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VAT public clarification – Bank interest and dividend

VAT registered person may earn interest income by depositing money in a bank account or by holding fixed deposits, recurring deposits, or any other similar bank deposit. In addition, a VAT registered person may earn dividend income by holding shares in a company.

This Public Clarification discusses the VAT implications of the interest income generated from bank deposits and dividend income.


Passively earned interest income generated from bank deposits does not amount to consideration for a supply. Similarly, dividend income received by merely holding shares in a company does not constitute consideration for a supply.

Passively earned interest income from bank deposits and dividend income are, therefore, outside the scope of VAT, and there is no requirement to report them in the VAT return.

Detailed Discussion

Value Added Tax (‘VAT’) is a tax imposed on the import and supply of goods and services at each stage of production and distribution, including deemed supplies.

“Supply” is the foundation of VAT, and therefore, VAT implications arise only when there is a supply. In other words, if there is no supply, there is no VAT implication.

A supply can be made of either goods or services. The terms taxable supply, supply of goods and supply of services have been accorded specific definitions under the Federal Decree-Law No. 8 of 2017 on Value Added Tax (“VAT Law”) and Cabinet Decision No. (52) of 2017 on the Executive Regulations of the Federal Decree-Law No (8) of 2017 on Value Added Tax (“Executive Regulations”). Where any transaction falls outside the scope of these definitions, it falls outside the scope of VAT.

Article (42) of the Executive Regulations sets out the tax treatment of financial services. The Article states that the payment or collection of any amount of interest and dividend is considered to be a financial service and exempt from VAT. However, this only applies where there is in fact a supply.

Interest Income from bank deposit

Bank deposits may accrue interest to their holders. For example, a retail business may put its business income into a bank account and earn interest on the deposited amount. The business does not do anything to earn this interest income other than to merely deposit the money in the account, and therefore, it can be said to be earned passively.

In this case, the retail business does not make a supply to the bank, and therefore the interest income received is not a consideration for a supply. The retail business is not required to declare this income on its VAT return, as it is outside the scope of VAT.

It is important to note that the above position only applies to interest derived from bank deposits and does not have any bearing to the interest generated from extending loans or credit, which are exempt supplies for VAT purposes.

Dividend Income

The payment of a dividend by a company is a distribution of its profits to its shareholders. The holder of a share is, however, not entitled to a dividend until the company has declared a dividend.

dividend income accrues to the shareholder by merely holding shares in a company. If the company makes profits, and declares profits, the shareholder receives a dividend. The shareholder does not make any supply in order to be eligible for a payment of dividend. In other words, a dividend is generally a passive income.

As the shareholder does not make a supply to receive the dividend, the dividend income cannot be treated as consideration for a supply. Accordingly, dividend income is outside the scope of VAT, and is therefore, not required to be reported on the VAT return.

While dividend income is generally outside the scope of VAT, any amount charged as a “management fee” would be subject to VAT. For example, management fees charged by a holding company to its subsidiaries would be subject to VAT.

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.

You can also watch our video about the same topic below:



Balaram Vuchidi

Managing Director
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