Public Clarification on Bank Interest and Dividends
The Federal Tax Authority (FTA) has recently provided the Public Clarification VATP010 (the Clarification) in relation to the VAT treatment of interest and dividend income.
The Clarification highlights the fact that passively earned interest income derived from bank deposits is not a consideration for a supply. Similarly, dividend income received as a result of holding shares in a company does not initiate the consideration for a supply. These two types of income are therefore considered outside the scope of VAT.
The Clarification further emphasizes the fact that “supply” is the foundation of VAT and thus VAT implications can only arise when there is a supply. In other words, if there is no supply, there is no VAT.
The Clarification gives two examples of passively earned income:
Interest from Bank deposits
A retail business may put its business income into a bank account and earn interest on the deposited amount. It can be said to be earned passively.
The payment of a dividend by a company is the distribution of its profits to its shareholders. The holder of a share is not entitled to a dividend until the company makes a profit and decides on the distribution of a dividend. The shareholder does not make any supply in order to be eligible for a payment of dividend., in other words, a dividend is generally a passive income.
The Clarification also concludes that the position for interest earned passively only applies to interest derived from bank deposits and does not extend to interest generated from the granting of loans or credit, which are exempt supplies for VAT purposes.
The Clarification has been issued by FTA to clarify certain aspects related to the implementation of the Federal Law No 7 of 2017 on Tax Procedures, Federal Decree-Law No. 8 of 2017 on Value Added Tax and their Executive Regulations.
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