VAT Treatment on Options and Option Premiums

April 22, 2022Dated:  | |

Within the contemporary corporate environment, we can frequently see options as a part of financial management and investment business decisions. In big businesses, there are frequent transactions using Options, which is why it is critical to understand the VAT implications and its monetary impact to apply appropriate remedies. 

To eliminate ambiguity regarding the VAT application over Option transactions, we have Federal Tax Authority (FTA) public clarification; we have a list of the main points below.

What is an Option and Option Premium?

A financial agreement grants the option bearer the right to trade any tradable asset class, such as stocks, at a particular price on a special future date or before a set date. 

The suitable price is set for the underlying financial instrument’s market price while exercising the option or can be set at a discount or a premium.

If the buyer exercises his right of option, the seller (the option holder) is obligated to complete the deal (buy or sell). An option grants the owner the right to purchase the underlying financial instrument at a specific price through a Call Option.

A Put option grants the owner the right to sell the underlying financial asset at a specific price. An “Options Premium” is the fee paid for selling or purchasing an option.

VAT Tax Applicability to Supply of Options

The VAT treatment of options as per the provisions of Cabinet Decision No. 52 of 2017 on the Executive Regulations of Federal Decree-Law No. 8 of 2017 on VAT (VAT Executive Regulations) is as follows:

Debt or Equity Securities 

The regulation expressly excludes the transfer of equity or debt security ownership and the delivery of Options relating to such assets. These are exempt from VAT which means the supplier will not charge VAT, nor will the recipient pay it. 

Non-debt or Non-equity Securities

These include underlying commodities and are subject to VAT. In all other circumstances, when there is a different sort of asset or commodity other than debt/equity security, such options supplies are taxable, and the VAT levy on the appropriate Option premiums.

Rectification of Incorrect VAT Application to Options

According to the clarification, if a taxable person mistakenly regarded the delivery of exempt options, the person must alter the treatment as follows:

  • Provide the recipient with a tax credit note for rectifying the VAT treatment.
  • Adjust inaccurate output VAT discharged earlier in the tax return for the period during the issue of the tax credit note if the supplier can show that the tax credit notes were issued and handed on to the recipients to whom the VAT was charged.

Likewise, suppose the recipient has already deducted the input tax concerning the supply. In that case, it must submit an input tax adjustment (as a negative in the net and VAT column of Box 9) in the tax return for the tax period in which the recipient received the tax credit note.


Businesses should assess how they have handled such transactions since the imposition of VAT to determine whether action is required to achieve compliance with VAT legislation and Public Clarifications.

Businesses should interact with suppliers/customers to agree on amending existing agreements and issue credit notes for any necessary modifications if such transactions have been treated wrongly from a VAT standpoint.

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