Clarification on Donation,Grants and Sponsorships

VAT Public Clarification

Donations, Grants and Sponsorships

Issue

Article 1 of the Federal Decree-Law No. 8 of 2017 on Value Added Tax (“VAT Law”) defines consideration as “all that is received or expected to be received for the supply of Goods or Services, whether in money or other acceptable forms of payment”.

A taxable person may receive payments in the nature of donations, grants and sponsorships from third parties including but not limited to employees, customers, suppliers etc. In order to determine whether such donations, grants or sponsorships are subject to VAT, one needs to identify whether such moneys can be treated as consideration against “taxable supplies”.

This Public Clarification discusses the principles that must be applied to ascertain the taxability of donations, grants and sponsorships.

Summary

The VAT treatment of donations, grants and sponsorships depends on whether the donor, grantor or sponsor, as the case may be, has received any benefit in return for such payments. Where any benefit is received in return for the payments, VAT implications will arise. However, where no benefit is received, the payments will be treated as outside the scope of VAT as they will not be seen as consideration for a supply.

The use of the terms donation, sponsorship and grant are not in themselves determinative of the VAT treatment of the payments, and a business must consider all the facts and circumstances before arriving at a conclusion.

Detailed discussion

VAT implications arise only when there is an underlying taxable supply. Despite the fact that the definition of “consideration” is wide and includes within its ambit all that is received or expected to be received in money or other acceptable forms of payment, VAT is applicable only when the payment relates to a taxable supply. Therefore, whether the donor, grantor or sponsor has received any kind of benefit in the form of a supply needs to be determined. The benefit must have a close nexus to the payment for VAT to be applicable.

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