United Arab Emirates Sheds Light on VAT Rules for Virtual Assets

The introduction of a value-added tax exemption for certain virtual asset transactions is a key change in the United Arab Emirates’ revised Executive Regulations on VAT. The tax authorities also issued VAT Public Clarification VATP040 on aspects of the VAT treatment of virtual assets.

The amendments provide taxpayers with a concrete reference point for determining their VAT position.

Article 1 of the Executive Regulations defines virtual assets as “Digital representation of value that can be digitally traded or converted and can be used for investment purposes, and does not include digital representations of fiat currencies or financial securities.”

The amendments introduce these exemptions:

• The transfer of ownership and conversion of virtual assets is exempt from Jan. 1, 2018, the effective date of VAT in the UAE.
• Keeping and managing virtual assets and enabling their control is VAT exempt, provided it isn’t conducted in return for an explicit fee, discount, commission, and rebate or similar.

The definition of virtual assets and the VAT exemption for certain activities, are welcome developments. While practical challenges remain,businesses should evaluate whether the exemption applies, its impact, and how to manage their VAT position.

Practical Challenges

Taxpayers face several challenges when determining the scope of the VAT exemption, valuation of transactions, and managing the input tax recovery position.

Retrospective effective date. Taxpayers need to analyze the impact of the retrospective VAT exemption for transferring ownership and conversion of virtual assets, especially in relation to their input tax recovery position.

Stablecoins. Stablecoins are cryptocurrencies whose value is pegged or tied to (another) currency, including fiat currency, financial instrument, or commodity. The question is whether the transfer or conversion of stablecoins is exempt—as virtual assets—or whether it follows the VAT treatment of the underlying asset to which it’s pegged.

The definition of virtual assets excludes digital representations of fiat currencies or financial securities. Stablecoins pegged to fiat currency could potentially be excluded from the definition of virtual assets on this basis. However, as stablecoins are cryptocurrency (and cryptocurrencies aren’t money according to VAT Public Clarification VAT040) this conclusion may have unintended consequences.

Taxpayers need to consider on a case-by-case basis whether the stablecoins they are dealing with qualify as virtual assets and, if not, how they should be treated from a VAT perspective.

Nonfungible tokens. A nonfungible token is a digital unit (commonly referred to as a token) on a distributed ledger. It consists of an identification code and metadata. The identification code is used to identify the token. The metadata refers to what the NFT represents—the asset. It might contain several elements such as a certificate of authenticity, the NFT’s name, a description of the NFT, and a URL when appropriate.

Based on a reading of the amended VAT legislation, it’s not clear whether an NFT is a digital representation of value not specifically excluded from the definition of virtual assets. Although NFTs represent value, qualifying NFTs as virtual assets may lead to non-neutral VAT treatment.

In the absence of guidance, taxpayers may refer to the regulatory framework. The Dubai International Financial Center specifically excludes NFTs from the definition of crypto tokens. The same follows from guidance published by the Central Bank of the UAE.

Zero-rated supplies. Services provided to recipients established outside the UAE are zero rated, provided conditions are met. To apply the zero rate of VAT, the supplier should ensure the recipient is established outside the UAE, which may not always be straightforward when dealing with virtual assets and anonymous parties.

Valuation. Valuation is an important aspect of the VAT system. The value of the supply is the consideration excluding the VAT. VAT is calculated on the value of supply and the value of supply may also impact the input tax recovery position.

It’s not unusual for creators and developers to be paid by a crypto project in tokens, usually the project’s native token. Determining the value of the supply of the underlying services can be challenging when virtual assets are the consideration for the services and there is no monetary consideration, especially when the token isn’t widely traded.

Even when payment is made in major cryptocurrencies, the difficulty remains, as there is no official exchange rate, and values may fluctuate significantly during a 24-hour timespan.

Barter transactions. When goods and services are obtained in exchange for virtual assets, it is in principle a barter transaction, provided both parties operate as taxable persons. This may lead to additional, unwanted, and unexpected exempt supplies by the purchaser (the one transferring the virtual assets).

Incorrect determination of the value of the supply, for example the value of the virtual asset, may result in incorrect reporting and over- or under-recovery of input tax.

Input tax recovery. Input tax on expenses related to VAT-exempt virtual asset transactions isn’t recoverable. If the standard method for input tax recovery doesn’t reflect the actual use, taxpayers may have to adjust the input tax recovered at the end of the year, and tax authorities may request the taxpayer to apply for a special method.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Bastiaan Moossdorff is director, indirect taxes with PwC Middle East.

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