Clarification on the VAT Treatment of Compensation type payments

VAT Public Clarification

VAT treatment of compensation-type payments

Issue

VAT is a tax on supplies of goods and services. Therefore, no VAT is due if no supply takes place. As part of business arrangements, businesses will often make payments to compensate each other for any loss, omissions or other wrongdoings. A question arises whether VAT is due on such payments.

Summary

Where a payment is not consideration for supply, no VAT is due on the payment.

Detailed discussion

Under Article 2 of the Federal Decree-Law No. 8 of 2017 on Value Added Tax (“VAT Law”), VAT is imposed, among other things, on taxable supplies of goods and services. “Taxable supply” is defined in Article 1 of the VAT Law as a “supply of goods or services for a consideration by a person conducting business in the State, and does not include exempt supply”. As a consequence, in order for an obligation to charge VAT to arise, there must be a supply of goods or services. If any payment does not relateto a supply of goods or services then the payment is not subject to VAT.

PFA the file to know more in details.