The Federal Tax Authority (FTA) has outlined the principles that must be applied to ascertain the taxability of donations, grants, and sponsorships, noting that if the donor, grantor, or sponsor has received any benefit in return for such payments, then these payments will be subject to Value Added Tax (VAT), whereas when no benefit is received, the payments will be treated as outside the scope of VAT as they will not be seen as consideration for a supply.
The Authority had issued a new Public Clarification on VAT treatment for donations, grants, and sponsorships, through its “Public Clarifications” service available on the FTA’s official website to familiarise taxpayers with technicalities and procedures surrounding the tax system, which serves to help them self-comply with UAE tax regulations with the highest levels of accuracy and efficiency.
In a statement, the Federal Tax Authority asserted that the terms donation, sponsorship, and grant are not in themselves determinative of the VAT treatment for such payments, urging businesses to consider all facts and circumstances before arriving at any conclusion.
FTA Director General Khalid Ali Al Bustani affirmed that the UAE tax system places a great emphasis on encouraging charity work and social contributions with an accurate set of principles that facilitate philanthropy, including donations and grants as per local legislation. This, in turn, enhances the UAE’s pioneering role in encouraging government and private entities to play their part in serving the community and solidifies the country’s role in the service of society and promoting sustainable development.
The authority pointed out that Article (1) of the Federal Decree-Law No. (8) of 2017 on VAT defines consideration as “All that is received or expected to be received for the supply of Goods or Services, whether in money or other acceptable forms of payment”. The FTA added that a Taxable Person may receive payments in the nature of donations, grants and sponsorships from third parties including, but not limited to, employees, customers, and suppliers, among others, and further explained that in order to determine whether such payments are subject to VAT, the Taxable Person must determine whether these payments can be treated as consideration against “taxable supplies” or not.
The Authority went on to clarify that VAT implications arise only when there is an underlying taxable supply. Despite the fact that the definition of “consideration” is wide and includes within its ambit all that is received or expected to be received in money or other acceptable forms of payment, VAT is only applicable when the payment relates to a taxable supply. Therefore, whether the donor, grantor or sponsor has received any kind of benefit in the form of supply needs to be determined. For VAT to be applicable, this benefit must have a close nexus to the payment.
The FTA reiterated that if a donation is given without any express or implied benefit, it is not treated as a consideration for a supply and is accordingly outside the scope of VAT. The donation must be unconditional and unrestricted for such a treatment to apply, it added, citing, as an example, that if a business donates money to a hospital and in return the hospital provides space to the business to display and market its products, then the donation will be treated as consideration against the taxable supply of providing space for undertaking marketing activities, and will be subject to VAT.
Sponsorships are generally subject to VAT as the person who gets the sponsorships normally makes supplies to the sponsor, the authority explained, noting that if, for example, a business pledges a certain amount of money to sponsor a football match on the condition that the organizer displays the company’s logo at the entrance of the stadium, then the business is receiving a benefit in return for the sponsorship and the sponsorship will be subject to VAT.
The Federal Tax Authority concluded by explaining that just as with donations and sponsorships, determining the VAT treatment in the case of grants requires establishing whether the grantor has received any benefit in return for giving the grant. For example, 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 be subject to VAT.