Comprehensive Guide to VAT Compliance in the UAE

VAT Compliance in the UAE

Value-added tax (VAT) is a crucial part of the UAE's taxation system. Introduced in January 2018 to diversify the economy and reduce reliance on oil revenues, VAT is a crucial part of the UAE's taxation system. This guide provides a detailed overview of VAT compliance in the UAE, focusing on registration, filing, and maintaining compliance in 2025.

Understand the VAT rates in the UAE

Value Added Tax (VAT) is an indirect tax which is levied on goods and services supplies in or from the UAE. VAT is charged at each stage of production and distribution. The ultimate VAT liability is on the consumer of goods and services. The standard VAT rate in the UAE is 5%, and it is applicable to most of the supply of goods and services inside the country. However, certain goods and services are zero-rated or exempt from UAE, such as 99% purity gold, healthcare and education.

Comprehensive Guide to VAT Compliance in the UAE

Who Needs to Register for VAT?

VAT registration is mandatory for all businesses in the UAE that meet specific thresholds under the Federal Decree Law No.8 of 2017:
Mandatory Registration: Businesses with taxable supplies and imports exceeding AED 375,000 in the previous 12 months or expected to exceed the said threshold in the coming 30 days shall apply for VAT registration within 30 days from the date of crossing the threshold. Late registration applications can result in an administrative penalty of AED 10,000.

Voluntary Registration: Businesses can voluntarily register for a VAT number once the tax supplies and imports cross AED 187,500 in the previous 12 months or are expected to cross within 30 days.
Example: A retail store with an annual turnover of AED 450,000 must register and obtain a TRN under VAT Law, while a small consultancy firm earning AED 200,000 per year can register voluntarily.

Steps for VAT registration

To register for VAT, the below steps are to be followed;

1. Eligibility Check

Businesses must assess their turnover, the nature of the transaction, the location of the recipient, etc. in order to determine whether they are eligible to register and obtain a Tax Registration Number under UAE VAT Law.

2. Documents required for VAT registration

Get all necessary documents for VAT registration, including;

Trade License and Incorporation Certificate
MOA/AOA
Copy of passports and Emirates ID copies of all shareholders and authorized signatories.
Bank account details
Branch details, if any.
Monthly turnover report
Business flow-chart
Sample invoices and contract copies

3. Create an Account with the Federal Tax Authority (FTA)

Visit the website of the Federal Tax Authority and create an account under e-services

4. Complete the Registration Application

5. Submit Application and monitor

Apply and monitor for further questions from FTA. If any further information is asked by FTA, submit it without any delay. FTA normally takes up to 20 business days to take action on the application submitted. Once the application is approved, the tax payer will be allotted the Tax Registration Number and receive a certificate of VAT registration.

Key point: Are you or your business registered for Corporate Tax? Make sure that you apply VAT under the same portal you registered for Corporate Tax. Do not create a separate taxable person or separate FTA account to register for VAT

VAT Returns Filing

VAT returns shall be filed every quarter or on a monthly basis, depending on the turnover of the business, through the FTA portal. Before filing the VAT reports, businesses must;

Report taxable sales and purchases.
Calculate output VAT (VAT collected from customers).
Deduct input VAT (VAT paid on purchases).
Pay any outstanding VAT due to the FTA.

Example: A Retail store's total sales in a quarter are AED 500,000, and VAT collected from customers is AED 25,000. The store spent AED 400,000 for the purchase of goods and AED 50,000 for other expenses, and the total VAT spent is AED 22,500. The net VAT to pay to FTA is AED 2,500.

Check Input Tax Credits and Eligibility

Businesses can claim the VAT paid in the UAE for business expenses which are related to taxable supplies. Certain expenses are blocked from claiming the input tax, and it is crucial for businesses to understand the eligibility before claiming the input tax. Example: - Input tax for cars available for personal use, input tax on the entertainment expenses, etc.

Eligibility Criteria:

The purchases or expenses must be directly related to the business activities.
Proper invoices and records must be maintained.

Adhering Compliance

The compliance regulations under Article 65 of UAE VAT Law must be taken care of, which includes:

a) Record Keeping

Records must be maintained which include;

Sales invoices
Purchase invoices
Import and Export documentation
Contract copies

All the records relating to the VAT filing must be kept for a minimum period of 5 years. Records related to real estate must be kept for a minimum period of 15 years.

b) Issuance of Invoices, which is VAT Complaint

Tax Invoices must include the requirements specified in the Law, which include;

Seller's name and TRN
Buyer's details
Description of goods/ services
VAT breakdown

VAT Filings and Payments on time

VAT filings must be done before the deadline, generally within 28 days from the end of the quarter/month. Late filing can be penalized:

Late filing penalty: AED 1,000 for the first offence and AED 2,000 for the repetition within 24 months.
Late VAT payment penalty: 2% interest on the first month and 4% interest in the subsequent months.

Special Cases: Free Zones and Tax Groups

a) Free Zones

Free Zone entities may have different VAT applicability due to the nature of the transaction they undertake but must comply with VAT rules while initiating transactions. Example: Free Zone entity buying from China and goods are directly delivered in India without bringing to UAE, the UAE VAT does not apply for such transactions. Another example is the Free Zone entity; bringing goods to designated zones, storing the goods and exporting from there is considered as outside of scope under UAE VAT Law.

b) Tax Groups

2 more companies who has common control/ownership can register as a tax group for VAT purposes. VAT groups can simplify the compliance requirement by filing a single tax return, and the transactions within the VAT group are considered as outside the scope of UAE VAT.

Compliance Tips

Use FTA accredited accounting software
Conduct VAT health checks regularly to ensure accuracy.
Proper training for the staff who handle the VAT-related matters in your business.
Appoint an FTA-approved tax agent to handle your business VAT matters.

Conclusion

VAT compliance is essential for businesses operating in the UAE's dynamic economy. By understanding registration requirements, filing processes, and maintaining accurate records, companies can navigate the complexities of VAT efficiently while avoiding penalties.
For personalized assistance with your VAT compliance needs, reach out to Flying Colour Tax Consultant LLC. Our experts are here to simplify your journey toward seamless compliance!

To learn more about Comprehensive Guide to VAT Compliance in the UAE, book a free consultation with one of the Flyingcolour team advisors.

Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.