April 6, 2022Dated: | Byadmin admin | Dividend income is a significant source of investment income; therefore, its receipt and proper accounting are substantial to the investors. But do you need to pay VAT on your dividend income? You must review every transaction carefully to decide whether it will come under VAT purview and choose proper accounting and reporting treatment compliant with the VAT regulations. A misclassification of taxes can result in financial losses, counterparties’ reconciliation mistakes, and noncompliance penalties. To help you understand the taxation of the dividend income, we will explain how is the dividend income treated under the UAE VAT law. So, let’s get started. VAT Treatment for Dividend Income According to the Federal Tax Authority of the United Arab Emirates (UAE), financial services like bank deposit interest are exempt from VAT subject to certain conditions. Similarly, dividend income is received for the shares held in the company without any exchange of service or goods. The basis on which the dividend income can be taxable or not is dependent on whether there is any supply of service or goods. Since the dividend income does not involve any supply, it is considered a passive income. Hence, the payment or collection of interest or dividend is considered a financial service under VAT law and is free from VAT. Dividends on VAT Return: Should You Report? An income must be taxable at the standard rate, zero-rate, or exempt from being eligible to be reported in a VAT return. Since the dividend income is out of scope from VAT, there is no need to report it in the VAT return. As a result, any individual or firm receiving dividend income passively by holding shares in a company does not need to include it in their VAT returns. Dividend Income vs. Management Fees Now that we have understood that the dividend income is out of scope from VAT, what will be the treatment for management fees received? The differentiating factor, in this case, would be the supply of goods or services in exchange for consideration. Since the receipt of the management fees involves the supply of management services for consideration, it is taxable in the UAE for VAT at the standard rate of 5%. The Bottom Line you must consider the applicability of VAT in the UAE on a case-to-case basis since not all transactions are the same. It is advisable to consult a tax expert to avoid errors and misinterpretation of the law. How can We Help? Flyingcolourtax can assist you in determining the VAT treatment of dividend income and other financial services to ensure the right and timely tax compliance. Our qualified professionals can also help you in accounting, auditing, company registration, and PRO requirements. Book your free consultationwith us to know more about the comprehensive services.