Tax Treatment of Financial Services – Article 42 – VAT Executive Regulations

Article 42 – Tax Treatment of Financial Services

1. For the purposes of this Article:

1. The phrase “debt security” means any interest in or right to be paid money that is, or is to be, owing by any Person, or any option to acquire any such interest or right;
2. The phrase “equity security” means any interest in or right to a share in the capital of a legal person, or any option to acquire any such interest or right;
3. The phrase “life insurance contract” means a contract lawfully entered into to the extent that it places a sum or sums at risk upon the contingency of the termination or continuance of human life, marriage, similar relationships permitted under applicable law, or the birth of a child.
4. The phrase “Islamic financial arrangement” means a written contract which relates to a supply of financing in accordance with the principles of Shariah.

2. Financial services are services connected to dealings in money (or its equivalent) and the provision of credit and include for instance the following:

1. The exchange of currency, whether effected by the exchange of bank notes or coin, by crediting or debiting accounts, or otherwise.
2. The issue, payment, collection, or transfer of ownership of a cheque or letter of credit.
3. The issue, allotment, drawing, acceptance, endorsement, or transfer of ownership of a debt security.
4. The provision of any loan, advance or credit.
5. The renewal or variation of a debt security, equity security, or credit contract.
6. The provision, taking, variation, or release of a guarantee, indemnity, security, or bond in respect of the performance of obligations under a cheque, credit, equity security, debt security, or in respect of the activities specified in paragraphs (b) to (e) of this Article.
7. The operation of any current, deposit or savings account.
8. The provision or transfer of ownership of financial instruments such as derivatives, options, swaps, credit default swaps, and futures.
9. The payment or collection of any amount of interest, principal, dividend, or other amount whatever in respect of any debt security, equity security, credit, and contract of life insurance.
10. Agreeing to do, or arranging, any of the activities specified in paragraphs (a) to (i) of this Clause, other than advising thereon.

3. The following financial services shall be exempted:

1. Activities under Clause 2 of this Article where they are not conducted in return for an explicit fee, discount, commission, and rebate or similar.
2. The issue, allotment, or transfer of ownership of an equity security or a debt security;
3. The provision or transfer of ownership of a life insurance contract or the provision of re-insurance in respect of any such contract.

4. Activities under Clause 2 of this Article shall be subject to tax where the consideration payable in respect of a supply of Services is an explicit fee, commission, discount, and rebate or similar.

5. Islamic finance products, being financial products under contract which are certified as Islamic Shariah compliant, which simulate the intention and achieve effectively the same result as a non-Shariah compliant financial product, will be treated in a similar manner as the equivalent non-Shariah financial product for the purpose of applying exemption from Tax.

6. Any supply made under an Islamic financial arrangement shall be treated in such a way as to give an outcome for the purposes of the Decree-Law and the decisions issued by the Authority, comparable to that which would be the case for their non-Islamic counterparts.

7. Where Article 31 of this Decision applies in respect of a supply of financial services, this supply should be treated as zero-rated.