Understanding Deemed Supplies in VAT: A Comprehensive Guide for the UAE

Value Added Tax (VAT) in the UAE, introduced on January 1, 2018, is governed by the Federal Decree-Law No. 8 of 2017 on Value Added Tax. One of the key concepts within this VAT framework is the notion of "deemed supplies." This blog will provide a detailed explanation of deemed supplies, their implications, and their treatment under UAE VAT law.

What is a Deemed Supply?

In VAT terminology, a "deemed supply" refers to a transaction that, while not a traditional sale or exchange of goods and services, is considered a taxable supply for VAT purposes. Essentially, deemed supplies are transactions that are treated as supplies by the tax authorities, even if they do not fit the conventional definition of a sale.

Deemed supplies are designed to prevent VAT evasion and ensure that VAT is applied to transactions that might otherwise escape taxation. The UAE VAT law includes specific provisions to classify certain transactions as deemed supplies, thus requiring VAT treatment even though they might not involve a standard exchange of goods or services.

Types of Deemed Supplies in the UAE

In the UAE, the concept of deemed supplies primarily applies to the following scenarios:

1. Supply of Goods for Personal Use:

 Definition: If a business uses goods for personal purposes or for purposes other than those related to its business activities, such a use may be treated as a deemed supply.

o Example: A company using office supplies for a director’s personal use or using business assets (e.g., company vehicles) for personal reasons.

o VAT Treatment: The business is deemed to have made a taxable supply of these goods to itself, and VAT must be accounted for based on the market value of the goods.

2. Provision of Services for Personal Use:

 Definition: If a business provides services for personal purposes or for non-business activities, this may also be classified as a deemed supply.

 Example: An entity providing free services to employees or owners that are not directly related to business operations.

 VAT Treatment: VAT must be accounted for on the value of the service provided, and the business is treated as having made a taxable supply to itself.

3. Use of Assets in a Non-Taxable Way:

 Definition: When assets that were previously purchased with VAT are used for purposes not related to the taxable business activity, a deemed supply occurs.

 Example: A company initially purchases machinery with VAT recovery but later uses it for a personal project or a non-taxable activity.

 VAT Treatment: The business must account for VAT on the market value of the asset as if it were a taxable supply.

4. Sale of Assets Subject to VAT:

 Definition: Certain transactions involving assets, such as the transfer of ownership of goods or rights, may be deemed as supplies.

 Example: The transfer of ownership of real estate or other high-value assets that were initially purchased with VAT recovery.

 VAT Treatment: VAT must be accounted for on these transactions, ensuring that the VAT system captures all relevant transfers.

Implications for Businesses

1. VAT Reporting and Compliance:

 Businesses must accurately report deemed supplies in their VAT returns. This requires careful tracking of any personal use of goods or services and ensuring VAT is accounted for accordingly.

2. Record-Keeping:

 Proper documentation is crucial. Businesses should maintain records of all transactions, including those involving deemed supplies, to substantiate VAT calculations and claims.

3. VAT Reclaim:

 For deemed supplies involving business assets, businesses might need to adjust VAT reclaim positions if assets are used for non-business purposes.

4. Tax Planning:

 Understanding deemed supplies can help businesses plan their VAT strategies and minimize VAT liabilities by ensuring that personal use of business assets is properly accounted for.