor-friendly with stable and robust regulation. In January 2018, the government introduced Value Added Tax at a normal rate of 5% of goods and services for the state’s economic growth purposes. It incorporates most traded goods and service sectors with the inclusion of digital and virtual assets such as cryptocurrencies. Guidelines from the Federal Tax Authority provide clarity in its VAT regulations and compliance. To businesses and people who are dealing with blockchain in the UAE, understanding how this value-added tax applies to mining cryptocurrencies is an important factor.
What is cryptocurrency mining?
Cryptocurrency mining is the process of using specialized computers or mining rigs to validate transactions on a blockchain network. Miners contribute computational power to solve cryptographic equations, which helps verify transactions. As a reward for their efforts, miners receive cryptocurrency tokens like Bitcoin or Ethereum.
Miners can either:
- Mine for personal use (for their own account).
- Provide mining services for others in exchange for a fee
VAT Rules for Cryptocurrency Mining
1.Own Account - Mining for Personal Use
- If a person mines a cryptocurrency for personal use, then it is not taxable under UAE VAT law.
- Since the reward-it can even be just some mined tokens-is unrelated to any taxable supply, as they are not linked to an identifiable recipient or any specific transaction.
- Any VAT paid on costs such as hardware, electricity, or maintenance cannot be recovered because these costs are not incurred to make a taxable supply.
2. Mining for Others (Mining Services)
- Where a miner sells computational power to another person for a fee, it is a taxable supply of services under UAE VAT law.
- If the recipient is in the UAE, then the normal 5% VAT applies unless the service is zero-rated.
- If services are supplied to a non-resident outside the UAE, then the supply may be zero-rated if all conditions under UAE VAT law are satisfied.
Recovery of Input Tax
It refers to the VAT amount paid on goods and services used by a business. Different rules govern the recovery of input tax depending on the type of mining activity:
- Mining for Own Account: Input tax cannot be recovered since no taxable supply is made.
- Providing Mining Services: Input tax on costs such as equipment, utilities, and rentals can be recovered if these costs are directly related to providing taxable mining services
VAT Treatment for Mining Services Received
If a UAE-based business receives mining services from a non-resident provider:
- Provided that the recipient is VAT-registered, VAT has to be accounted for through the reverse charge mechanism.
- If the recipient is not VAT-registered, the non-resident service provider must register and charge VAT in the UAE.
Exporting Mining Services
Exporting cryptocurrency mining services to a non-resident outside the UAE may qualify for zero-rated VAT if certain conditions are met. These include:
- The recipient of the services must not have a place of residence in the UAE or any implementing state.
- The recipient must be outside the UAE when the services are performed.
- The services must not be directly connected to real estate or assets within the UAE.
- The services must not be in deviation of the requisites stipulated under Article 31 of the Federal Decree- Law No. 8, 2017 on VAT concerning the Executive Regulation thereof.
For an elaborative review, refer Article 31 from the UAE VAT Law. Thereby, firms offering mining-related services for exporting can remain intact with the level of competition for other international exporting firms due to free of additional VAT.
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