Article 1 of the Federal Decree-Law No. 8 of 2017 on Value Added Tax (“VAT Law”) 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”.
A taxable person may receive payments in the nature of donations, grants and sponsorships from third parties including but not limited to employees, customers, suppliers etc. In order to determine whether such donations, grants or sponsorships are subject to VAT, one needs to identify whether such moneys can be treated as consideration against “taxable supplies”.
This Public Clarification discusses the principles that must be applied to ascertain the taxability of donations, grants and sponsorships.
The VAT treatment of donations, grants and sponsorships depends on whether the donor, grantor or sponsor, as the case may be, has received any benefit in return for such payments. Where any benefit is received in return for the payments, VAT implications will arise. However, where 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 use of the terms donation, sponsorship and grant are not in themselves determinative of the VAT treatment of the payments, and a business must consider all the facts and circumstances before arriving at a conclusion.
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 applicable only 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 a supply needs to be determined. The benefit must have a close nexus to the payment for VAT to be applicable.
If a donation is given without any express or implied benefit, it is not 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 and the following principles must be applied in order to determine whether this is the case
Does the donor receive any benefit in return for the donation?
Does any person other than the donor receive any benefit in return for the donation?
Is there any condition to state that the donation must be used in a particular way which may benefit the donor or any other person?
Is there any written or oral agreement between the parties? If yes, what does the agreement stipulate?
For example, 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.
Sponsorships are generally subject to VAT as the person who gets the sponsorships normally makes supplies to the sponsor. The supplies that a receiver of sponsorship may make to the sponsor typically include, for instance, any of the following:
Displaying the sponsor’s logo;
Allowing the sponsor to use the name of the person who has received sponsorship;
Providing entertainment services;
Hosting the sponsor at restaurants;
Providing access or tickets to events.
Having said that, all the facts and circumstances should be considered holistically to arrive at a decision.
For example, 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.
Similar to donations and sponsorships, 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.
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 attract VAT.
Donations, sponsorship and grants in the form of goods:
There may be cases where donations, sponsorships and grants are given in the form of goods. In such cases, deemed supply provisions may apply.
This Public Clarification issued by the FTA is meant to clarify certain aspects related to the implementation of the Federal Law No 7 of 2017 on Tax Procedures, Federal Decree-Law No 8 of 2017 on Value Added Tax and their Executive Regulations.
This Public Clarification states the position of the FTA and neither amends nor seeks to amend any provision of the aforementioned legislation. Therefore, it is effective as of the date of implementation of the relevant legislation, unless stated otherwise.
based on the article published in FTA website