VAT on Charities and Non-Profit Organisations

VATGCH1 has been issued by the FTA to provide guidance on VAT registration and treatment of Non-designated Charitiesas well as designated charities. It also provides a description of rules with the help of which VAT can be recovered on charities.

VAT treatment of Charities:

VAT is a general consumption tax imposed on most supplies of goods and services in the UAE. In respect it will be by default be applicable on goods supplied by Charities in UAE.

Business Activities for a charge:

Where Charities will make supply of goods for a charge, this is a business activity for VAT purposes and VAT will have to be charged thereon.

The Charity will be able to recover the VAT on costs which directly relates to onward activities which are liable to VAT as per the normal VAT recovery rules.

Donated goods and services:

The VAT is also charged on the charities which receive donations of goods and services and are further used as a part of the onward provision of charitable activities.

No VAT on costs is recoverable in the case of donated charities as goods and services in such a case are received free of charge.

Non-business activity for VAT purposes:

The VAT would not be charged in case of an activity which is performed by a charity while acting in its charitable capacity as no charge has been incurred during the supply of the concerned goods or services.

DESIGNATED CHARITIES

A charity would be treated as a designated charity if:

• The Ministry of Community Development has given approval for carrying out a charitable activity in the UAE or the same has been established as a charity under a Federal or Emirate Decree or a license has been given by an agency of the Federal or Emirate Governments to operate as a charity;
• The same is either operated within the terms of any license or approval granted by the authorized bodies;
• It is being operated for a nonprofit basis;
• The charity is being primarily being funded by means of grants or donations.

To date there have been two Cabinet Decisions listing Designated Charities, namely:

1. List of Charities Annexed to the Cabinet decision No (55) of 2017on Charities that may recover Input tax and

2. Cabinet decision no 15 of 2018 on amending the list stated in above Cabinet decision.

VAT REGISTRATION OF CHARITIES

• Any charity engaged in a business activity in UAE and the taxable supplies exceed the VAT registration threshold.

• Any charity carrying business activity and either making taxable supplies or incurring expenses in excess of the voluntary VAT registration threshold.

• Designated Charities needs to be registered for recovery of VAT input, whether or not they meet the threshold.

Furthermore, charities can also register as a tax group with other entities. Designated Charity may only join a tax group comprising other Designated Charities

VAT TREATMENT WITH REGARD TO THE SALES OR LEASES OF NEW BUILDING TO CHARITIES

The first supply of either a new building or a part of a building would be subject to VAT @ 0% if:

• The charity is a designated charity
• The supply should be the first supply of that building
• Either the entire building or a part of the building must specifically be designed to be used by the charity for a charitable purpose.

VAT RECOVERY RULES FOR CHARITY:

Non designated charities are subject to normal VAT recovery rules ie only in case of taxable supplies.

In case of activities which do not generate taxable supplies or incurs VAT which relates to exempt supplies, VAT is non-recoverable.

Charities will therefore be required to allocate and apportion VAT recovery between taxable activities (recoverable) and non-taxable activities /exempt activities (non- recoverable)

Designated Charity may recover VAT on any expenses incurred by it in full(even if those expenses do not specifically relate to supplies that typically allow VAT recovery. However, it cannot be recovered if the expenses relate to the exempt supplies or blocked supplies as per the VAT law.

Refer the Cabinet decision stated above (Cabinet decision 15 of 2018 making amendment in Cabinet decision 55 of 2017) for the list of designated Charities.

Note: In all the cases, VAT which is specifically blocked from recovery as per VAT Law cannot be reclaimed whether or not Charity is designated or non-designated.

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