As per UAE VAT Law, the payment or collection of any amount of interest and dividend is considered to be a financial service and exempt from VAT. However, this only applies where there is, in fact, a supply.
Bank deposits may accrue interest to their holders. The business does not do anything to earn this interest income other than to merely deposit the money in the account, and therefore, it can be said to be earned passively. In this case, 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 business is not required to declare this income on its VAT return, as it is outside the scope of VAT.
It is important to note that the above position only applies to interest derived from bank deposits and does not have any bearing to the interest generated from extending loans or credit, which are exempt supplies for VAT purposes.
The shareholder does not make a supply to receive the dividend; the dividend income cannot be treated as consideration for a supply. Accordingly, dividend income is outside the scope of VAT, and is, therefore, not required to be reported on the VAT return.
Last Updated: 30th January 2019
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Tag: VAT in UAE