No VAT on payments relating to compensation

The Federal Tax Authority (FTA) has issued a public clarification regarding tax treatment of compensation-type payments, noting that Value Added Tax (VAT) is imposed on supplies of goods and services and if any payment does not relate to a supply of goods or services, then it is not subject to VAT.

FTA noted that as part of business agreements, businesses usually make payments to compensate each other for any loss, negligence or other errors. VAT should not be applied to such amounts if they don’t relate to a supply.

In a recent statement, FTA noted that under Article 2 of Federal DecreeLaw No. 8 of 2017 on VAT, it is imposed, among other things, on taxable supplies of goods and services. Taxable supply is defined in Article 1 of the same law as a “supply of goods or services for a consideration by a person conducting business in the UAE and does not include exempt supply”.

FTA had issued these statements in a Public Clarification on “VAT Treatment of Compensation-Type Payments”. The clarifications are the latest of the FTA’s various instruments used to raise awareness among taxpayers about the technicalities of the tax system.