On 19 March 2022, the Federal Tax Authority (FTA) issued Public Clarification VATP010, titled “Bank Interest and Dividends”. It addresses whether bank-deposit interest and dividend income are “consideration for a supply” for VAT purposes. The FTA stated plainly that passively earned interest from bank deposits and dividend income from merely holding shares do not constitute consideration for any supply. As a result, they are outside the scope of VAT and are not to be reported in the VAT return as exempt supplies.
This is not a new “rule,” but an articulation of first principles: if there is no supply, there is no VAT implication. The Clarification also distinguishes this passive income from interest arising on extending loans or credit, which is an exempt financial service (and, therefore, a supply), but that is a different fact pattern from simple bank deposits.
This clarification was issued after the Financial Services VAT Guide No. VATGFS1, which had been released on 31 July 2019. In Sec. 4.3.1 under subheading “Returns on investment” the FTA clarified that “where a financial service provider makes a payment which is a return on an investment, such as interest on deposits, dividends, drawings, etc. and where there is no service nor transaction provided in return for such a payment, then these returns on investment will be outside the scope of VAT”. That guidance, however, was framed from the payer’s perspective—the recipients of deposits and the issuers of shares—not from the perspective of depositors or shareholders themselves.
VATGFS1’s tabular guidance is consistent with this framing. In Table 7 (Treasury and Financial Markets), “Dividend income on investments” is classified as outside scope. Table 3 (Equities Trading) reiterates this with the note “Not consideration for a supply for VAT purposes”. Section 4.1.5 further elucidates that “Financial services, insofar as they are remunerated by way of an implicit margin or spread (i.e. no explicit fee is charged in respect of them) will be exempt from VAT (i.e. they are not treated as taxable supplies). Accordingly, this VAT treatment will also apply to interest payable in respect of borrowing”. “Interest income earned on credit cards” and “Finance charge (interest)” are shown as exempt in Table 1 (Retail and Private Banking), while “Investment income – interest income” is designated exempt in Table 2 (Asset Management and Private Banking).
The sectoral tables also classify interest received in various banking contexts as exempt: Table 3 (Equities Trading) addresses “Interest received on fixed deposits placed with other banks”; Table 5 (Institutional Banking) covers “Interest received from other banks”; Table 6 (Corporate Finance/Investment Banking) lists “Interest on loans” as exempt; and Table 4 (Transaction Banking) treats “Corporate lending – interest/profit (akin to interest for Islamic finance)” as exempt. Treasury and Financial Markets guidance further refers to all types of interest income in this vein.
Taken together, these listings provided strong direction to classify dividends received as outside-scope income. Interest, however, including interest earned on deposits, was, under the guide’s taxonomy, more likely to be treated as exempt rather than outside scope. Crucially, VATGFS1 did not articulate the principle distinguishing interest generated by borrowing/lending (exempt supply) from passive deposit interest received by the depositor (no supply). VATP010 fills that interpretative gap by providing the missing guidance from the depositor/shareholder’s perspective.
Is this only about whether we include interest/dividends in the VAT return?
No, it is bigger than that. VATP010 closes off a planning path some had attempted to derive from Article 54(1) of the VAT Law and Article 52(1) of the Executive Regulation.
Article 54(1)(c) of VAT Law sets out when input tax is recoverable, including (among other limbs) inputs “used or intended to be used for making… supplies specified in the Executive Regulation … made outside the State which would have been treated as exempt had they been made inside the State”. Article 52(1) Executive Regulation then confines those “supplies” to financial services whose place of supply is outside the UAE and where the recipient is outside the UAE at the time the services are performed.
Accordingly, if depositing funds in a foreign bank or investing in shares of a foreign entity could be regarded as constituting the supply of financial services (to the foreign bank or the foreign investee), and such investments or deposits were managed through a foreign establishment of the UAE company, then:
- the place of supply of those financial services would be treated as outside the UAE;
- those services would qualify as exempt if they had been supplied within the UAE;
- the recipient of the services (i.e., the foreign bank or investee) would be located abroad.
On that basis, any input VAT incurred in the UAE in relation to this activity could, in principle, be recoverable, since it would be attributable to supplies treated as exempt if made in the UAE but actually supplied outside the State, in accordance with Article 54(1)(c) of the VAT Law read with Article 52(1) of the Executive Regulation.
VATP010 defeats this logic at the threshold: there is no supply by the investor/depositor in the passive scenarios. If there is no supply, Article 52(1) never “switches on”, and Article 54(1)(c) cannot be used to recover input VAT on the basis of “exempt supplies made outside the State”.
“Non-passive” scenarios
If facts evolve into active financial services (e.g. lending by the business, or charging management fees by a holding company to subsidiaries), those are supplies (often exempt for lending; taxable for management fees) and the usual rules on exempt/taxable attribution apply. VATP010 itself highlights that management fees by a holding company are subject to VAT.
Classification and its quantitative effect on apportionment
The consequences of VATP010 extend into the mechanics of input-tax apportionment. The VAT Input Tax Apportionment Guide No. VATGIT1 (updated on 30 September 2025) reiterates that apportionment is not a single calculation but an iterative process consisting of several stages and periodic reviews.
The process operates through:
- Direct attribution (removal of wholly recoverable and wholly non-recoverable inputs);
- Identification of Residual Input Tax;
- Application of an Apportionment Rate to that residual.
This procedure is carried out quarterly (or monthly, depending on the frequency of VAT return filing) and followed by an annual wash-up adjustment. The guide also requires a subsequent annual actual-use adjustment where the use of inputs diverges from their initial intended use. The method to determine the “actual use” must be one of the special apportionment methods described in Section 3 of the Guide.
Section 3.1 introduces the outputs-based method. Section 4.4.1 explicitly defines the denominator of this method as “all supplies … (including non-business activities)”, while Section 3.3.1 states that “to calculate the recovery ratio under this method, the registrant needs to identify the value of taxable supplies as a proportion of all supplies made by the taxable person,” giving the formula: “Value of taxable supplies ÷ Total value of supplies × 100”. Example 3 in Section 3.4.3 further illustrates the denominator in the outputs-based special apportionment method as “Taxable Supplies … + Exempt Supplies…”.
Against this background, VATP010 characterizes passively earned bank-deposit interest and ordinary dividends as outside the scope of VAT, because the recipient makes no supply. The clarification explicitly notes that “the retail business does not make a supply to the bank, and therefore the interest income received is not a consideration for a supply... The shareholder does not make any supply in order to be eligible for a payment of dividend.”
Accordingly, neither dividends nor deposit interest should be added to the denominator when applying an outputs-based apportionment method. Misclassification of these outside-scope receipts as “exempt supplies” can distort recovery percentages in the final actual-use adjustment by unjustifiably inflating the denominator of the apportionment formula and depressing the recoverable input tax percentage.
A numerical illustration (for a tax year)
The taxable person in this example makes taxable supplies, including both standard-rated and zero-rated transactions, amounting to AED 100,000,000 during the tax year. In addition, the person makes exempt supplies, such as lending transactions, with a total value of AED 20,000,000. The entity also earns passive returns, consisting of bank-deposit interest and ordinary dividends, amounting to AED 15,000,000.
After direct attribution, the amount of residual input VAT, representing input tax incurred on mixed-use costs not directly linked to either taxable or exempt supplies, stands at AED 5,000,000. Separately, the taxpayer incurs AED 200,000 of Input VAT on custody and safekeeping fees that relate solely to the holding of shares. Because such fees are directly attributable to activities classified as outside the scope of VAT under VATP010, this AED 200,000 is non-recoverable by direct attribution.
Variant A “Misclassified practice (incorrect)”: treat passive returns as exempt supplies.
If one were (incorrectly) to book the AED 15,000,000 as exempt supplies, the outputs-based special method would compute the residual recovery ratio on a denominator swollen by items that are not, in fact, “supplies”:
- Outputs-based recovery ratio = Taxable supplies ÷ Total supplies = 100,000,000 ÷ (100,000,000 + 20,000,000 + 15,000,000) = 100 ÷ 135 = 74%.
- Residual input VAT recovered = 5,000,000 × 74% = AED 3,700,000.
- Custody fee VAT: AED 200,000 non-recoverable (direct attribution).
Variant B “Correct practice”: treat passive returns as outside the scope (no supply).
Under VATP010, the AED 15,000,000 is not a supply. The outputs-based method’s denominator is therefore limited to all supplies (including any non-business activities where applicable), but outside-scope business receipts are not supplies and do not enter the fraction.
- Outputs-based recovery ratio = Taxable supplies ÷ Total supplies = 100,000,000 ÷ (100,000,000 + 20,000,000) = 100 ÷ 120 = 83%.
- Residual input VAT recovered = 5,000,000 × 83% = AED 4,150,000.
- Custody fee VAT: AED 200,000 non-recoverable (direct attribution).
Delta attributable solely to correct classification: AED 4,150,000 − AED 3,700,000 = AED 450,000 additional residual recovery.
This delta is a pure function of correct legal characterization. The outputs-based method, as described in VATGIT1, explicitly references “supplies” for the denominator. Under VATP010, the dividends should not be treated as supplies, and therefore should not be added to the denominator.
Disclaimer
Pursuant to the MoF’s press-release issued on 19 May 2023 “a number of posts circulating on social media and other platforms that are issued by private parties, contain inaccurate and unreliable interpretations and analyses of Corporate Tax”.
The Ministry issued a reminder that official sources of information on Federal Taxes in the UAE are the MoF and FTA only. Therefore, analyses that are not based on official publications by the MoF and FTA, or have not been commissioned by them, are unreliable and may contain misleading interpretations of the law. See the full press release here.
You should factor this in when dealing with this article as well. It is not commissioned by the MoF or FTA. The interpretation, conclusions, proposals, surmises, guesswork, etc., it comprises have the status of the author’s opinion only. Furthermore, it is not legal or tax advice. Like any human job, it may contain inaccuracies and mistakes that I have tried my best to avoid. If you find any inaccuracies or errors, please let me know so that I can make corrections.
