On 6 September 2024, the UAE Cabinet issued Cabinet Decision No. 100 of 2024, significantly amending the Federal Decree-Law No. 8 of 2017 on Value Added Tax. This announcement introduced amendments specifically addressing the VAT treatment of virtual assets and other financial services. These changes are designed to clarify how businesses should approach the taxation of digital assets, such as cryptocurrencies, as the UAE continues to adapt its tax laws to the evolving digital economy. The new rules are scheduled to come into effect on 15 November 2024, and businesses involved with virtual assets must ensure they comply with these updated regulations to avoid penalties.
Under the previous VAT framework, the treatment of virtual assets, including cryptocurrencies and other digital tokens, was not clearly defined. This ambiguity led to varying interpretations and inconsistencies in VAT reporting for businesses dealing with virtual currencies. With the Cabinet Decision No. 100 of 2024, virtual assets are now officially included under the definition of financial services, and specific guidance is provided on when these assets and the related services are subject to VAT.
The new regulations provide that virtual assets, defined as digital representations of value that can be traded or used for investment purposes, will be treated similarly to traditional financial products like stocks or bonds in terms of VAT. This change applies to services like the conversion, management, and transfer of virtual assets, which will now be taxable if conducted for an explicit fee, commission, or other financial consideration. On the other hand, if these services are offered without a direct fee or commission, they will remain VAT exempt, aligning with the treatment of traditional financial services.
Those companies that handle virtual assets, including cryptocurrency exchanges, wallet providers, and businesses using virtual assets as part of their operational models must adhere to these amendments to ensure compliance. Services related to virtual assets, such as conversion, management, and transfer, will now be taxable at 5% VAT if they involve explicit fees, commissions, or rebates. However, services provided without direct fees, like custody or management of virtual assets, will remain VAT-exempt. They will be required to charge VAT on services related to virtual assets where an explicit fee or commission is charged. This could lead to an increase in taxable income for businesses providing such services, as they now need to apply the standard VAT rate to these transactions.
When an exchange charges a commission for converting one cryptocurrency to another, these services will now attract VAT. Companies must ensure that they are prepared for this by updating their accounting systems and pricing models to reflect the VAT that must be collected on such transactions.
While the standard VAT rate of 5% remains unchanged, the significant difference lies in the scope of application for businesses dealing with virtual assets. Services that were previously not clearly subject to VAT, such as the transfer and conversion of virtual assets, will now attract the 5% VAT rate when conducted for explicit fees. Businesses must consider the impact on capital assets involving virtual assets. The amendments introduce rules for making VAT adjustments on capital assets, including virtual assets. For instance, if virtual assets form part of a company’s capital, any changes in their taxable use will require an annual VAT adjustment. For buildings and real estate, this adjustment is spread over 10 years, while for other capital assets, such as virtual assets, the adjustment period is 5 years.
There is no specific percentage increase or decrease in the VAT rate itself; however, the expansion of taxable services and annual adjustments on capital assets may result in a noticeable financial impact for companies heavily involved in virtual asset transactions. The need to adjust for VAT on capital assets means that companies will have to account for potential increases in VAT liability if their asset usage shifts toward taxable activities.
The changes introduced by Cabinet Decision No. 100 of 2024 will come into effect on 15 November 2024, with just a month to prepare to implement these new amendments. Companies dealing with virtual assets to ensure that they have updated their tax compliance procedures will be revising their invoicing systems to accurately charge VAT on all taxable services related to virtual assets.
Businesses need to ensure they have systems in place to differentiate between services that are taxable and those that are exempt. For instance, services that do not involve an explicit fee, such as providing custody of virtual assets without direct compensation, will remain exempt from VAT. On the other hand, services such as trading or managing virtual assets for a commission will be subject to VAT, and businesses need to apply this distinction in their VAT reporting.
The introduction of Cabinet Decision No. 100 of 2024 has brought virtual assets into the same regulatory framework as traditional financial services and the UAE government has clarified the tax obligations for companies dealing with these digital assets, particularly for businesses that charge fees for converting, managing, or transferring virtual assets, as these services will now be subject to VAT. Virtual asset-related services are taxable under the new UAE VAT rules if they involve explicit fees, commissions, or discounts. Services offered without direct financial compensation remain VAT-exempt.
In the run-up to 15 November 2024, businesses must take the necessary steps to review their current service offerings and ensure that VAT is correctly applied to taxable transactions, and adjusting their internal accounting systems to reflect these changes. Companies should clearly understand how the new VAT adjustments on capital assets, including virtual assets, will affect their overall tax liabilities.
