The United Arab Emirates has introduced significant amendments to its Value-Added Tax (VAT) regulations, exempting certain cryptocurrency and virtual asset-related activities from VAT. This development, approved by the UAE Cabinet, marks a crucial step towards clarifying the tax treatment of digital assets in the country.
Nimish Goel, a partner at Dhruva Consultants, explained that this VAT exemption applies to digital representations of value that can be traded or converted digitally, particularly for investment purposes. “Virtual assets have been exempted from VAT, and this exemption applies to digital representations of value that can be digitally traded or converted and are intended for investment purposes,” Goel stated. However, he clarified that the exemption does not extend to digital representations of fiat currencies or financial securities. “This regulatory update establishes clear distinctions regarding the types of virtual assets eligible for VAT exemption,” Goel added.
The UAE Ministry of Finance announced that the Cabinet has approved Decision No. 100 of 2024, which introduces changes to the Executive Regulations of Federal Decree-Law No. 8 of 2017 concerning VAT. The VAT, initially implemented in January 2018, was introduced at a rate of 5% as part of a broader Gulf Cooperation Council (GCC) agreement on taxation. It applies to goods and services across various sectors in the UAE.
Scope of the VAT Exemption
Anurag Chaturvedi, CEO of Andersen in the UAE, further elaborated on the scope of this exemption. He emphasized that the VAT exemption covers activities involving cryptocurrencies and Non-Fungible Tokens (NFTs), which are classified as digital representations of value that can be traded or used for investment purposes. “The amendment to the VAT Executive Regulations covers virtual assets, i.e., cryptocurrencies and NFTs, which are defined as digital representations of value that can be digitally traded or converted and can be used for investment purposes,” Chaturvedi explained.
Chaturvedi added that the exemption encompasses a range of services, including the transfer, conversion, and management of virtual assets, particularly in the context of cryptocurrency trading. However, he noted that transactions involving the conversion of digital fiat currencies, such as Bitcoin to USD, are not covered by this exemption and will require independent VAT assessments. “The scope of the exemption must meet the criteria of the definition set forth for virtual assets. In cases where activities relate to digital fiat currency (e.g., conversion of Bitcoin to USD), the transaction shall not fall within the definition, and the VAT treatment must be assessed independently,” he said.
Importantly, Chaturvedi pointed out that this exemption applies if services are not provided for a fee, discount, commission, or similar compensation. This move, he noted, enhances transparency around the taxation of cryptocurrencies, which have become increasingly popular as an investment option in the UAE.
Exemptions in Investment Fund Management Services
The new amendments also include VAT exemptions on certain investment fund management services. Nimish Goel elaborated on this, noting that services related to the management of a fund’s operations, investments, and performance improvement are now classified as exempt. “This update aims to enhance the UAE as a hub for investment activities while supporting the growth of the financial sector,” he said.
While these exemptions are seen as positive steps for the industry, businesses are advised to assess the potential impact on their financial strategies, particularly regarding the recovery of input tax. Goel warned that many companies might not be able to recover a significant portion of the VAT incurred on related expenses, urging them to carefully analyse their strategies in light of the new exemptions.
These amendments are set to take effect on November 15, 2024, positioning the UAE as a leading global hub for digital assets and investment activities.
