Insights

MBG VAT

VAT update on insurance

October 09, 2018
Background:

This guide covers details of applicability of UAE VAT Law to the activities of all providers of insurance and related services; and the approach providers of insurance and related services in the UAE should take to determine the amount of VAT on costs (i.e. input tax) they are eligible to reclaim where they make both taxable and exempt services of insurance and related services.

Exceptions already Defined Earlier:

It is important to note that two specific types of insurance were already defined by way of exception in the Federal Decree-Law and Executive Regulations, namely: Life insurance and associated reinsurance (exempt) and insurance relating to the international transport of goods and passengers (zero-rated).

General Principle:

The general principle applicable in the Law and Executive Regulations is that all insurance and related services will be subject to VAT at the standard rate. VAT treatment between Islamic and non-Islamic finance products will be same if it effectively archives the same result and same intention. Any significant difference in the overall liability between an Islamic insurance product and any non-Islamic counterpart arising as a consequence of differential treatment being applied will be addressed on a product by product basis.

Exceptions to General Principle:
  1. Export of Insurance Service outside implementing state will be zero-rated.
  2. Supply of service to registered person in implementing state will be out of scope in UAE and subject VAT on reverse charge mechanism by registered recipient of service.
  3. Supply of service to unregistered person in implementing state will be subject to VAT at standard rate of 5%.
  4. Import of Insurance will be subject to VAT as per reverse charge mechanism.
Single Composite Supply:

In addition, there will be a single composite supply where there is a supply which has two or more elements which are so closely linked that they form a single supply and which it would be artificial or impossible to split. Taxable person must not use apportionment where you make a single composite supply. A single composite supply will only typically exist where the price of the different components of the supply is not separately identified or charged by the supplier and all the components of the supply are supplied by a single supplier. (example – life insurance including critical illness).

Real Estate Insurance:

A supply of insurance in respect of real estate will not be considered a “service related to real estate” for the purposes of the place of supply rule in Article 30(7) of the VAT Law. Therefore, the place of supply of the insurance relating to real estate has to be determined on the basis of the general place of supply rules, i.e. by reference to the Place of Residence of the supplier. If the insurance is exported, i.e. where the recipient of the Real Estate insurance is not located in the UAE or other GCC Implementing States, it will be zero-rated.

Travel Insurance:

Standard-rated if the recipient is resident in the UAE and Zero-rated if the recipient is resident outside the GCC Implementing states and recipient does not have right to recover VAT as per UAE VAT Law.

Insurance Intermediary (i.e. an agent or broker):
  1.  Acts as a disclosed agent for an insurance transaction – Commission/fees / brokerage will be subject to VAT and not entire premium amount, if collected on behalf of insurer.
  2.  Acts as an undisclosed agent for an insurance transaction – Commission/fees / brokerage and also entire premium amount will be subject to VAT in entire supply chain, if premium is collected on behalf of insurer.
Input Tax Recovery of Health Insurance

costs incurred for the health insurance of employee’s family members (which is in the nature of personal benefit), will only be recoverable where:

  1. It is a legal obligation to provide those services or goods to those employees under any applicable labour law in the State or Designated Zone.
  2. It is a contractual obligation or documented policy to provide those services or goods to those employees in order that they may perform their role and it can be proven to be normal business practice in the course of employing those people.
Insurance companies – Recovery of Claims Costs:

VAT cost incurred by insurance companies to settle insurance claims will be recoverable input tax as per general rules. (car repair cost incurred by insurer with VAT for insured cars).

Input Tax Apportionment:

Input Tax apportionment will apply as defined in VAT Law and Executive regulations.

Transitional Provisions:

Transitional provisions will apply as defined in VAT Law and Executive regulations.


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