One significant tax update has been making waves globally:
The Federal Tax Authority of the United Arab Emirates (UAE) implemented a key change in its value-added tax (VAT) regulations, the so called Executive Regulation of Federal Decree-Law No. 8 of 2017 on Value Added Tax (https://tax.gov.ae/en/legislation.aspx).
Effective retroactively from January 1, 2018, the FTA is now granting a VAT exemption on transfers and conversions of digital assets, including cryptocurrencies. Not included are digital representations of fiat currencies or financial securities.
At the same time a VAT exemption of the management of investment funds has been introduced (not applied retroactively), i.e. services provided by the fund manager independently for a consideration, to funds licensed by a competent authority in the State, including but not limited to, management of the fund’s operations, management of investments for or on behalf of the fund, monitoring and improvement of the fund’s performance.
So far the bare facts.
What Does This Mean for You?
While this is certainly exciting news, it is crucial to keep the cardinal rules in mind when assessing tax updates, especially when it comes to complex topics like cryptocurrencies and investment funds:
Taxes always come in systems
Tax policies never exist in isolation. The new VAT exemption on digital assets and on the management of investment funds is part of a broader framework. How this fits into other tax regulations, especially in relation to income tax or capital gains, should not be overlooked.
Tax systems are embedded in a global context
The UAE’s VAT exemption may save costs and simplify transactions locally, but international tax policies and cross-border transactions still need to be considered. The UAE is part of a globally interconnected tax environment, and changes in one jurisdiction can have ripple effects. For example, while this development may create opportunities for more favorable structuring, it’s important to be mindful of how international tax treaties resp. their non-renewal as in the case of UAE and Germany or rules on crypto in other jurisdictions might influence or counterbalance these savings.
Substance matters
In the world of international taxation, substance is crucial.
Even with a VAT exemption, when considering introducing a structure in a particular jurisdiction, it is essential to ensure that there is real economic substance in that country.
Without genuine operations or business activities, the structure may still be subject to scrutiny or taxation under other laws.
To dive deeper into this topic, be sure to watch the news video below: