PUBLIC CLARIFICATION ON BANK INTEREST AND DIVIDENDS
Under the VAT which was implemented in the UAE on 1st January 2018, a provision was made under which a VAT-registered person could earn interest income by way of depositing money in a bank account or, by holding fixed deposits, recurring deposits. Article 42 of the Executive Regulation dealt with the tax treatment of financial services under which the payment or collection of any amount of interest or dividend was a financial service and was exempt from VAT. Further provisions were made under which this exemption was only available in case of supply.
In order to provide clarification on the VAT implication of the interest income generated from bank deposits and dividend income, the Federal Tax Authority has issued VATP010- a public clarification on bank interest and dividends.
INTEREST INCOME FROM BANK DEPOSITS
Bank deposits result in interest accruing to the holders. Interest earned on the deposit of business income by a retail business into the bank account is outside the scope of VAT and has been earned passively. This is not required to be furnished in the business’s VAT return as the interest income is not a consideration for the supply.
Dividend income earned by a shareholder holding shares in a company is outside the scope of VAT. This is because the shareholder does not make any supply to receive the dividend and this income cannot be treated as consideration for a supply. However, any management fees which is charged by a holding company to its subsidiaries are subject to VAT.
This Public Clarification is effective as per the date of its implementation and only states the position of the Federal Tax Authority.