Public clarification (VATPO11)- Donations, Grants and Sponsorships
Cabinet Decision No. (52) of 2017 on the Executive Regulations of the Federal Decree Law No. (8) of 2017 on Value Added Tax defines consideration as “all that is received or expected to be received for supply of goods or services in the form of money or other acceptable forms of payments”. This definition cannot be applied on payments received in the form of donations, grants and sponsorships, therefore creating confusion regarding such payments.
The FTA has issued the Public Clarification VATP011 in order to provide clarity.
The Clarification analyses whether donation, grants and sponsorship are pure payments, outside the scope of VAT, or considerations for taxable supplies giving rise to VAT implications. The Clarification stresses on the fact that, for a VAT event to be triggered, a taxable supply should have taken place.
The public clarification also clears the fact that the mere use of terms like “donations”, “grants” or “sponsorship” for some payments does not exclude such payments from the applicability of VAT. Businesses must always assess all the facts and circumstances under which a payment takes place before reaching a conclusion on the VAT treatment applicable.
If a donation is given without obtaining any benefit in exchange, it is not a consideration for a supply and thus the payment will be outside the scope of VAT. In order to assess whether the payment is a consideration for a supply of goods and services, the donor must consider the agreement entered with the beneficiary of the donation and assess whether any benefit is obtained (either directly or by a third party) as a result of the donation. It shall be noted that the benefit can accrue to a third party also.
Example for Donations:
If a business donates money to a hospital and in return the hospital provides space to the business to display and market its products, the donation will be treated as consideration against the taxable supply of providing space for undertaking marketing activities, and will as such attract VAT.
Similar to donations, in order to determine the VAT treatment in the case of grants, there is a need to establish whether the grantor has received any benefit in return for giving the grant. Where the grantor does not receive any benefit, the grant is outside the scope of VAT. However, where the grantor receives a benefit, the grant will be subject to VAT.
Example for Grant:
Where a person gives a grant to a University for undertaking research such that the findings of the research will be used in the business of the grantor, the grant will attract VAT.
- Sponsorship is generally considered as a supply from the receiver of the sponsorship to the sponsor and therefore, falling within the scope of VAT. Such supply can be by way of display of a logo, entertainment services, hosting of the sponsor, access provided or tickets to an event.
- Again, the sponsor and receiver of the sponsorship must analyse their contractual arrangement to identify the specific supply obtained.
Example for Sponsorship:
- A business agrees to sponsor AED 100,000 for a football match on the condition that the organizer will display the company’s logo at the entrance of the stadium. As the business is getting a benefit in return for the sponsorship, this will be subject to VAT.
Additionally, the clarification mentions that where a donation, grant or sponsorship is provided in the form of a good, deemed supply provisions shall be applied; i.e. VAT shall be applied at 5% if such goods fall under the definition of deemed supply.
Definition of Deemed supply:In accordance to the Article 11 of Federal Decree Law No-8 of 2017, deemed supply shall be initiated in the following instances:
- Those assets which were purchased for business purposes and VAT has been claimed on them.
- Later if these assets are supplied for no consideration.
- Transfer of businesses assets from UAE to another GCC Implementing State or GCC Implementing State to the UAE.
- Goods used for the non-business purpose on which input VAT deduction is claimed.
- Goods and Services that a Taxable Person owns at the date of Tax Deregistration.
It shall be noted that VAT shall be implemented on deemed supplies then.
As the Public Clarification has been provided by the FTA, it can be concluded that it shall be the responsibility of the Non- profit organizations in the UAE to make sure that proper understanding of the Executive Regulations and Public Clarifications has been achieved and implemented in their business activities.
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