Advantage for investors as UAE simplifies VAT structure for virtual assets

Easing VAT on crypto investments make key milestone for UAE tax policy

The UAE government has made a significant move to address the booming digital asset market by updating its VAT regulations to cover virtual assets like cryptocurrencies and NFTs (non-fungible tokens).

The rules, effective retroactively from January 1, 2018, provide much-needed clarity for businesses engaged in digital transactions.

Under the updated regulations, virtual assets are classified as digital assets that can be traded, converted, or used as investments, distinguishing them from traditional currency and financial securities. This means that while digital currencies like Bitcoin or unique digital items like NFTs fall under these rules, other forms of digital currency, like government-backed digital versions of fiat money, do not.

A key aspect of the new rules is the classification of virtual asset transactions as financial services, which makes them exempt from VAT. Specifically, the transfer, ownership change, or conversion of virtual assets are now categorized as exempt supplies.

This exemption could reduce VAT costs for businesses involved in these types of transactions, easing the tax burden and promoting growth in the UAE’s digital finance sector.

Managing virtual assets

However, certain fees—like those explicitly charged for managing these assets—may still attract a 5% VAT, depending on the nature of the service.

Another notable development is the introduction of zero-rated VAT for virtual asset services provided to customers outside the UAE. This means that businesses exporting digital asset services may be able to recover input VAT.

However, identification of the actual recipient outside the country could be a challenge that may hamper the supplier’s ability to take the advantage of zero rating. In the past, the FTA has been quite stringent in allowing zero rating for transactions where the supplier has been unable to showcase the identity of the recipient.

The regulations also introduce a ‘reverse charge’ mechanism. UAE businesses that pay fees for services acquired from outside the country, such as trading fees or insurance related to virtual assets, may now be subject to UAE VAT under this system.

This change impacts how companies handle their VAT accounting and may require them to reassess their tax planning and expenses related to international service providers.

Status on VAT for stablecoins

Despite these updates, some questions remain. For example, there’s limited guidance on how the rules will apply to central bank digital currencies (CBDCs) or stablecoins, which are gaining popularity in the financial landscape.

Additionally, the regulations’ retroactive application may require businesses to review and possibly reverse previous VAT claims, potentially impacting their financial records.

These changes mark an important milestone in tax policy as the UAE embraces the digital economy. Businesses are encouraged to carefully review their VAT compliance strategies in light of these updates. For firms focused solely on trading or converting virtual assets, VAT deregistration might even be an option to explore, as it could streamline compliance and reduce administrative overheads.

In a world rapidly adopting digital assets, these VAT regulations position the UAE as a forward-thinking jurisdiction while giving businesses the clarity they need to thrive in a digital-first marketplace.

Nimish Goel

The writer is a partner at Dhruva Consultants