If you are a VAT-registered business in the UAE, it’s important to know how bank interest and dividend income are treated for VAT purposes. This guide explains everything in simple terms.
What You Need to Know
-
Interest Income: Earned by depositing money in a bank account, fixed deposits, recurring deposits, or similar bank deposits.
-
Dividend Income: Earned by holding shares in a company.
Key Takeaways
-
Passively earned bank interest does not count as consideration for a supply.
-
Dividend income received from simply holding shares does not count as consideration for a supply.
-
Both types of income are outside the scope of VAT and do not need to be reported on your VAT return.
How VAT Works on These Incomes
Value Added Tax (VAT)
-
VAT applies only when there is a supply of goods or services.
-
If no supply occurs, there is no VAT obligation.
Financial Services
-
According to Article 42 of the Executive Regulations, payment or collection of interest and dividends is considered a financial service and is exempt from VAT where a supply exists.
Bank Interest
-
Bank deposits may earn interest passively.
-
Example: A retail business deposits its income into a bank and earns interest. The business does nothing beyond depositing the money to earn this income.
-
Since no supply is made to the bank, the interest is outside VAT scope.
-
Note: This rule applies only to bank deposit interest, not interest from loans or credit, which are exempt supplies.
Dividend Income
-
Dividends are payments of profits to shareholders.
-
Shareholders earn dividends just by holding shares and do not make a supply to receive them.
-
Therefore, dividends are passive income and outside VAT scope.
-
Exception: Management fees charged by holding companies to subsidiaries are subject to VAT.
Official FTA Position
-
This clarification reflects the Federal Tax Authority (FTA) stance.
-
It does not amend any existing laws.
-
Effective from the date of implementation of relevant legislation unless stated otherwise.
If you earn bank interest or dividends as a VAT-registered person in the UAE, you generally do not need to include them in your VAT return. Only active supplies or management fees are subject to VAT.
