Virtual assets are changing conventional conceptions of money, investing, and ownership through the impact of the given transformation as per emerging trends in the system; today, virtual assets have taken on a number of forms, and all the types contribute to the ongoing disruption of the financial and ownership sphere.
Also read: VARA Company Rulebook
Common types of virtual assets include:
- Cryptocurrencies: Cryptographic currencies in which payments are made online or through other electronic means (for instance, Bitcoin and Ethereum) cryptocurrencies enable safe and independent financial transactions that do not require banks to participate
- Non-Fungible Tokens (NFTs): Specialized virtual commodities referring to property rights over concrete products such as paintings or music files. NFTs are a means to determine the ownership of digital art, music, and other works.
- Security Tokens: Cryptocurrencies related to old fashioned financial instruments in shape of shares of an organization and being regulated under securities laws
- Utility Tokens: These are tokens which give user’s privileges to access a particular good or service in a blockchain supported environment.
As technology advances these virtual assets are expected to be part of normal individuals’ and institutional investors’ life.
Also read: Guide to VARA Audit in Dubai
Regulation of Virtual Assets in UAE
To achieve the sustainable development of the virtual assets market, the UAE uses a set of bilateral and collective steps, initiatives, and successful regulatory frameworks. Key steps include:
- Virtual Assets Regulatory Authority ((VARA): In terms of Virtual assets Dubai has enacted VARA that regulates virtual assets and the VASPs. The functions within this mandate are to supervise and examine the companies to control issuance, trading, and storage or virtual assets conforming to international standards and laws.
- Abu Dhabi Global Market (ADGM): ADGM has developed a set of rules which regulate the activity of virtual asset exchanges and custodians. It also makes certain that all players in the virtual asset industry strictly adhere to licensing standards, thus creating a secure trading market.
- DMCC Crypto Centre in Dubai: DMCC has established the Crypto Centre that offers companies engaged in virtual assets development and trading with all necessary support to evolve. The Crypto Centre provides help, tools and advice to crypto businesses thus enabling them to operate in a well-regulated yet flexible environment.
- Central Bank of UAE (CBUAE): CBUAE is in consultation with relevant authorities on regulation of digital currencies and virtual assets to prevent the collapse of the financial system. CBUAE’s regulations have consumer and innovation protection as guiding principles of consumer protection concerning virtual assets for adequately protecting consumers while allowing for secure movement of funds.
- UAE Blockchain Strategy 2021: The UAE Blockchain Strategy initiated in 2021 aims to incorporate blockchain in several fields which include; finance, health and governmental services. For that purpose and to deliver its goals with more clarity, efficiency, and security, the UAE turns to blockchain. Through Blockchain, the UAE seeks to improve transparency, efficiency and security, which are some of the key building blocks of virtual asset infrastructure. These measures evidence the UAE’s commitment of sponsoring innovation without compromising on the oversight needed for the virtual assets industry. Such a proactive approach put the UAE on the map of a preferred choice of countries for businesses and investors in this new digital economy.
- Specific Changes in the VAT law Concerning Gaming Assets: The changes in the VAT Executive Regulations convey some important amendments regarding the management of virtual assets under the UAE VAT system. These key provisions are designed to clarify how virtual assets should be handled within the VAT framework:
Activities and Operations Under Virtual Assets Financial Services
According to Article 1, virtual assets mean “anything of value created in the digital environment and is exchangeable or utilizable electronically with the aim of investment.” In particular, it is proposed to leave out fiat currencies and financial securities. Article 42(2)(j)-(l) categorizes services connected to virtual assets as financial services, subject to specific VAT treatments:
- Transfer of ownership of virtual assets, virtual currencies.
- The consequences of virtual assets:
- The conversion of virtual assets Using virtual assets
- The Nature and Role of Virtual Assets Effective control of the assets
- Management Services dealing with virtual assets.
Details are given below:
- VAT Exemptions (Case of Financial Services): Article 42(3) of the regulation states that some of the financial services that are associated with virtual assets are Zero-rated for VAT if they efficiently meet the requirements of the regulation. For example, services associated with the exchange and storing of Virtual currency are not subject to VAT in the event that they were supplied on or after 1st January 2018.
- The consequences of virtual assets: Many enterprises engaged or intending to be involved in the virtual asset market should consider the consequences arising from the abovementioned VAT changes. Virtual assets classified under the broad definition includes stocks, cryptocurrencies or shares, environments, uses, and belongings. It can encompass a plethora of categories including everything from digital artwork to metaverse real estate and utility tokens.
- Amendments to Transfer and Conversion of Virtual Assets: The exemption as provided for these activities in the context of trading and conversion of virtual assets might have a considerable impact to the input tax recovery of the business entities involved in these activities. Business entities may have to use apportionment techniques to determine the amounts attributed to taxable and exempt uses in their recovery of VAT.
- VAT on Custodial and Management Services: The specific custodial and management services of virtual assets will normally fall within the regime of applying VAT at a standard rate of 5% or a zero-rate depending on the particular characteristics of the services provided. These services will only be exempt as per the provision made in Article 42(3) for other financial products and services subjected to the tax.
Also read: How to Audit Your Virtual Asset Holdings As per VARA in Dubai
Checklist or Immediate Action Points for Taxpayers
Due to the wide measures introduced by the FTA, the companies must initiate measures that would enable them to meet the new required VAT law.
- Understanding VAT Regulations: It is essential to learn about the changes in the new VAT laws regarding virtual assets. The activities of enterprises in the market of virtual assets are incredibly diverse therefore firms have to make regular measures to ensure they do not breach the new laws on VAT. The virtual asset market exhibits diverse structures and strategies with different forms of operations for VAT purposes therefore the person should determine whether the action that you perform – transfer, manage, broker, or negotiate virtual assets – will fall under the new implementation of VAT.
- VAT Registration: If your company’s business activities relating to virtual assets extend to the extent that your turnover has exceeded the threshold for VAT registration, make sure your company is registered for VAT. This is essential for getting compliant and can be claimed as input VAT on business related expenditure.
- Accurate Record-Keeping: Maintain clear paperwork of every evolution involving virtual assets, and that include buying, selling, exchanging and converting. Records should be kept to work out the VAT account as well as other auxiliaries and especially for audit.
- Assess Input Tax Recovery: Determine whether, and to what extent, interaction with virtual asset activities affects an organization’s input tax recovery position. In case your business offers both taxable and exempt juridical persons’ services, it becomes necessary to employ an apportionment method for VAT recovery purposes.
Conclusion
Virtual assets are new forms of assets incorporated together with traditional ones in the UAE VAT regulation indicating the current trends in the legal regulation of the development of the digital economy.
Thus, organizations involved in virtual assets activities are advised to ensure compliance with the statutory laws and requirements to avert incurring fines for noncompliance.
