Clarification on Bank Interest and Dividends

VAT Public Clarification

Bank Interest and Dividends

Issue

A VAT registered person may earn interest income by depositing money in a bank account or by holding fixed deposits, recurring deposits, or any other similar bank deposit. In addition, a VAT registered person may earn dividend income by holding shares in a company.

This Public Clarification discusses the VAT implications of the interest income generated from bank deposits and dividend income.

Summary

Passively earned interest income generated from bank deposits does not amount to consideration for a supply. Similarly, dividend income received by merely holding shares in a company does not constitute consideration for a supply.

Passively earned interest income from bank deposits and dividend income are, therefore, outside the scope of VAT, and there is no requirement to report them in the VAT return.

Detailed discussion

Value Added Tax (‘VAT’) is a tax imposed on the import and supply of goods and services at each stage of production and distribution, including deemed supplies.

“Supply” is the foundation of VAT, and therefore, VAT implications arise only when there is a supply. In other words, if there is no supply, there is no VAT implication.

A supply can be made of either goods or services. The terms taxable supply, supply of goods and supply of services have been accorded specific definitions under the Federal Decree-Law No. 8 of 2017 on Value Added Tax (“VAT Law”) and Cabinet Decision No. (52) of 2017 on the Executive Regulations of the Federal Decree-Law No (8) of 2017 on Value Added Tax (“Executive Regulations”). Where any transaction falls outside the scope of these definitions, it falls outside the scope of VAT.

Article (42) of the Executive Regulations sets out the tax treatment of financial services. The Article states that the payment or collection of any amount of interest and dividend is considered to be a financial service and exempt from VAT. However, this only applies where there is in fact a supply.

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