UAE Exempts Crypto and Fund Management Services from VAT, Effective 2024

October 21, 2024

Companies involved in digital assets received a push from the United Arab Emirates (UAE) government, which is working hard to position itself as one of the top, if not the top, countries for crypto in the world.

At the beginning of October, the Federal Tax Authority published the Executive Regulation of the Federal Decree (Decree), updating the VAT legislation regarding the VAT treatment of digital assets and investment fund management.

Impact on Crypto and Fund Management Services

Starting November 15, 2024, the 5% VAT rate applicable to most digital asset transfers, including crypto, will be removed. From that date onwards, the ownership, transfer, and conversion or management of digital assets, such as crypto, will be treated as financial services. Therefore, these services will fall under the scope of VAT-exempt supplies.

Interestingly, this decision to remove the 5% VAT rate will be implemented retroactively. So, the date from which the VAT exemption is applied will be January 1, 2018.

This is important for businesses and individuals who paid VAT on digital asset-related transactions in the past six years since they can now claim it back. However, as is always the case with VAT refunds, those who request a refund may face tax audits.

Also, managing investment funds services are now exempt from VAT. This affects both the fund managers and those who appoint them, that is, those who use the service provided by the fund managers.

Conclusion

These changes set a new direction for businesses involved in the blockchain sector and further certify the UAE as one of the leading countries. As the Web3 community grows, more companies and individual investors participate in developing blockchain technologies. Therefore, all of them might take advantage of VAT exemptions provided by the latest regulatory changes in the UAE to ensure greater cash flow.

Also, businesses that already operate in this field in the UAE should analyze if and to what extent new rules apply to them.

Source: PwC, BDO, The Executive Regulation of the Federal Decree-Law No. 8

What changes have been made to the UAE's VAT treatment of digital assets and fund management services?

Effective November 15, 2024, the United Arab Emirates (UAE) has exempted the transfer, conversion, and management of digital assets, including cryptocurrencies, from the standard 5% Value Added Tax (VAT). Additionally, services provided by fund managers to investment funds licensed by UAE authorities are now VAT-exempt.

Is the VAT exemption for digital assets applied retroactively?

Yes, the VAT exemption for digital asset transactions is applied retroactively from January 1, 2018. This means businesses and individuals who paid VAT on such transactions since that date may be eligible to claim refunds.

How does this exemption affect businesses involved in cryptocurrency transactions?

Businesses dealing with digital assets are no longer required to charge the 5% VAT on transactions involving the transfer, conversion, or management of these assets. However, this exemption may limit their ability to recover VAT on related business expenses. Companies should reassess their VAT obligations and consider amending past VAT returns if necessary.

What qualifies as investment fund management services under this exemption?

The exemption applies to services provided by fund managers independently for consideration to funds licensed by a competent authority in the UAE. This includes managing the fund's operations, overseeing investments on behalf of the fund, and monitoring and improving the fund's performance.

Are services provided to non-UAE licensed funds also exempt from VAT?

No, the VAT exemption specifically applies to services rendered to investment funds licensed by UAE authorities. Services provided to funds not licensed in the UAE remain subject to the standard 5% VAT rate.

What steps should businesses take in response to these changes?

Businesses should evaluate whether their services qualify for the VAT exemption and understand how it affects their VAT recovery on expenses. They may need to review and possibly amend past VAT returns due to the retroactive application of the exemption. Consulting with tax professionals is advisable to ensure compliance and to optimize the benefits of these regulatory changes.

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