Charities in the UAE are subject to the VAT. They may provide a range of goods and services, each having its own VAT consequences, unless it is a relevant charity activity. They can recover VAT on costs connected to their activity using ordinary VAT recovery standards.
However, donated goods and services are subject to VAT. Charities shall follow Decree-Law No. 20 of 2018, its implementing laws, Cabinet Decision 10 of 2019, and any applicable guidance issued by the UAE Central Bank on anti-money laundering (AML) and combating the financing of terrorism (CFT).
In terms of tax responsibility on free supplies, if a charity delivers products or services for free and no VAT is applied, it is normally not responsible for VAT unless the provision is characterized as a presumed supply. VAT cannot be recovered on actual expenditures paid in receiving such free provisions for grants and contributions.
Approval and License: Charities in the UAE must be approved by the Ministry of Community Development, established by Federal or Emirate Decree, or licensed by a relevant government agency with authority to grant such licenses. Their objectives may include health, education, public welfare, religion, culture, science, and related activities.
Operating Requirements:
The charity must comply with the requirements of its permission, license, or other authorization.
It must operate on a non-profit basis and be largely supported by grants or contributions.
The charity shall only carry out the activities for which it is licensed.
Charitable organizations may engage in trading activities as long as they do not generate profit or are used for charitable purposes. The charity must be managed by individuals who are deemed ‘fit and proper,’ with no history of tax fraud or fraudulent behavior.
Step-by-step VAT recovery for charities
A charity can be classed as either designated or non-designated. The requirements for recovering input taxes for charity vary depending on the type of institution.
VAT Recovery by Non-Designated Charities
Non-designated charities are obligated to follow the standard VAT recovery regulations, therefore they do not have an automatic entitlement to recover VAT unless the expenditure is related with a taxable supply. It is vital to highlight that VAT imposed on non-taxable or exempt supplies cannot be recovered.
Step 1: Direct Attribution.
For each tax period, input tax that is creditable against a specific supply must be associated with that supply. This is referred to as direct attribution, and depending on whether the supply is taxable or exempt, the VAT might be recovered or prevented.
For example, VAT on legal expenses associated with establishing a center to provide free services cannot be recovered since they are not taxable. VAT on products purchased for resale in order to raise finances, on the other hand, is recoverable because the sales are for taxable supply.
Step 2: Allocate Residual Input Tax
Any input tax that cannot be immediately detected must be assigned in an appropriate way to determine the recoverable amount.
Determine Recovery Ratio: Formula: (Input tax originating from taxable supply) divided by (Input tax coming from both taxable and non-taxable supplies).
Apply the Recovery Ratio: To get the recoverable amount, multiply the recovery ratio by the residual input tax.
Annual adjustment: An annual reconciliation would be performed at the end of the tax year to check that the recoverable input tax corresponded to the charity organization’s operations for the year.
VAT Recovery for Designated Charities
Most designated charities have standard VAT recovery regulations that allow them to collect VAT on costs, but the expenses must not be related with the delivery of an exempt product and cannot be excluded or barred for recovery.
The input tax on taxable supplies (T) is entirely traceable, therefore charity can fully recover the VAT. Exempt supply (E) are also subject to the full input tax; however, no recovery is permitted. Finally, for non-taxable supplies or activities (C), the input tax remains traceable, and charities can fully recover it using a special VAT recovery mechanism.
Step 1: Direct Attribution.
Most designated charities have normal VAT recovery rules, meaning they can recover VAT on expenses provided these expenses do not relate to an exempt supply and are not otherwise blocked. For taxable supplies (T), the input tax is wholly attributable, so charities can recover the VAT in full. For exempt supplies (E), the input tax is likewise wholly attributable; however, no recovery is allowed. Lastly, for non-taxable supplies or activities (C), the input tax is still attributable, and charities can recover it in full under a special VAT recovery scheme.
Step 2: Allocate Residual Input Tax
The residual input tax is calculated using the following formula:
Determine Recovery Ratio: The formula is (T + C)/(T + C + E).
Apply the Recovery Ratio. To calculate the recoverable fraction, multiply the recovery ratio by the residual input tax.
Annual adjustment: An annual evaluation must be completed at the conclusion of the tax year and should be proportionate to the charity’s activity.
Conclusion
Finally, for VAT recovery for charities in the UAE, they must be completely informed of the regulations controlling the procedure and the approach that will be used. As a result, charities must follow the processes indicated above to recover VAT for charity while remaining within the legal constraints of the UAE tax system and tax consultant Dubai.