The Federal Tax Authority, FTA, has clarified that donations, grants and sponsorships are outside the scope of Value Added Tax, VAT, only when no benefit is received in return.
Any benefit in return for such payments will be subject to VAT, the authority said.
The authority had issued a new clarification on VAT treatment for donations, grants and sponsorships through its "Public Clarifications" service available on the FTA's official website to familiarise taxpayers with the technicalities and procedures surrounding the tax system.
In a statement issued today, the FTA asserted that the terms "donation", "sponsorship" and "grant" by themselves will not determine the VAT for such payments, urging businesses to consider all facts and circumstances before arriving at a conclusion.
FTA Director-General, Khalid Ali Al Bustani, affirmed that the UAE tax system placed great emphasis on encouraging charity work and social contributions with an accurate set of principles that facilitate philanthropy, including donations and grants, as per local legislation.
The authority pointed out that Article (1) of the Federal Decree-Law No. (8) of 2017 on VAT defines consideration as, "All that is received or expected to be received for the supply of Goods or Services, whether in money or other acceptable forms of payment."
The FTA added that a taxable person may receive payments in the nature of donations, grants and sponsorships from third parties including, but not limited to, employees, customers, and suppliers, among others, and further explained that to determine whether such payments are subject to VAT, the taxable person must determine whether these payments can be treated as consideration against "taxable supplies" or not.
The authority went on to clarify that VAT implications arise only when there is an underlying taxable supply. Despite the fact that the definition of "consideration" is wide and includes within its ambit all that is received or expected to be received in money or other acceptable forms of payment, VAT is only applicable when the payment relates to a taxable supply. Therefore, whether the donor, grantor or sponsor has received any kind of benefit in the form of supply needs to be determined. For VAT to be applicable, this benefit must have a close link to the payment.
The FTA reiterated that if a donation is given without any express or implied benefit, it is outside the scope of VAT. The donation must be unconditional and unrestricted for such a treatment to apply, it added, citing, as an example, that if a business donates money to a hospital and in return the hospital provides space to the business to display and market its products, then the donation will be treated as consideration against the taxable supply of providing space for undertaking marketing activities, and will be subject to VAT.
Sponsorships are generally subject to VAT, as the person who gets sponsorships makes supplies to the sponsor, the authority explained. For example, if a business pledges a certain amount of money to sponsor a football match on the condition that the organiser displays the company's logo at the entrance of the stadium, then the business is receiving a benefit in return for the sponsorship, and the sponsorship will be subject to VAT.
The FTA concluded by explaining that just as with donations and sponsorships, determining the VAT treatment in the case of grants requires establishing whether the grantor has received any benefit in return for giving the grant. For example, where a person gives a grant to a university for undertaking research such that the findings of the research will be used in the business of the grantor, the grant will be subject to VAT.