FEDERAL TAX AUTHORITY CLARIFICATION ON INSURANCE
Amongst the GCC countries, UAE is considered as the main insurance market since 70% of the market accounts for health and motor policies and implementation of VAT in UAE from January 1, 2018 had called for 5% VAT on general insurance except on life insurance, life reinsurance and insurance relating to the international transport of goods and passengers . As a result of VAT’s implementation, a lot of economic, regulatory and organizational shifts have taken place in insurance.
General insurance is subjected to the standard rate of 5% and insurers are allowed to recover all VAT ( input tax) incurred in purchasing supplies. Insurance contracts are treated as continuous supplies of services for VAT purposes.
RATE OF TAX ON SUPPLY OF INSURANCE OR REINSURANCE SERVICES
Supply of insurance or reinsurance services to a recipient in a GCC non implementing state and overseas ( whether or not they would otherwise have been exempt where supplied in GCC) is to be zero rated and the treatment of VAT for both Islamic and non Islamic products is supposed to be the same.
DECISION AS PER THE CLARIFICATION ISSUED BY THE FEDERAL TAX AUTHORITY ON INSURANCE
The Federal Tax Authority has recently issued clarification related to the applicability of UAE VAT law to the activities of all providers of insurance and related services; approach of the providers of insurance and related services in the UAE in order to determine the amount of VAT on costs for which they are eligible to reclaim where they make taxable as well as exempt services of insurance and related services.
EXCEPTIONS WITH REGARD TO THE GENERAL PRINCIPLES
- Export of insurance services outside the implementing state would be zero rated
- The supply of service to a registered person in an implementing state would be out of the scope of UAE and would be subject to VAT on the reverse charge mechanism by registered recipient of service
- 5% rate would be applicable for supplying of service to an unregistered person in an implementing state.
- Import of insurance would be subject to VAT as per the reverse charge mechanism
RECOVERY OF INPUT TAX WITH RESPECT TO HEALTH INSURANCE PROVIDED TO EMPLOYEES
In 2014, the government in UAE had made it compulsory for all the residents to have health insurance and health insurance after VAT’s introduction was subjected to zero rated which meant that the insurers could get a right of credit for everything they bought.
As per the clarification, employer was only allowed to claim input VAT on health insurance provided to the family of the employee if he was under a legal obligation to provide the insurance. There is however no legal obligation on the employer in Dubai to provide health insurance to the family of an employee. Thus, VAT can only be recovered when there is a legal mandate on the employer or there is some documented policy.
INSURANCE WITH RESPECT TO REAL ESTATE
For the purpose of place of supply rule in Article 30(7) of the VAT Law, supply of insurance with respect to real estate would not be considered as supply of services related to real estate and the supply would be determined based on the general place of supply rules. In case, the provision of insurance is included within the service charge for real estate, it would be considered as service related to realty.
Travel insurance is to be subject to standard rate that is 5% in case the recipient is a resident in the UAE and it is to be subject to zero rate if the recipient is a resident outside the GCC states.
- In case the insurance intermediary acts as a disclosed agent for an insurance transaction, the the commission/ fees/ brokerage would be subject to VAT and not the entire premium amount if it is collected on behalf of the insurer.
- If the insurance intermediary acts as an undisclosed agent for an insurance transaction, then the commission/ fees/ brokerage and an entire premium amount would be subject to VAT in the entire supply chain if the premium is collected on behalf of the insurer.