Article 1 of VAT Law No. 8 of 2017, defines consideration as all that is received or expected to be received in return for the provision of taxable supplies i.e., goods and services, whether in the form of money or any other payment.
A tax payer may therefore receive consideration in the form of donations, grants or sponsorships from third parties, such as clients and suppliers. The question then arises whether such donations, grants or sponsorships will be subject to the payment of VAT?
In this regard, the first step would be to determine whether the donation, grant or sponsorship in question would be deemed a consideration in exchange for taxable supplies.
To this end, the Federal Tax Authority (FTA) has published VAT Public Clarification VATP011 to address and discuss the principles applicable when considering the taxability of donations, grants and sponsorships.
Summary – Was any benefit received?
The Clarification provides that when determining the taxability of donations, grants and sponsorships, it must be considered whether the donor, grantor or sponsor received any benefit in return therefore.
In the event that benefit was indeed received, there will be VAT implications attached to the transaction.
However, in the event that no benefit was received, the transaction will be deemed to fall outside the scope of VAT as there would have been no exchange of consideration for supply.
It is important to bear in mind that the mere fact that a payment is referred to as a donation, grant or sponsorship does not in itself determine the taxability of such payment. As mentioned previously, each situation must be dealt with on a case-by-case basis bearing in mind the individual circumstances and facts related to the matter.
The most important factor to bear in mind is that VAT will only be applied in instances where the payment made relates to a taxable supply. Therefore, although the definition of consideration is particularly broad, the most important factor which must be considered is whether the donor, grantor or sponsor received any return benefit in the form of a taxable supply.
In the event that a donation is made without any benefit attached thereto, it will fall outside the scope of VAT in light of the fact that there was no taxable supply made.
It is imperative that the donation must be made unconditionally and without reservation.
The following factors must be taken into account when considering whether this is indeed the case:
- Does the donor receive any benefit (express or implied) for making the donation?
- Does another person or third party, other than the donor, receive any benefit for the donation made?
- Is there any condition providing that the donation must be utilized or applied in a specific way which may in turn benefit the donor or another person?
- Is there any existing agreement, written or verbal, between the parties? If so, what are the stipulations thereof?
An example would be where a company donates money to a library, however, in return for the donation the library provides space to the company where it may promote and market its products. In this instance the donation will be considered taxable because it is deemed consideration given in return for the taxable supply of providing space for the company’s promotional and marketing activities.
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Sponsorships are usually taxable because in most cases the person or entity receiving the sponsorship also provides supplies to the sponsor.
These supplies typically include, but are not limited to displaying the sponsor’s name or logo, allowing the sponsor to use the name of the person receiving the sponsorship, provision of entertainment services, hosting sponsor at social events, provision of access to social events and tickets etc.
An example of such a scenario would be where a company agrees to sponsor AED 1million for a horse racing event, however this is on the proviso that the company logo is displayed on the jerseys of the jockeys as well as at the all entrances of the event. VAT in UAE would be payable in this instance due to the fact that the company is receiving benefits in return for its sponsorship.
However, each scenario must be considered on a case-by-case basis, bearing in mind all the relevant facts and circumstances prior to reaching a conclusion.
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Just as with donations and sponsorships, the benchmark used to determine the taxability of a grant is whether or not the grantor has received any benefit in return for making the grant. Similarly, if no benefit has been received the grant will fall outside the scope of VAT. However, if a benefit is received then VAT will be applicable.
An example of this is where grantor gives a grant to a university to conduct medical research into the treatment of cancer, which research findings will eventually be utilized in the grantor’s company. In this instance the grant will attract VAT in light of the fact that the grantor will eventually draw benefit from the grant it has given to the university.
If you’re confused regarding VAT policies in the UAE and how they apply to your business, the regulated tax agents in Dubai of Farahat & Co can be of great service! To know more and to discuss your concerns with our tax professionals, call us today!