Host
Drive Live – it’s the legal hour! Ludmila Yamalova is here from Yamalova & Plewka. Ludmila, welcome back. You’re a very regular guest on this segment, practically a fixture at this point.
Host
Let’s start with the VAT update, shall we? I know it’s becoming the norm to start with this, but you’ve always got new insights. What’s the latest this week?
Ludmila Yamalova
Well, indeed. Ironically, I feel like I’m becoming a VAT expert! Though, to be clear, no one in this jurisdiction can truly claim to be a VAT expert just yet because, and this is very important to emphasize, we do not yet have the law.
The VAT law has not been implemented or made public. So, what we’re discussing is based on the details shared by authorities through workshops held by the Ministry of Finance and other accounting firms. While these statements are credible, they remain unofficial until the law is finalized.
Host
Understood. So, with that disclaimer in place, what’s new this week?
Ludmila Yamalova
One key update is regarding free zones. Previously, there was speculation about whether VAT would apply to free zone companies. As of this week, the indication is that VAT will apply to free zones.
This is because VAT is an indirect tax, not a corporate tax. Free zone companies are exempt from corporate tax but not indirect taxes. For example, free zone companies act as tax collectors, collecting VAT from end-users and transferring it to the government.
Host
Got it. So, what’s the process for businesses to register for VAT?
Ludmila Yamalova
The registration system for VAT will be available starting October 1st, 2017. Everything will be automated and handled online, from registration to filing returns and paying taxes.
Another significant update relates to foreign companies. Foreign companies will be eligible to claim VAT refunds, but tourists will not. This means the common refund scheme for tourists, as seen in Europe, won’t be implemented here.
Host
That’s interesting. We’ve already received a question on this topic. Goran asks, “I’m a locally-based duty-free operator. Will my customers be liable for VAT?”
Ludmila Yamalova
Great question. According to recent updates, goods sold in duty-free zones will be exempt from VAT. This ensures that duty-free remains true to its name.
Host
That makes sense. Any other updates for businesses?
Ludmila Yamalova
Yes, businesses will be able to claim VAT refunds for bad debts. For example, let’s say my firm provides legal services but hasn’t been paid. I would still need to pay the VAT owed on the invoice, as VAT is collected quarterly. However, if the payment becomes a bad debt after six months, I can apply for a credit.
Additionally, deposits will not be subject to VAT unless they’re applied to services. This means businesses should maintain separate accounts for deposits and advanced payments to streamline compliance.
Host
That’s a lot to digest! Is there anything else?
Ludmila Yamalova
Yes, one final point. The UAE’s VAT system will reportedly be modeled after Malaysia’s VAT system rather than the UK’s. Businesses wanting to prepare might find it useful to research Malaysia’s VAT framework for guidance.
Host
Thanks for that. Let’s take some listener questions.
Listener Question (George)
Why is VAT classified as an indirect tax?
Ludmila Yamalova
Great question. VAT is an indirect tax because it’s collected by businesses from the end-users and then paid to the government. The business acts as a tax collector, but the end-user ultimately bears the cost.
Listener Question (Eddie)
We’re in the ship supply industry, effectively exporting our products. Will we be exempt from VAT or eligible for tax rebates?
Ludmila Yamalova
Exports are generally subject to a 0% VAT rate, meaning you won’t charge VAT to your customers, but you can claim back the VAT you’ve paid on related expenses. Make sure your invoices clearly outline these transactions for compliance and refunds.
Listener Question (Ali)
If a company has no sales in the UAE or GCC, can it register for VAT to claim back the VAT on its purchases?
Ludmila Yamalova
Yes, businesses without local sales can register for VAT if they meet the registration thresholds. This allows them to claim back VAT on their purchases.
Listener Question (Sandrine)
How will VAT apply to commercial leases?
Ludmila Yamalova
Commercial leases will be subject to VAT, with landlords acting as tax collectors. For long-term leases signed before VAT implementation, landlords may need to amend contracts to reflect the new tax.
Host
We’re getting a lot of VAT-related questions today! Let’s take a short break and continue with more after the news.
Host
Welcome back to the Legal Hour. Ludmila Yamalova is here. We’ve been diving deep into VAT updates and taking your questions. Let’s get back to it.
Listener Question (Ian)
Will VAT apply to residential properties?
Ludmila Yamalova
No, residential leases and sales will not be subject to VAT. However, commercial properties will be.
Listener Question (Adam)
What about school fees?
Ludmila Yamalova
Education services will fall under the 0% VAT rate, meaning schools won’t charge VAT on tuition fees, but they can claim refunds on VAT paid for related expenses.
Listener Question (Patrick)
How will VAT impact UAE offshore entities without a physical presence?
Ludmila Yamalova
Offshore entities conducting business outside the UAE may not be directly affected by VAT. However, if they own commercial property or conduct taxable activities locally, they could be liable for VAT.
Host
We’re almost out of time, but any final advice for businesses preparing for VAT?
Ludmila Yamalova
Start preparing now. Ensure your contracts and invoices include VAT clauses, separate your accounts for deposits and payments, and stay updated on new developments.
Host
Thank you, Ludmila, for another informative session. That’s all the time we have today for the legal hour on Drive Live. Stay tuned for more updates next week.